MANHATTAN (CN) - Ralph Lauren, whom Forbes magazine calls the second-highest paid CEO in the United States, "almost entirely handpicked and unilaterally approved" the board of directors that approved his enormous salary, shareholders say in a derivative complaint.
USA Today estimated that Lauren made $75.2 million in 2011, more than 50 percent higher than he made the year before.
The named plaintiff, the City Pension Fund for Firefighters and Police Officers in the City of Pembroke Pines, also sued Lauren's brother, Jerome Lauren; his son, David Lauren; top Lauren executives Roger Farah and Jackwyn L. Nemerov; and company directors John R. Alchin, Arnold H. Aronson, Joyce F. Brown, Hubert Joly, Robert Wright, Frank A. Bennack, Jr., Joel L. Fleischman, Stephen P. Murphy, and Ralph Lauren Corp. (RLC), in New York County Court.
"RLC has long been treated by R. Lauren as if it were a private company rather than a publicly traded corporation," the complaint states. It summarizes Ralph Lauren's dominant role in the company since he founded it.
"As the eponymous founder of the Ralph Lauren clothing and home goods empire, defendant R. Lauren has, since the Company's beginnings in 1967 through today, remained deeply involved and entrenched in the company's management and operations. In addition to his roles as CEO and Chairman of the Board, defendant R. Lauren is the principal stockholder of the company, owning, along with family members and related trusts, approximately 76 percent of the voting power of RLC's outstanding common stock," the complaint states.
"The company's ownership structure consists of two classes of common stock, Class A shares, which are held by both members of the Lauren family and by the public, and Class B shares, which are held exclusively by R. Lauren and entities controlled by R. Lauren. Specifically, 90.6 percent of the Class B shares are owned by R. Lauren outright, while 9.4 percent of the Class B shares are owned by entities controlled by R. Lauren's family.
"At the most recent annual meeting of shareholders, Class A shares, which are traded on the New York Stock Exchange under the symbol 'RL,' were entitled to elect three of the eleven directors standing for election, while Class B shares were entitled to elect eight directors. Accordingly, as the owner of all outstanding shares of Class B common stock, R. Lauren singlehandedly designates the company's eight Class B directors, and R. Lauren himself is among the eight directors 'voted' into such a director role."
The shareholders complain that Ralph Lauren filled the board of directors with company executives, such as its Chief Operating Officer Farah and Executive Vice President Nemerov.
"Since the company's inception over forty years ago, founder R. Lauren has retained tight control over the company's operations and management through his roles as CEO, Chairman of the Board, and controlling shareholder of RLC. The Board is comprised of twelve directors, three of whom also serve as executive officers of the Company (R. Lauren, Farah, and Nemerov)," the complaint states. "This results in a Board makeup that boasts 25 percent admitted insiders, a higher ratio of Board insiders than peers and industry competitors Tiffany, VF Corporation, Limited Brands, and Luxxotica. Further, given that R. Lauren controls the election of 9 of 12 directors, in actuality, the Board consists of 75 percent insiders."
The pension fund says the board of directors has "defaulted to rubberstamping unreasonably excessive and wasteful compensation packages," which for the top five executives came to nearly 13 percent of the company's reported profits in fiscal year 2010.
"While company performance was generally positive, the increases in pay for RLC's executive officers were disproportionately generous in relation to company profits, with the total payout equivalent to the company's profits for all of the first quarter of 2009 (i.e. the quarter ended March 31, 2009)," the complaint states. (Parentheses in complaint.)
The shareholders allege breach of fiduciary duty, waste of corporate assets and unjust enrichment. They want Ralph Lauren, Jerome Lauren, David Lauren, Farah and Nemerov to return their excessive compensation to the company, and pay unspecified damages.
The pension fund is represented by Eduard Korsinsky with Levi & Korsinsky.