You have to give Reuben Mark a lot of credit for his management of Colgate-Palmolive Co., producing an exemplary record for shareholders, besting investment benchmarks year after year for almost two decades. And Mr. Mark deserves credit, too, for his refreshing candor in his public appearances, particularly in criticizing Procter & Gamble Co.'s profit-sharing plan and Lucent Technologies Inc.'s 401(k) plan. Both plans, he argued, are too heavily invested in sponsor stock.
You want Mr. Mark running your company, for sure. But do you want him running your retirement program? No, although his criticism of other companies' retirement programs make sense. That's because Mr. Mark hasn't stopped Colgate-Palmolive's own retirement plans from being heavily invested in company stock.
Mr. Mark's long-sustained performance for shareholders demonstrates without question his skill as a manager and has elicited comparison to a celebrated contemporary, Jack Welch, the recently retired CEO of General Electric Co. From April 30, 1984, when Mr. Mark became CEO, through Sept. 7 of this year, the compound annual return, dividends reinvested, to shareholders was 21.11%. By contrast, over the same period, the Standard & Poor's 500 stock index's total return, including dividends reinvested, was 14.6%. His performance has been consistent. Colgate-Palmolive, under Mr. Mark's tenure, has outperformed the S&P 500 every year.
Mr. Mark's record is similar to Mr. Welch's, although General Electric is a far larger company. From March 31, 1981, when Mr. Welch became CEO of GE, to last Sept. 7, when he retired, the total annual shareholder return of GE stock, including dividends reinvested, was 21.13%. By contrast, over the same period, the S&P 500's total return, including dividends reinvested, was 14%. (All numbers were calculated by Graef Crystal, an expert in compensation and shareholder performance.)
The problem with Mr. Mark is his views on Colgate-Palmolive's retirement program, which contradict his views of other pension plans. In a recent appearance, he was critical of Procter & Gamble's principal pension program, a defined contribution plan, for its lack of diversification. It has $12.7 billion in assets, 94% of which are invested in P&G's own stock.
He was likewise critical of Lucent's management for allowing such a large percentage of its own stock in its 401(k) plan, totaling some 42%. A class-action suit is pending against Lucent over the large amount of stock.
"Knowing what I know about the company," Mr. Mark said, "if I were a judge, I would say Lucent was at fault. I would rule it's not fair to have so much Lucent stock in the plan."
But what of Colgate-Palmolive's own retirement plans? Some years ago, when Mr. Mark realized the firm's defined benefit plan had no Colgate-Palmolive stock, he said he encouraged the pension committee to invest in it. The plan now has 10% of its $1 billion in assets in company stock, the maximum allowed under the Employee Retirement Income Security Act. About the same time, he wanted 100% of the company's matching contribution to the 401(k) plan to be in Colgate-Palmolive stock. But the committee prevailed in moderating his position, so the match was made only 60% in company stock. That 401(k) plan now has some 80% of its $1.8 billion in assets in Colgate-Palmolive stock.
That kind of overconcentration in the 401(k) puts Colgate participants at risk for lack of diversification. Colgate-Palmolive stock has performed exceptionally well during Mr. Mark's reign. But based on that logic, the plan should have 100% in the stock. Mr. Mark ignores the lessons of Lucent and other companies. Colgate-Palmolive ought to take a look at ways of encouraging employees to diversify in order to lessen their risk. They are doubly at risk of a decline in the company's fortunes, with their jobs and their retirement income.
Colgate-Palmolive could start by making its 401(k) contribution entirely in cash, allowing employees to allocate it as they choose.
Diversification in pension plan portfolios is a good idea not only for poorly performing companies, but also for companies currently performing well. There's no guarantee good performance will last. If Mr. Mark were a judge, as he would say, he might know better.