We believe the announcement by Ethan Allen on October 1 of the upcoming retirement of Frank Wisner and Kristin Gamble, two long-tenured Directors who have served on the Board of Directors (the “Board”) for 14 years and 23 years, respectively, is a self-serving and transparent attempt to address but one of the numerous governance failings that we have pointed out at the Company. Notably, this is yet another example of Farooq Kathwari and the Board that he chairs being reactive, not proactive, as this step was taken only after the nomination of Sandell’s highly-qualified and experienced slate of Director candidates and our firm’s public condemnation of what we believe to be the Company’s stale and entrenched Board and other poor governance practices. Shareholders should not be misled by what in our opinion is the Company’s superficial ploy to portray itself as embracing good governance practices – this is clearly too little, too late. To make a home design analogy, we believe these actions are the equivalent of Ethan Allen putting a fresh coat of paint on a house whose walls are cracked and whose foundation is sagging and attempting to pass it off as a new home.
Furthermore, we question the ability of the two new Directors, Domenick Esposito and Tara Stacom, that Ethan Allen has recently appointed to replace these “retiring” Directors, to effectively serve as a counter-weight to the will of Mr. Kathwari. As evidence of our concerns, we note that on October 2, Ethan Allen disclosed that Farooq Kathwari, the Company’s 71-year old Chairman, President and CEO – some of which positions he has held for the last 27 years – was just granted a new employment agreement with a five-year term and two automatic one-year extensions. The Company stated that, “As of September 29, 2015, the Company’s Compensation Committee approved and the independent members of the Company’s Board of Directors ratified” this employment agreement.
Aside from the length of its term, we are concerned by the narrow metrics in the employment agreement that the Compensation Committee is using to determine Mr. Kathwari’s compensation, namely Adjusted Operating Income and Adjusted Operating Income per share. Furthermore, it is a concern that Mr. Kathwari’s compensation does not appear tied to total shareholder return. As we have previously noted, Ethan Allen had underperformed its peers by a staggering 119% over a 10-year time frame. We believe that a CEO’s compensation should be tied to shareholder returns in order to ensure focus on enhancing shareholder value and proper alignment with shareholder interests.
Alluvial Fund August 2020 Performance Update
Fortunately, shareholders of Ethan Allen will soon be offered a choice as to which Directors they want to represent their interests on the Board. In order to further our goal of seeking election of our slate of candidates for the Board of Directors, we have launched a new website entitled “Redesign Ethan Allen,” which is available at www.RedesignEthanAllen.com. We look forward to sharing our views as to how we believe our candidates for the Board can help the Company create value for all shareholders.
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