GMI Ratings Governance Issue | Northrop Grumman Corp.

Northrop Grumman Corp. has announced numerous changes to its staff, after repositioning among the company’s senior officers already contributed to a higher score in recent months measuring its governance risk to investors.

The Falls Church, Va.-based defense contractor said James E. Pitts, the corporate vp and president of Northrop Grumman Electronic Systems since 2005, will retire December 31, 2012.  Gary W. Ervin, corporate vice president and president of Aerospace Systems since 2009, will retire as executive on December 31, 2012 but remain with the company in a non-executive officer position until Feb 28, 2013, according to a statement on Monday and regulatory documentation.

The company also said it’s shifting the positions of more than seven people; exactly how many is unclear given discrepancies between the 8-K form and press release filed with the Securities and Exchange Commission Tuesday. For example, the 8-K says Prabu Natarajan is to become corporate vp and Treasurer. Linda A. Mills, who is currently the corporate vp and president of information systems, will become corporate vp of operations. The corporate vp and president of Northrop Grumman’s technical services sector, Thomas E. Vice, will become corporate vp and president of its aerospace systems sector. All the above-mentioned people will take on their new roles January 1, 2013.

“The work we have been doing to develop our leadership team enables us to effectively execute our management succession plan for these roles,” Northrop Grumman’s CEO Wes Bush explained in the statement Monday.

In another example of significant changes among the senior ranks, Northrop Grumman said in November 2011 that its corporate vp, controller and chief accounting officer, Kenneth N. Heintz, would retire before this March. Kenneth L. Bedingfield was to take the position of corporate vp, finance that month and then Heintz’ duties once his predecessor left. The company announced in its annual report for the year ended Dec. 2011 that Bedingfield would replace Heintz following the filing of the 10-K on Feb. 8. Investors should note such changes, as the chief accounting officer plays a key role in the quality of the company’s financial statements.

Bush himself has been the CEO and president since only January 2010. He worked his way up following Northrop Grumman’s 2002 acquisition of the defense company TRW, which he had joined in 1987. In July 2011 he took on the role of board chairman in addition to his CEO duties – effectively becoming one of his own supervisors. A management structure such as this does not create the kinds of checks and balances needed to ensure that CEOs will put the shareholders’ interests above their own. However, the board apparently sees this issue differently, as it explained the move in its proxy filing as an effort to help Northrop Grumman be “innovative, compete successfully and advance shareholder interests.”

The same day, the board designated Lewis W. Coleman its lead independent director. As the CFO of DreamWorks Animation, Coleman has limited time to carry out his duties, which include advising Bush and having the authority to call meetings among the independent directors. While Northrop Grumman’s proxy filing described his designation as a demonstration of the “continuing commitment to strong corporate governance and Board independence,” Coleman’s impartiality is arguable. (In 2011 the company paid him over $5.2 million in costs related to security protection; that included housing him in a more secure residence and providing for his personal travel and travel required by his employer using company-provided aircraft.) This raises more questions about how much the board is capable of defending shareholder interests.

In part due to the new red flags raised by such developments, Northrop Grumman’s financial statements reflected an AGR score of 10 as of March, indicating more accounting and governance risk than 90% of comparable companies. The AGR score has been in that range since June 2011, when it was a 56 and indicated average risk.

Northrop Grumman is rated “D” overall.  Perhaps in the years ahead, the company will develop the team that it recently repositioned to address its corporate governance issues.

Region:  North America
Sector: Industrials
Industry: Aerospace / Defense
Market Cap: $16,043.4mm (Large Cap)
ESG Rating:  D
AGR:   Very Aggressive (10)

 

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