Monday, May 07, 2012

Liberty Mutual Takes Major Hit To Reputation

By Richard E. Nicolazzo

On April 11, 2012, the Boston Globe undoubtedly raised the blood pressure in the executive suites at Liberty Mutual when it ran a story on the “outrageous” compensation of longtime CEO and current board chairman Edmund “Ted” Kelly.

Seventeen days later, on April 28, when Kelly and current Liberty Mutual CEO David Long finally spoke with the Globe about the issue, the company had already endured a Globe news blitz that featured four, fact-filled highly-negative columns by Metro columnist Brian McGrory and three stinging news stories by reporter Todd Wallack.

Kelly told the Globe that his pay package of nearly $50 million a year was “an accounting issue”, adding, “It’s as if I got stock options over the years. If the company does well, the stock options do well.”  Long stated he was “not going to apologize” for Kelly’s pay and did not think Kelly had anything to apologize for either.  According to the Globe, Kelly further noted that the company was near bankruptcy when he first came on board in 1992 and it is now a Fortune 100 company with approximately $35 billion in sales.

After Kelly and Long spoke with the Globe, they probably thought the avalanche of negative news and editorial coverage had ended.  Then came further blasts from the Globe.  In a May 2 Metro column, McGrory continued to decry the “clueless, callous” behavior of Liberty Mutual’s top executives and directors, stating:  “Greed and arrogance are a toxic mix.”  In a May 4 Business story, Todd Wallack continued the onslaught, taking issue with the company’s version of its past financial woes.   

In my more than three decades of experience in this market, I cannot recall another instance when one columnist took so many shots at a top business leader. To Kelly and Liberty Mutual, it must feel like they’re standing on the ropes in a prize fight and taking blow after blow, practically defenseless.

Back Story

One has to ask:  How did this issue get so messy so fast?

While not privy to the strategy discussed in behind-the-scenes meetings, I believe things got off to a bad start from the beginning.

Through public filings, the mutually-owned company was required to report Kelly’s salary for years 2008-2010. However, when first asked, the company declined to disclose how much Kelly earned in 2011 when he retired as CEO, or how much he continues to be paid as board chairman.  In fact, this data was not included in its annual report filed with state regulators in March. While the company likely met reporting guidelines, it did not account for something equally important … its policyholders. 

Part of the disclosure problem was apparently Kelly’s own making. According to published news reports, Liberty Mutual created a holding company a decade ago, paving the way for the company to sell a minority stake in the subsidiaries to outside investors, without compensating policyholders. The change also made it difficult to track pay packages since its insurance units must file annual reports with Massachusetts regulators, but the holding company does not.

This was mistake number one - lack of transparency and poor corporate governance. Did Liberty Mutually actually believe no one would find out what these numbers were?

The issue was compounded when the company, through a spokesperson using classic “corporate-speak,” told the Globe that Kelly’s pay was based on an analysis by an executive compensation firm and included long-term incentive awards.

Just a day later, when approached at the company’s annual meeting, Kelly revealed he got $50 million in 2011. So what was the point of holding back this information in the earlier story?

Blood in the Water

The Globe sensed it really had an issue to run with, and McGrory penned the first of his six columns.  There’s not enough space to chronicle all the arrows shot at the company in these columns, but here’s one from McGrory’s April 13 piece: “…every Liberty Mutual policyholder, all those regular people making ends meet at kitchen tables, have paid for Kelly to take $200 million out of the company, their company, over the last four years…the whole thing is grotesque.”

Next came the revelations about the Liberty Mutual fleet of jets at Hanscom Field. Five powerful, long-range jets to ferry executives around the world. With reporters now having access to flight logs, it wasn’t difficult for the Globe to find flights that looked a little suspect in terms of the “business purposes” of these trips. When questioned by McGrory, another corporate-speak gaffe occurred when the vice president of public relations said, “Can I ask why you’re writing this?”

A few days later, as one could have predicted, came a Globe editorial calling for Massachusetts regulators to probe Kelly’s pay. The Globe didn’t hesitate to state that Kelly’s yearly pay was more than 100 times that of President Obama and more than the entire 100-member Senate. A subsequent news story found many critics who decried the executive pay package and policyholders who were equally upset. There was still more anger over $46 million in tax breaks the company was awarded for construction of a new tower in Boston’s Back Bay.

Further compounding the negativity was the lack of comment from the board of directors who signed off on Kelly’s  compensation.  Because  of the company’s  “information void”, the press, namely the Globe, continued to report on the story.

The most inexcusable behavior, though, was trying to make it sound like the company was near bankruptcy when Kelly took over. It appears that Liberty Mutual just didn’t check its facts. The company did cut jobs back in 1992 and suffered two bond rating downgrades, but it remained profitable. By searching earlier news coverage, the Globe found a quote from former CEO Gary Countryman, who said the company ended 1992 “stronger than ever financially” as profits rose by almost half to $217 million.

“Hide-and-Seek”

From a business perspective, in my view, Liberty Mutual let Kelly’s pay package get completely out of hand. Kelly is not an executive working at a private, family-owned company that can play by a different set of rules. He’s leading a Fortune 100 company that is “mutually-owned.”  There needed to be a greater sense that every dollar used for executive compensation and benefits, like jet trips to vacation homes, is coming out of the pockets of the policyholders who make payments every month.

This is clearly a board governance issue that needs to be corrected, and it puts into question the future compensation package and benefit formulas for the new CEO. It is unlikely policyholders will tolerate more $50 million-a-year salaries.

From a communications standpoint, the company seemed to have a fundamentally flawed strategy that resulted in a game of “hide-and-seek” with the press. It should have been clear from the beginning that the Globe was on to a hot story. When this happens in today’s environment of free-flowing, easily accessible information, there is literally no place to hide.

As soon as the first story broke, Liberty Mutual’s current CEO and Kelly should have met with Globe editors and reporters. The company should have gathered all the relevant information, presented it to the paper, outlined the rationale that supported Kelly’s compensation package, and fielded questions.  Although there was no guarantee that the stories would have ended, it’s reasonable to assume that the unrelenting negative media coverage would not have lasted more than three weeks.

In my view, Liberty Mutual’s senior management and its board of directors owed it to the “owners” of the company to be as transparent and accountable as possible. When it comes to excessive compensation, senior executives act like the company is being run for their benefit when, in fact, the opposite is true:  It is run for the policyholders/owners.  Maybe it’s time, in the case of mutually-owned companies, for these policyholders/owners to assert their rights. 

In today’s business environment, there is a major difference between good corporate citizenship and good corporate governance. To be at the top of the class, a company needs both.

I’m sure the negative coverage over the past 24 days does not reflect an accurate picture of Liberty Mutual. Certainly, there are thousands of hard-working employees around the world who have made the company a financial success. Liberty Mutual sponsors the Boston Pops July 4th concert each year and contributes more than its share to charities.  Recently, the company finished second among major auto insurers in the J.D. Power and Associates survey, up from 5th in 2001.

Nor should we diminish Kelly’s outstanding record of success in quadrupling annual revenues at Liberty Mutual since 1992, creating five times the equity, and expanding operations globally. 

Inevitably, this issue will fade.  However, Ted Kelly's legacy will be tarnished by focusing on his compensation.  Perhaps the ultimate consequence is that he will be remembered as a symbol of corporate greed and arrogance, eclipsing his remarkable business accomplishments and contributions as a leader in the Boston community and elsewhere.

# # #

Richard E. Nicolazzo is managing partner of Nicolazzo & Associates, a strategic communications and crisis management firm headquartered in Boston, Massachusetts

Joe M. Grillo, Partner, and Linda Harvey, Client Services Director at Nicolazzo & Associates, contributed to this blog.

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