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The TIES that BLIND?: Experts say links between company, directors may have taken toll

February 6, 2006

The Arkansas-based goliath has been on a rampage in central Indiana the past five years, building its market share in the local grocery business to 26 percent.

When Marsh announced last N ove m b e r that it had hired Merrill Lynch & Co. to explore a s a l e , m a ny o b s e r ve r s attributed the steady decline of the state's sixth-largest employer to inroads by discount rivals. But a dozen interviews and a review of Marsh's regulatory filings suggest another problem: At least three of the seven ostensibly "independent" members of the 10-person board had financial or family ties that might have made them reluctant to challenge Chairman and CEO Don Marsh on important decisions.

For example, the chairman of the Compensation Committee is restaurateur Stephen M. Huse, whose daughter Kimberly is married to Don's son, company executive Arthur Marsh. The company does not mention the relationship between Huse and the Marsh family in proxy statements or other regulatory filings.

The other two members of the Compensation Committee-J. Michael Blakley, CEO of Indianapolis building contractor The Blakley Corp.; and James K. Risk III, CEO of Lafayette electrical equipment distributor Kirby Risk Corp.-collectively received nearly $2 million in business from the company over the past five years.

Corporate governance experts look askance at doling out lucrative business to board members, saying it can lead them to acquiesce to decisions they otherwise might question.

And observers see a lot to question. Don Marsh, for instance, earns higher compensation than CEOs of similar-size firms reviewed by IBJ. In addition, he'll receive $7.1 million over the next year under a spe- CEO Perry Odak $540,000 in 2004.

Don Marsh also outearned top brass of other publicly traded grocers. The CEO of Florida-based Publix Super Markets Inc. earned $714,000 in 2004, for instance, and the president of a year after his daughter married Arthur Marsh, said the Compensation Committee reviews "detailed information about comparable jobs" before setting pay levels.

"I have never let my relationships with any family members get in the way of making a sound decision," he said through Myra Borshoff Cook, spokeswoman for the grocery chain.

NASDAQ adopted rules in November 2003 designed to curtail boardroom cronyism. The rules don't permit family members to sit on compensation committees, though they don't define whether that includes people who aren't direct relatives, such as Huse.

Corporate governance experts said the Wisconsin-based Fresh Brands Inc. earned $375,000. Publix has a market value of $15.8 billion; Fresh Brands has a value of $34 million.

Huse, who joined Marsh's board in 1985, arrangement is dubious at best.

"It obviously raises questions," said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. "That kind of relationship ... would be considered by some investors to be problematic."

The proxy statement shows Don Marsh is far from the only Marsh family member taking home a substantial paycheck. Don's son David, the company president, received $477,000 in salary and bonus last year.

In addition, seven others who are Marshes or married to Marshes collectively earned $1.6 million last year, the proxy statement shows.

For example, former spokeswoman Jodi Marsh, who is in the process of divorcing David Marsh, earned $163,077.

Compromised positions?

Governance experts question Blakley's and Risk's dual roles as board members and vendors to the company.

Blakley's contracting firm received $1.1 million in Marsh business over the past five years, while Risk's electrical firm received $870,000, filings with the Securities and Exchange Commission show.

Under NASDAQ rules, directors aren't independent if they get more than $200,000 from a company in one year. Last year, Blakley's firm received $82,762 from Marsh, and SEC filings don't list Kirby Risk as receiving anything.

Neither Blakley nor Risk returned calls.

"Business dealings between directors and their companies are problematic these days," said the University of Delaware's Elson. "You want to get to a situation where the amounts" are so small they're not meaningful.

They already are that small, Doug Dougherty, Marsh's chief financial officer, said through Borshoff Cook. The 15,000-employee company, which operates 119 groceries and 160 Village Pantry convenience stories, reported revenue in its last fiscal year of $1.7 billion.

"The amount of business is relatively insignificant and the decisions are made at the buyer level," Dougherty said. "In such cases, the terms are no less favorable than the company could have obtained from unaffiliated third parties."

The one Marsh executive who spoke freely with IBJ downplayed the business relationships.

Jack Bayt is president of Crystal Food Services, the company's catering division. He owns a 31-percent interest in the equipment rental firm A-1 Classic Rental and a 25-percent stake in Evergreen LLC, which has leased land to Marsh. In the past two years, the two firms have received more than $1.1 million in business from Marsh.

Bayt, who is not on the board, said using his firms is to Marsh's advantage. He said he sees that they do a good job for the company, which "triple and quadruple checks" to make sure the deals are better than what it would find on the open market.

Paul Lapides, director of Kennesaw State University's Corporate Governance Center, said some conflicts are inevitable.

"If you said every board member couldn't have any conflict whatsoever, you might be putting people on a board that knew nothing about the industry and nothing about the business," he said.

More important to Lapides is that the Audit Committee appears free of conflicts. SEC filings show no business dealings between the company and the three committee members, Catherine Langham, K. Clay Smith and Charles Clark.

"As directors, we have a responsibility to act in the best interest of the shareholders and we take that very seriously," Langham, president of Indianapolisbased Future Enterprises Inc., said through Borshoff Cook.

Doling out dividends

Observers also question why Marsh went forward with a 13-cents-a-share dividend payment following its fiscal second quarter, a period when it lost $3.4 million.

"Dividends are supposed to be handed out to shareholders when the company makes a profit," said Calvin Clemons, author of "The Perfect Board," a book on how to serve as a director. "If the company's not making any money, I'd question the decision. They are essentially taking money from operations to enrich the shareholders."

The payout provided nearly $100,000 to Don Marsh, the company's largest individual shareholder. Don's brother William collected more than $20,000 while David Marsh received about $5,500. Huse, Blakley and Risk each received more than $1,000.

Spokeswoman Borshoff Cook defended the move. Although the dividend was paid after the second quarter ended Oct. 15, the board had declared it at the end of the first quarter, after recording a $674,000 profit.

Yet the payments cost more than $1 million. For the year ended April 2, 2005, Marsh paid out more in dividends than it earned-$4.1 million in dividends vs. a $3 million profit. Marsh suspended future dividend payments on Nov. 29, the same day it reported the second-quarter loss.

Since then, the company has been attempting to rein in other expenses, apparently to make itself more attractive to potential buyers. Last month, it said it was taking a series of steps that collectively would reduce after-tax compensation due to executives after a sale by $28 million.

But observers question whether payments should have been so large in the first place. Especially generous was a supplemental retirement plan for top executives the company has decided to terminate.

Because of the termination, participants will cash out of the program over the next year, receiving "reduced" benefits totaling $18.9 million, the company said in a press release. Don Marsh's share will be $7.1 million, which is in addition to an estimated $800,000 he's due annually under the company's regular pension.

So-called supplemental pensions have gained popularity in corporate America in recent years, but many watchdogs consider them overkill.

"They've turned retirement plans into wealth-creation devices, which is not what they were intended to do," said Brandon Rees, assistant director of the AFL-CIO Office of Investment.
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