Sears CEO’s proposed lifeline raises ethical questions
Sears CEO Eddie Lampert is the man with a plan. But is it one that’s ethical?
Lampert proposes to have his own hedge fund acquire Sears’ assets. As the CEO of hedge fund ESL and Sears Holdings, Lampert probably will stand aside and let Sears’ board of directors take over.
The move could complicate a bankruptcy — if the owner of Sears and Kmart goes down that road. Even if the company doesn’t seek relief from the courts or through liquidation, the proposal raises concern about whether Lampert’s financial self-interests would trump those of the business, sharehold- ers and creditors.
“You can create special committees and make all the arguments you wish, but ultimately, human nature always wins out,” said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.
The Sears CEO, who disclosed that he owns 49% of Sears Holdings through his hedge fund ESL, lined up a series of deals in recent years that culminated in his hedge fund acquiring control of many of the company’s prized assets.
Lampert disclosed a proposal Monday to go a step further by potentially acquiring all of Sears’ remaining real estate, the company’s Kenmore brand and other assets, including its home-improvement division and Parts Direct business.
The billionaire, who declined to comment for this story, has said he’s “fighting like hell” to revitalize the company. He often points to a loyalty program the company introduced, called Shop Your Way, as an example of his commitment to a sustainable turnaround.
Sears watchers questioned Lampert’s motives. Legally, the CEO is required to preserve the best interests of the company’s shareholders.
“If it’s between his interests and the company’s interests, the concern is his interest wins,” Elson said.
Sears Holdings declined to comment beyond a statement that the company is reviewing the deal.
Lampert’s maneuverings helped keep Sears and Kmart, both part of Sears Holdings, alive longer than some observers expected.
“In fact, were it not for the financial acumen, and deep pockets, of Chairman Lampert, Sears would have already gone the way of Toys R Us,” Susquehanna International Group stock analyst Bill Dreher wrote in February. But he said the company’s “operations appear to be as dismal as ever.”
In a letter to Sears, Lampert, in his role as head of the hedge fund, said that if he acquired all the company’s real estate, he could lease back “some or all of the stores,” which would probably include Kmart locations.
He expressed interest in buying Kenmore, one of the nation’s leading homeappliance brands, after Sears failed for the past two years to strike a deal to sell it. It has sold other big brand names such as its Craftsman tool line.
Investors liked the idea. Shares rose 7.6% Monday to close at $3.24.
Lampert has extended credit on several occasions to Sears and spun off valuable real estate into a separate company. That company holds shares in apparel seller Land’s End, which is worth about $300 million more than Sears, based on stock prices.
For Lampert to justify a deal to acquire more Sears assets for his personal enrichment, he must stay at arm’s length. He can’t be personally involved in negotiating or authorizing the transaction on behalf of Sears.
Sears said in a statement that Lampert’s offer would “be reviewed and considered by a committee of independent directors of the company’s board.” Lampert won’t participate in that process, the company said, “except to the extent specifically requested” by the committee. That still raises ethical concerns since Lampert is the key figure on both the buying and selling ends of the deal.
Even with Lampert on the sidelines, the arrangement is “problematic,” Elson said, because investors typically are predisposed to tilt a deal in their direction financially.
Lampert’s deals could come under scrutiny if Sears ends up in bankruptcy. The company has lost billions in recent years and shuttered several hundred stores to shed costs.