Tuesday, August 19, 2014

Hertz Bad Dream: PEU Legacy?

Consider that Hertz withdrew guidance for its 2014 financial performance and will restate financials for 2011 and revise those for 2012 and 2103.  This is huge news for the former private equity affiliate, controlled until 2011 by The Carlyle Group, Clayton-Dubilier-Rice and Merrill Lynch.

How did executive incentive pay impact confessed "accounting errors" the last three years?

In June, the company said it needed to review and correct financial statements from the last three years because an audit had uncovered accounting errors. Earlier this month, Hertz delayed filing its second-quarter results because of that review.
Hertz ceased to be PEU controlled on March 21, 2011 but that left little time for a different board slate in the April 6, 2011 Def-14a proxy statement.  Clearly the Hertz caravan rolled through 2011 with significant PEU momentum.

Hertz 2011 Definitive Proxy Statement dealt with restated financials and its potential impact on executive incentive pay:

Effective as of January 1, 2010, our Board approved an amended and restated Standards of Business Conduct applicable to our employees, including our named executive officers, on a prospective basis, in order to include a "claw back" policy for all executive officer annual incentive, long-term incentive, equity-based awards and other performance-based compensation arrangements. Specifically, a repayment obligation is triggered by an award of compensation based on achievement of financial results that were the subject of a restatement, if the Compensation, Nominating and Governance Committee determines that the executive officer's gross negligence, fraud or misconduct caused or contributed to the need for the restatement and the need for a restatement is identified within three years after the first public issuance or filing of financial statements. The Compensation, Nominating and Governance Committee retains discretion as to implementation and interpretation of all matters relating to the "claw back." In addition, Section 304 of the Sarbanes-Oxley Act of 2002 provides for the forfeiture of certain bonuses and profits by our CEO and CFO in connection with certain accounting restatements. In 2011, these "claw back" policies will likely be revised, as necessary, to reflect the SEC's rules promulgated under Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
How much is there to potentially clawback?

Executives earned over $25 million as a group for 2011.  It's rare any C-suite exaggerators are asked to pay funds back.

I wonder how much Carlyle et al made in later equity sales based on fudged finances.  (Goldman Sachs purchased 50 million shares in March 2011 and JP Morgan bought another 50 million shares in December 2012.)  That's what should be clawed back.

Hertz was PEU led and directed through 2011.  I imagine the culture of equity optimization stuck through the next few years.

Lying, cheating and stealing to get the prize is a core part of extrinsic motivation schemes.  It will be interesting to hear more of the "accounting error" story, however I don't expect any investigating firm to honestly state behaviors or causes.  Covering for the board room boys garners much more future business than being truthful with the public or shareholders.

Update 8-20-14:  Carl Icahn announced his increased stake in Hertz. Forbes reported "Icahn said he intends to have discussions with representatives of Hertz’s board of directors about “accounting issues, operational failures, underperformance relative to its peers” and “lack of confidence in management.”