Standard Pacific Corp. CEO Stephen Scarborough's surprise retirement in late March left many in the industry scratching their heads. And when the board selected independent director Jeffrey V. Peterson as his replacement, shock turned to speculation about a possible bankruptcy or sale.
Although Peterson had served on the company's board since 2001, he was a relative unknown in home building circles. His background was from outside the industry–although it included some experience in real estate investment management–and that made him a surprising choice to some.
Many company stakeholders expected a succession plan to include someone from inside the ranks. CFO Andy Parnes, for example, had been a part of the company's financial backbone since 1989 while COO Scott Stowell had made impressive leaps up the corporate ladder in recent years.
While Peterson's long-term intentions for the struggling Irvine, Calif.-based company have yet to be mapped out, what is clear is that he's got a big-time challenge in the near term.
In fiscal 2007, the company lost $767.3 million. It also is currently among the most heavily leveraged public home builders with a debt-to-backlog ratio of nearly 6 to 1. Moreover, a $180.5 million deferred tax charge has pushed the company into noncompliance with net worth requirements on several of its loans. Its bank group has given it a bit of a reprieve; the company has until May 14 to renegotiate the debt covenants it is violating.
May 14 is a critical date for Peterson for another reason, as it is also when the company will host its annual shareholders' meeting. Among the agenda items is a California Public Employees' Retirement System (CalPERS) proposal to "declassify" the board. The move would mean elections for all of the company's directors every year, rather than on the current schedule, which has each seat coming up for election every three years.
CalPERS argues that the current staggered board schedule could be a contributing factor to the company's recent underperformance. "You need a change, and when you have a staggered board you really can't do that," says CalPERS spokesperson Clark McKinley. "You can't hold the whole board accountable year after year, so it's very difficult to make any change quickly."
That's one reason the board structure should remain the same, the builder asserts in a note urging its stockholders to vote against the proposal. The staggered board structure not only makes it more difficult for the company to be taken over quickly but also protects the board's independence.
Other public builder boards are under similar pressures. Pulte Homes, like Standard Pacific, is resisting the change while Lennar Corp.'s board has agreed to annual elections.
CalPERS has other concerns about Standard Pacific's board structure as well, including that the company has not agreed to CalPERS's request to remove the company's 80 percent supermajority voting requirements by shareholders from its articles and bylaws. "It's very difficult to get that [80 percent vote]; it's practically impossible," McKinley says.
In other information released by Standard Pacific related to its annual meeting, it announced that in the wake of former CEO Stephen Scarborough's sudden retirement on March 20, the company is reducing how much it pays executives under the company's "change of control program" to meet market norms.
Under the change, when "the company terminates an executive officer without cause or an executive officer terminates his or her employment for good reason [generally consisting of adverse changes in responsibilities, compensation, benefits, or location of work place]," he or she will get a lump sum payment of two times annual base pay, two times his or her average annual bonus, and incentive compensation over the past three years; continuation of the company's life, health, and disability insurance for two years; a car allowance; and any cash-in-lieu payments.
When Scarborough retired after serving 27 years with the company, he received three times his base salary and average annual bonus as well as the continuation of benefits subject to caps for three years.
Scarborough's Retirement Perks
In exchange, Scarborough agreed not to disclose confidential company information, disparage Standard Pacific, or solicit any of the company's employees for two years.
- Age: 62
- Years with Standard Pacific: 27
- Years AS CEO: 8
- Severance payment: $1.25 million