By Damion Rallis, Senior Research Associate
Last week, there was yet another spill at The Dow Chemical Company (NYSE:DOW), but this time, fortunately, there was no environmental damage. At about 10 o'clock last Tuesday evening, there was an "inadvertent premature release" by someone at Dow who accidentally e-mailed a draft copy of the company's plans to reduce its workforce to Bloomberg News. At GMI Ratings, Dow Chemical is already rated "D" for long-term sustainability risk; and while we're not worried about premature e-mails, the company's rating could be downgraded once again if the company continues to be mired in negative news.
The leaked draft made headlines not only for its inadvertent release but for the troubling news within, most notably, that Dow Chemical would cut 5 percent of its global workforce (about 2,400 jobs) and shut down 20 manufacturing facilities. Due to the error, the company was forced to rush its earning news release that same night and then hastily reschedule its conference call with analysts the following morning. Aside from the considerable layoffs, there was other negative news: earnings per share dipped to $0.42 per share, down from $0.69 in the same quarter last year; sales were down 10 percent; and equity earnings fell from $375 million last year to $175 million. In a nutshell, Dow posted a 39 percent fall in quarterly profit to $497 million, hurt by weaker demand and price declines. Per the norm, the company blamed the economy, saying it was "operating in a slow-growth environment." Dow currently trades slightly below $30 and since September 14, the company's share price has declined about 7 percent, about 17 percent from a peak on April 25, and more than 28 percent since May 2011 when Dow's share price was over $42.
Governance concerns at Dow Chemical are highlighted by an "F" for its overall environmental impact. Long considered a major threat to the environment, Dow Chemical has struggled mightily to shed its image as one of the world's major polluters. An oft-cited industry list compiled by the Political Economy Research Institute listed Dow Chemical as the seventh-worst company on its Toxic 100 Polluters Index, as of August 2012. A 2004 report from U.S. PIRG, the federation of state Public Interest Research Groups (PIRGs), identified Dow Chemical as one of twelve companies endangering the most people. Not only is Dow seen as one of the world's major polluters and producers of harmful substances, but its reputation is overwhelmingly that of a company infamous for its denial and reluctance to pay for its damages.
Over the summer, the company received disastrous press due to its official partnership with the Summer Olympics held in London. The London Assembly even went so far to say that the decision to have Dow Chemical as a worldwide partner has "caused damage to the reputation of the London 2012 Olympic and Paralympic Games." The Assembly went on to say that Olympic organizing committees "should consider the environmental, social, ethical and human rights records of companies when awarding high-profile partnership and sponsorship deals." At issue are the links between Dow Chemical and the Bhopal, India gas tragedy that killed thousands in 1984.
A gas leak at the Union Carbide India Limited pesticide plant in early December 1984 leaked forty tons of a the methyl isocyanate toxin and was said to have killed at least 15,000 people in a matter of days. In 2006, the Indian government revealed that nearly 560,000 were injured from the leak. The BBC reported that a water sample taken in 2009-an astounding 15 years later-contained "nearly 1,000 times the World Health Organization's recommended maximum amount of carbon tetrachloride, a pollutant known to cause cancer and liver damage." Dow Chemical's involvement in the tragedy began in 2001 when it bought Union Carbide, and therefore, was presumed to assume complete responsibility. Except that Dow Chemical assumed no responsibility at all, claimed it had no liability for the cleanup or for the victims, and even went so far as to sue victim groups, an attitude that has resulted in years and years of anger and protest.
The company's reluctance to assume liability at Bhopal is indicative of a long line of environmental disasters at Dow Chemical. In fact, despite its notable association as one of the producers of Agent Orange, the chemical used by the U.S. military during the Vietnam War that is said to be responsible for 400,000 deaths and 500,000 children born with birth defects, Dow continues to be on the wrong end of environmental ruin. Most telling is the company's utter abuse of the river in its own hometown of Midland, Michigan. The U.S Environmental Protection Agency (EPA) reported in 2007 that the toxic dioxin found in the Saginaw River could represent "the highest level of dioxin contamination ever discovered in the nation's rivers and lakes." Despite being a corporate role model in its efforts to reduce the impacts of global warming along with other initiatives aimed at improving the environment, critics accuse the company of "greenwashing" as Dow Chemical is frequently cited for its reluctance to accept blame for its numerous environmental infractions and its ongoing push to ensure federal regulations have consistently favored the polluters and not the pollutees.
While the list of Dow Chemical's infractions are too numerous for this report, the important takeaway is the company's faltering international reputation. Such high profile companies are watched closely and are consistently subjected to negative press if executive officers tend to "make out like bandits." That's the story at Dow at least. Chairman and CEO Andrew Liveris' fiscal 2011 total summary compensation was about $19.3 million. This amount includes a base salary of $1,741,667, which is more than 70 percent over the limit for deductibility under Section 162(m) of the Internal Revenue Code. When base salaries for those executives subject to 162(m) exceed the limit, it raises concerns about the decision-making of the board with regard to protecting shareholders' interests. Additionally, the CEO received change in pension valued at more than $3.7 million, or more than the combined base salaries of the other named executive officers. Overall, Mr. Liveris has already accumulated pension benefits worth nearly $22 million.
Not included in the CEO's total amount was over $13 million realized from the vesting of 425,807 stock awards. On top of that, he also was granted over $12 million in equity, nearly $7.2 million of which consisted of stock options and deferred stock awards that vest simply over time without performance-contingent criteria. Equity awards should have performance-vesting features in order to assure alignment with shareholder interests and market-priced stock options may provide rewards due to a rising market alone, regardless of individual performance. Lastly, the Dow Chemical CEO received such generous perquisites as $140,000 for his personal use of company aircraft and over $68,000 in company contribution to savings plans. Considering the median household income of Dow's hometown in Midland is under $49,000, compensation policies such as these are sure to draw even more negative attention to the company.
While compensation practices such as these are not aligned with shareholder interests, a closer examination of Dow's compensation committee offers a bit of insight to its pro-CEO policies. The Compensation & Leadership Committee's chair is Dennis Reilley. Not only is Mr. Reilley the former CEO at S&P 500 company Praxair, but he also notably serves on the boards of three other S&P 500 companies, all of which GMI Ratings rates no higher than "D" overall with at least a "D" rating for their pay practices. Similarly, two of the committee's other four members are current CEOs of large cap companies. John B. Hess is CEO at Hess Corporation, whose poorly rated pay practices suffer from some of the same red flags as Dow Chemical's. Not only does this suggest an incredibly strong fraternity of like souls, but directors who are active CEOs or are otherwise overcommitted may have difficulty devoting sufficient time to their board obligations. Due primarily to several pay and environmental KeyMetrics™ red flags, Dow Chemical continues to represent a high level of long-term sustainability risk.