"We believe Mr Johnson's emerging leadership at Heinz energises management up and down the line," said Mr William Maguire of Wasserstein Perella in New York. "Our sense of this company is that he is good for morale here in the initial stages of the Project Millennia restructuring programme."
Corporate America has once again turned the spotlight on Dr Tony O'Reilly, chairman and chief executive officer of Heinz. For the second time in a matter of a few years, Business Week, the largest-selling business magazine in the worl d with one million in circulation and eight million in readership, has highlighted what it claims are shortcomings in the way Heinz is run and, in a cover story claimed that Tony O'Reilly is under attack by the corporate governance movement.
Although Heinz disputes the claim, there is no doubt that some of its major shareholders would like to see radical changes implemented on the Heinz board.
Foremost among these is a greater mix of independent versus inside directors. Currently Heinz has 10 outside and nine inside directors.
"We have different views about the composition of the Heinz board," said Mr Kenneth West, senior consultant for corporate governance at the Teachers Insurance & Annuity Association - College Retirement Equities Fund (TIAA-CREF). This is the largest pension fund in the world, with $225 billion in assets and two million participants in the US. It owns 2.7 million Heinz shares worth $113 million. To say that CREF has specifically targeted Heinz would be unfair. It is, in fact, taking a look at every company in its portfolio of 1,800 companies in the US and 1,200 overseas companies and measuring them on 25 best practice guidelines. These include retirement age, number of outside directors, director pensions and pay. When a company appears negative on its radar screen, then CREF lobbies for change.
At the moment, CREF is in "constructive dialogue" with the Heinz board, as it is with about 11 other companies. "We talk to one another to reach accommodation," said Mr West.
CREF would also like to see the average age of the directors on the Heinz board reduced. The current average age is over 66 years.
"The aggregate board is getting old," said Mr West. "The average age of the outside directors is pretty high. It needs new blood." He said the tenure of the directors on the board is also "questionable and not many new board members have been added".
Most of the directors, the Business Week article claimed, are "business associates and even personal friends of the charismatic CEO". Each of the 19 directors receives an annual retainer of $30,000 and yearly grants of 300 shares of stock. They also receive $1,500 for each meeting they attend, which amounts to nine meetings a year.
Another vocal adversary to the Heinz board is the California Public Employees' Retirement System (CALPERS). With $120 billion in assets, it is the largest public pension fund in the US. It invests long-term in 1,500 to 1,600 companies, of which Heinz is one. It is now active in pushing for reforms at corporations. It has identified 10 in its portfolio that it is targeting - Heinz is not one of them.
"Although Heinz is not a target company, we see alarming issues," said Mr Brad Pacheco, public information officer for investments at CALPERS. "We need to look at its diversification, independence on the board and we'd like to see a majority of independent directors."
Calpers is detailing proposals to have an age limit of 70 years set for directors, a limit of 10 years' service for any independent director and a requirement that board members receive half their total compensation in company stock.
"We won't stand around while a company under-performs. We believe that reforming a board and having a good governance system is an insurance policy for a good performing company," says Mr Pacheco.
The matter of Heinz's stock price is not yet an issue. Mr Ted Smyth, Heinz's vice-president of corporate affairs and a former Department of Foreign Affairs senior diplomat said the Business Week article did not negatively affect Heinz's share price.
The day the magazine hit the streets on September 5th, Heinz's stock closed at $43. Since then, the share price has been stable. And at its shareholders' meeting, Heinz announced a dividend increase and a share buy-back programme.
Mr Smyth said that the payment of pensions to directors "is a good idea because then the directors are not beholden to the CEO. It creates a more independent board member". The question here, he emphasised, "is that none of the directors need the money. They are independently wealthy people and sit on the board out of a sense of obligation . . . it is getting harder to find people willing to become directors in the US".
He said the current directors were chosen for "their independence, business understanding and for their willingness to be professional in the execution of their legal responsibilities and to act in the best interests of all shareholders".
Some directors may in fact retire next May when it is expected that Dr O'Reilly will step down as CEO (but continue as chairman) to concentrate on his outside investments including Independent Newspapers, Waterford Wedgwood, Fitzwilton and Arcon. Some analysts on Wall Street would welcome the reigning president and chief operating officer Mr William R. Johnson who is the heir-apparent.
"We believe Mr Johnson's emerging leadership at Heinz energises management up and down the line," said Mr William Maguire of Wasserstein Perella in New York. "Our sense of this company is that he is good for morale here in the initial stages of the Project Millennia restructuring programme."
Project Millennia - announced by Dr O'Reilly in San Francisco in March - is the largest reorganisation in Heinz's 128-year history. It means the closing down of 25 of Heinz's 100 factories around the world, with 2,500 out of 45,000 employees losing their jobs. Another issue that concerns some investors is not that Heinz management is under-performing but what they are being paid. Dr O'Reilly's total compensation of $182.9 million in the past six years ranks him as one of the highest paid CEOs in America.
Analyst John McMillan of Prudential commented: "you live by the sword, you die by the sword. Tony O'Reilly got a lot of well-deserved praise in the 1980s. Now, in the 1990s, the media is trying to pull him down. While he deserves some of it, he doesn't deserve all of it."
