Posted on Tuesday, September 14, 2010 - 02:13 pm:

---

quote:

5 of the worst corporate boards



The embedded board

Harley-Davidson (HOG, news, msgs) still has what's known as a classified board, which means that only a portion of directors are up for re-election in any given year, instead of the whole bunch. This creates two problems for shareholders.

"If you have someone really bad, you have to wait to vote them out," says Lindsley, of the American Federation of State, County and Municipal Employees. It also discourages takeovers, because potential buyers have to wait so long to seat new board members. This can lead to complacent management.

So you have to give Harley-Davidson credit for offering shareholders the chance to eliminate this board structure by voting against it at the company's annual meeting April 24. Hopefully, they will come through. But Harley-Davidson's board has additional problems.

One director owns Deeley Imports, the exclusive distributor of Harley-Davidson motorcycles in Canada. So he does a lot of business with the managers he is supposed to oversee.

Harley-Davidson spokesman Robert Klein responds that the director gets the same terms anyone else would in the open market, so there is no conflict, and that his "deep knowledge of the motorcycle industry and the Harley-Davidson business is a valuable benefit."

Another director, Jochen Zeitz, missed nearly 30% of meetings last year, which seems curious given that five of the 11 board meetings were held by phone. Harley-Davidson says he has trouble attending all meetings because he lives in Europe.

"Well, he shouldn't be on the board then," says Barrett, of The Corporate Library. But Klein says, "As the company continues to expand the international mix of its business, we believe it is advantageous to have international representation on the board."

Besides these problems, three directors have been on the board for more than 15 years. Harley-Davidson says more than half of the directors came on board after 2002 and that having this kind of mix of new and long-standing directors makes for a better board.

At least Harley's entrenched board hasn't showered excessive pay on top execs. But you have to wonder whether they've been pushing management hard enough. Harley-Davidson stock has significantly underperformed the market over the past five years. Sure, you can blame the economy. Hogs are expensive, after all. But Morningstar analyst Philip Gorham thinks a big part of the problem is that the company has been too focused on one demographic: middle-aged males.

Harley-Davidson responds that it hired a new CEO last May and that it has recently consolidated plants and struck new labor agreements that bring down costs and provide more flexibility with its work force. It's also selling off motorcycle brands to focus on the Harley name, expanding internationally and marketing more to younger men and women, and to minorities.

Analysts at Gradient Analytics predict things will only get worse this year. During the 12 months through September 2009, Harley-Davidson shipped too many motorcycles to dealers, and inventories rose at the company as well, Gradient says. Plus more motorcycles have been sold on credit in recent years, Gradient says, suggesting that -- just like in the housing market -- more sales could go bad if employment remains soft.

Harley-Davidson says its own inventories and dealer inventories improved in the fourth quarter of last year and that a dealer survey by brokerage Robert W. Baird released in March found that nearly three-fourths of dealers believed inventory was "about right." The company says loan quality is improving because 80% to 85% of loans were considered "prime" last year, compared with 75% in prior years.

At the time of publication, Michael Brush did not own shares of any company mentioned in this column.

---