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Rite Aid’s vitals aren’t looking too good

Jun 21, 2011

By Eleanor Bloxham, contributor

FORTUNE -- If you own a share of common stock in Rite Aid, you wouldn’t be eligible to vote

for all the members of the 11-member board.

John Baumer, a partner with Leonard Green & Partners, a private equity firm, is not up for election by common shareholders, because preferred shareholders get to nominate and elect him separately. This kind of arrangement isn’t widespread and Rite Aid (rad) spokesperson Karen Rugen says it has been in place at Rite Aid since 1999. (Sirius XM (siri) is another company with such an arrangement.)

Purchasers of preferred shares often negotiate for this arrangement because “they want a say in how the company is being run,” says Stuart Grant, co-founder and managing director at law firm Grant and Eisenhofer.

But negotiation by specific shareholder groups for these kinds of rights is problematic.

As I’ve previously argued in the cases of J Crew and AMD (amd), when board directors represent (or have the appearance of representing) narrow interests, it can create a divided board.

Such agreements can create a conflict for individual directors between representing the interests of their constituency and the interests of the corporation as a whole. Directors are on a board to represent all shareholders and stakeholders, not just one group or interest.<!-- more -->

Attention is another concern with Baumer because he sits on eight company boards (some of which are private) according to his company’s website.

James Anderson, another Rite Aid board member who is CEO and Chair of TAG Holdings, “serves as a director of Quaker Chemical Corporation, ArvinMeritor, Inc., Valassis Communications, Inc. and NV Energy, Inc.” according to Rite Aid’s proxy.

Where do they both find the time? Are any of the boards concerned that these two directors are likely stretched thin?

Regarding independence, Baumer is not independent by NYSE standards, according to Rugen -- and Valassis Communications, where Anderson serves as a director, has a relationship with Rite Aid which “is fully disclosed,”Rugen says. In total, eight of the 11 directors “fully satisfy NYSE independence requirements”Rugen says.

But these are just a few of many issues the Rite Aid board will face at the company’s annual meeting this week. The company has been bleeding with net income losses in the last four fiscal years. Although the company lost money in its last fiscal quarter ending February 2011, there was positive growth in same store sales that quarter “and it has continued,”Rugen says.

A June 14 letter from CtW Investment Group calls on the company to revamp the board, comparing the performance of Rite Aid to competitors CVS and Walgreens and showing significant lags in Rite Aid’s 10-year stock performance.

The letter argues that, besides Baumer, three other directors affiliated with the Coutu Group, a large Rite Aid shareholder, may represent interests that are different from shareholders as a whole.

Rugensays Rite Aid has a “well qualified board with a diverse range of business experience” and the proxy states that the “Nominating and Governance Committee … seeks to have the Board represent a diversity of backgrounds and experience.”

But two board members (other than the CEO) are former Rite Aid executives. Two members of the board, the CEO, COO, CFO, and general counsel all have worked at Pathmark while two members of the board, the CEO and COO spent time working at Fred Meyer Stores.

For now, even Rite Aid’s employees are not encouraged to place their bets on the company’s future. In November, an independent fiduciary, GreatBanc, hired to help manage the company’s 401k program, removed Rite Aid as a single-stock investment option for participants in the company’s 401k plan. The fiduciary said that, due to the volatility of the stock, Rite Aid was not an appropriate retirement investment, Rugen says.

When the votes are counted this week, will the results show that shareholders are questioning the health of Rite Aid’s board? Clearly, the ideal prescription would be a board focused on common purpose, with diverse experience and the time to solve the real performance challenges that the company faces.

Eleanor Bloxham is CEO of The Value Alliance and Corporate Governance Alliance (http://thevaluealliance.com), a board advisory firm. 

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