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Has Andrea Jung Been Treated Ethically by Avon Products?

Longest-serving Female CEO to Continue as Executive Chairman of Avon

You may have heard by now that Avon Products CEO Andrea Jung, the longest-serving female CEO currently in the Fortune 500, will depart as CEO of the company but stay on as executive chairman thereby dividing the two roles. There has been a great deal of criticism of her decision to stay on for at least two years as executive chairman.

Some former board members fear that her continued presence would make it hard to attract a new leader. According to Wall Street Journal reporters Hannah Karp and Joann Lublin, James Preston, once one of Jung's closest mentors, took the unusual step of writing a letter to the board two days after the shake-up. He criticized Jung's leadership, stressed that departing CEOs should step aside and called on the board to replace her with someone with deep experience in the direct-selling world.

"I have long held the belief that once a CEO leaves that position, he or she should make a 'clean break' and not question or second-guess the actions of his successor," wrote Preston, who ran Avon from 1989 to 1998. "I have held true to that belief, even though in recent years I have become increasingly concerned—and saddened—by the declining fortunes of the company."

Fred Hassan, Avon's independent lead director, defended having Jung remain executive chairman for two years after the new CEO arrives. "Given the specific nature of the company and the specific nature of the board, we have very strong confidence that we can make this transition work”.

Ms. Jung was lauded by investors for her management of Avon during the early part of her tenure but more recently she has come under fire for generating poor results. The board last month succumbed to the growing criticism after Avon reported a disastrous third-quarter earnings report, tossed out its sales targets as unreachable, and said it faces a pair of SEC inquiries. The company's stock is down about 40% this year.

Avon has been the subject of an SEC investigation since 2008 for possible violations of the Foreign Corrupt Practices Act including bribing officials overseas. The inquiry began with Avon’s operation in China and has now spread to a number of other countries where its beauty products are sold, a $10 billion annual business. The SEC is looking into “travel, entertainment, gifts, use of third-party vendors and consultants and related due diligence, joint ventures and acquisitions, and payments to third-party agents and others.” Still, no action has been taken against the company by the SEC.

Historically, from a corporate governance perspective, it has not been uncommon for the same person to wear both hats – chairman of the board and CEO. After all, the CEO needs to sit on the board to answer questions about a company’s operations and explain recent actions and those going forward. It is also true that recently it has become more common to split these roles in the aftermath of the accounting frauds at companies such as Enron, WorldCom, and Tyco and the passage of the Sarbanes-Oxley Act. Indeed, the New York Stock Exchange requires such independence-inducing action.

In 2004, only 27% of the companies in the S&P 500 had split the roles of chairman and CEO between two individuals.  In 2011, 40% of the S&P 500 companies have appointed a separate board chairman to serve alongside the CEO on the board.  Furthermore, about a fifth of all S&P 500 companies now have an independent board chairman, up from under a tenth in 2004. This trend may have accelerated in part because the SEC and the Dodd-Frank Act now require public companies to explain to investors their reasoning behind either appointing an independent chair or allowing the CEO to handle both jobs in the boardroom.

In evaluating the ethics of the treatment of Andrea Jung we must recognize that Jung is no slouch. In addition to being the longest-serving female CEO currently in the Fortune 500, she also sits on the boards of Apple and GE.  Prior to joining Avon, Jung was executive vice president of Neiman Marcus and senior vice president, general merchandising manager, for I. Magnin. In other words she knows about women beauty products.

Jung joined Avon in 1994 as the company's president in its product marketing group. She became president of global marketing in 1996 and executive vice president/president of global marketing and new business in 1997. She has been on the company's board of directors since 1998. In November 1999, Jung was promoted to chairman and CEO.  

I have to question James Preston’s criticism of his successor at Avon. Preston served as Chairman of the Board from 1989 to May 6, 1999, and Chairman and CEO from 1989 to June 1998. The fact that Jung will continue as executive chair may be nothing more than a useful way to smooth the transition. It has also been reported that Jung wants to help identify a qualified woman to take on the role of CEO. I can understand her position given the nature of the products sold by Avon.

Let’s also recognize that while women have made some progress in assuming CEO roles in corporate America, they still have made little progress in breaking the glass ceiling on corporate boards of directors. Jung may have a spotty record of success but there is no denying the decline in profits and stock price is a reflection of our continued economic woes and it’s no surprise that women’s beauty products have been significantly affected during the decline.

Blog posted by Steven Mintz, aka Ethics Sage, on January 2, 2012