Social ties bind CEO, Directors at Victoria’s Secret Parent

Activist investor argues board lacks independence from CEO Leslie Wexner, who has run the company for more than five decades

Caption courtesy of Wall Street

By guest author Khadeeja Safdar from Wall Street Journal. She covers the U.S. retail industry, including brick-and-mortar chains and e-commerce players. She joined the Journal in 2013 after graduating from Columbia University.

For decades, Leslie Wexner has run the parent of Victoria’s Secret with a close-knit group of directors. But amid scrutiny of the board’s ties to the 81-year-old chief executive, the company is preparing to bring in some fresh blood.

L Brands Inc. has retained a search firm to find three new board candidates, according to people familiar with the matter. The company intends to replace some directors at its May annual meeting with an eye to increasing board diversity, they said.

The change would come after an activist hedge fund, Barington Capital Group LP, said this month that L Brands’ board members lack the independence or skills needed to navigate drastic changes in the lingerie market.

Tight Knit

The average L Brands director has been on the board for 20 years and is 71 years old.

Sales in L Brands’ lingerie business have declined as new competitors cropped up, and the company’s stock price has tumbled by a third from a year ago.

Mr. Wexner built L Brands, which also owns Bath & Body Works, into a global powerhouse from a single store in Columbus, Ohio, in 1963. The billionaire businessman, who is also L Brands’ chairman, has drawn heavily from his local ties to populate the retailer’s 12-person board, whose average tenure is 20 years.

Barington, which has a stake of less than 1% in L Brands, urged the company to add more women and younger directors who are outside Mr. Wexner’s business and social circles. It also called on L Brands to consider breaking itself apart.

“It is unclear that the board as currently comprised has the independence to effectively oversee you as chief executive officer,” James A. Mitarotonda, Barington’s chief executive, wrote in a March 5, 2019 letter to Mr. Wexner.

Mr. Wexner remains the company’s largest individual shareholder, with a 17% stake. His wife, Abigail, is also on the board, and neither is independent under the rules of the New York Stock Exchange. Two additional directors also don’t meet the requirements, including one who acts as a business adviser to the Wexners.

Though the company classifies the remaining eight directors as independent, most of them have close ties to the Wexners, Barington argues. One headed a university to which Mr. Wexner promised USD 100 million. Another runs a charity that partners with an organization founded by Mrs. Wexner. One director was formerly employed by Mr. Wexner at his retail company.

“It’s an old-style board with the kinds of interrelationships you saw many years ago, particularly in certain localities,” said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware. “It’s surprising that this kind of board continues to exist in today’s climate.”

A spokeswoman for L Brands said Mr. Wexner and the other board members weren’t available to comment.

In its proxy filing last year, L Brands said the eight directors were independent because in the past three years they hadn’t worked for L Brands or received more than $120,000 from it, and they aren’t related to top executives at the company. L Brands said it evaluates whether a director is independent on a case-by-case basis.

The Columbus Crew:

These directors are considered independent by L Brands:

  • E. Gordon Gee was president of Ohio State University while Mr. Wexner was chairman of the school’s board of trustees. The Wexners committed a $100 million gift to the school during Mr. Gee’s tenure, the largest gift the university has ever received.
  • Stephen Steinour, CEO of Columbus-based Huntington Bancshares, serves as a board member of the Ohio State University Wexner Medical Center, where Mr. Wexner is the chair.
  • Robert Schottenstein, CEO of a Columbus-based homebuilder, serves on the board of the Wexner Medical Center and Pelotonia, a local nonprofit where Mrs. Wexner is also on the board. He is a former director at Huntington Bancshares and was on the search committee that led to the hiring of Mr. Gee at Ohio State.
  • David Kollat, chair of the compensation committee, was employed for more than 10 years by Mr. Wexner as an executive at his retail company. Mr. Kollat has served on the L Brands board for 43 years.
  • Donna James, a former insurance executive, is chair of the audit committee. She is the co-founder of the Center for Healthy Families, a nonprofit organization based in Columbus. One of its core partners is a nonprofit founded and chaired by Mrs. Wexner.
  • Michael Morris, a retired utility CEO, is board chairman of the Columbus Downtown Development Corporation, another local nonprofit. Mrs. Wexner and Mr. Steinour are also on the organization’s board.

The average age for L Brands’ directors is 71, the youngest being 57, and seven of them have been on the board for more than a dozen years. The median age of a director at S&P 500 firms is 63.3, while the median tenure is 7.8 years. Three L Brands directors are women.

“When more than a third of directors have served for more than nine years, that’s when we start to have a little bit of concern,” said John Roe, head of ISS Analytics, the data intelligence arm of Institutional Shareholder Services. “The danger is groupthink, or the reluctance to consider new opinions.”

Mr. Wexner, who was behind other mall regulars such as the Limited, Abercrombie & Fitch and Lane Bryant, bought Victoria’s Secret, consisting of six stores and a catalog, in 1982 for $1 million. He opened hundreds of stores and bet on high-profile fashion shows featuring supermodels in push-up bras. The formula served him well. Victoria’s Secret, with more than $7 billion in annual revenue, is the leader in the women’s underwear market.

But in 2016, the brand began losing steam as shoppers gravitated toward more unstructured styles, such as bralettes and sports bras. Competitors capitalized on the natural trend by emphasizing unretouched ads and featuring models of different shapes and sizes.

Victoria’s Secret tried to adjust by hiring new leaders and changing its products. But some of Mr. Wexner’s decisions—such as eliminating swimwear from stores and continuing to rely on Edward Razek, his 70-year-old marketing chief—have emboldened critics.

L Brands shares closed Wednesday, March 20, 2019, at USD 28.18. In late 2015, the stock traded near USD 100.