Corporate Governance at Martha Stewart Living Omnimedia Case Solution

The prolonged investigation and trial of Stewart spanning across three years caused serious damage to the brand equity of MSO and pushed the company into losses. The company took measures to distance the brand from her but even after resignation from the position of CEO and chairman and her sentencing of five-month prison, Stewart was able to redesign the board using her controlling voting rights due to which her compensation was resumed.

Although 50% of women continued to favor Martha after her release from the prison (according to Lynne), MSO could not beat the competition and hence, could not return to profits except for the year 2007. More importantly, the company was faced with a number of internal issues such as replacement of CEO, continued restructuring of BOD mainly due to tension with Martha. Consequently, MSO had five CEOs in a decade, each with a different vision for the company making the strategy of the company and activities of the brand highly inconsistent overtime. On a serious note, MSO lacked strategic planning and policies, and eventually, it lost control of the market due to lack of growth plans and effective risk management aggravating the losses.

2. Answers to Case Questions

i. In what ways did Stewart's control of shareholder voting rights disrupt the functioning of the board? How did her control of the board interfere with directors' carrying out their fiduciary duties?

In a private company, the division between the shareholders and management is not defined as compared to a publicly held company. Likewise, Martha Stewart was the CEO, a controlling shareholder and chairman of the board of directors. Being a majority shareholder, Stewart was able to appoint her friend as the chief operating officer and a Director. Such a conflict gives rise to incompetent management and results in decreasing the value of the firm. However, Martha was maximizing her individual returns leveraging on herself as a brand icon which gave rise to the conflict of interest. Being a member of the board, Martha was obligated to not put themselves in a position where her personal interests and duties conflict with the duties that she owes to the company. Nevertheless, Martha used her controlling voting rights to control the board such that the decisions favored her more than the company itself, for instance, her affluent compensation and royalties.

ii. What changes in the makeup of the board would have improved governance?

The board of MSO was dominated by directors appointed by Martha Stewart herself which resulted in decisions that were beneficial to the interests of Stewart while harmful to the company's growth and profitability. The board of directors lacked a strategic planning committee which is very crucial for the growth of a business. In the absence of strategic planning and appropriate risk management, the company faced serious consequences due to lack of strategy when faced with challenges at later stages of the business.

iii. How might changes in corporate bylaws have improved governance?

MSO's bylaws required the formation of four committees called audit, compensation, finance and nominating and corporate governance committee. The audit committee was responsible for monitoring the principal risk exposure of the company along with audit duties. Moreover, the bylaws assigned the overseeing of succession planning to the nominating and corporate governance committee. As already mentioned, the board of directors lacked a strategic planning committee. Moreover, the role of the compensation committee should have been restricted. Although large capital and noncapital expenditures need approval from the board of directors, the bylaws should restrict the role of the committee to eradicate any chances of favors. In such a case, having a strategic plan as well as a consistent policy is helpful when deciding the major expenditures such as CEO compensation and royalties.

iv. What situations might have been improved or avoided through better risk management?

Martha Stewart Living Omnimedia faced a number of challenges both due to competition and Martha's scandal. Firstly, although the company was confident in their brand image and demand, they started facing competition from the rise of new celebrities, reality shows and the emergence of online traders. The primary brand equity of MSO was their pioneering efforts and innovation. In order to maintain that image and prevent head-on competition, the company should have focused more on innovation. Moreover, the company should have kept pace with technological advancements such as e-commerce. Secondly, better risk management could have mitigated the blow that MSO had to face due to Martha's scandal. Although Martha herself was responsible for the extent of reliance of the brand on herself, an independent board should have anticipated this risk and taken measures to separate the brand identity from that of Stewart.

v. What are the advantages and disadvantages of having one person serve as both a company's dominant brand its controlling shareholder?

In a corporation, shareholders need to remain separate from the activities of the company to avoid conflict of interest. The main objective of the company is to maximize shareholder's wealth. If a majority shareholder gets involved in a situation where his/her personal interests conflict with that of the company, he/she might act in a way that destroys the total value of the firm while benefiting that one person him/herself.