Cintas Under a Microscope

Shareholders seek to halt ‘five-year trend of underperformance,’ but company says it’s ‘outperforming’ competition

An institutional shareholder at Cintas Corp. will make a motion at the company’s annual meeting later this month seeking to have an independent chairman appointed to its board of directors to improve oversight and increase company performance.

Representatives for the North Carolina Retirement Systems (NCRS), which represents the pension investments of retired North Carolina state employees, said objective oversight is needed at Cintas to represent shareholders and “reverse a five-year trend of underperformance.”

At the company’s annual meeting on Oct. 14, the pension fund will also support a proposal seeking an advisory shareholder vote on executive pay and will oppose appointing nominee David Phillips to the firm’s board of directors.

The various proposals are supported by Risk Metrics/ISS Governance Services and Glass Lewis, which offer advice and proxy services to institutional shareholders.

Although Cintas is the largest uniform rental company in North America, its stock has underperformed the S&P 500 and its peers for the past five years, according to pension fund representatives. Cintas’ share price is down 18 percent during that period, while shares of its largest publicly-traded competitors are up 83 percent and 4 percent respectively.

Cintas also has lost market share in recent years, a trend that accelerated in 2008.

“These proposals offer an opportunity to make real change at a company that is underperforming and failing to address the concerns of shareholders,” said North Carolina Treasurer Richard Moore, who manages NCRS, in a prepared statement. “I encourage other institutional investors and shareholders to vote for these proposals and for improved governance at Cintas.”

Cintas officials disagree with the shareholders’ assessment of the company’s performance and oversight.

“We believe the Board of Directors’ governance of the company is appropriate,” says Heather Trainer, corporate communications manager. “Seven of the company’s 10 directors are independent, which meets independence standards established by NASDAQ. In addition, the chairman of a corporation should be the most qualified individual available to serve in that capacity. The Board needs to be able to use its business judgment to determine which individual has the knowledge, skill, commitment and necessary understanding of the company to best perform the chairman’s role. ...

“In response to the allegation that Cintas has underperformed its competitors in its field recently, that is false. Cintas is outperforming our competition overall and has not lost market share to any of the competitors in our industry.”

Fight over board appointment

Some shareholders contend that current Board Chairman Richard T. Farmer and his son, Cintas CEO Scott Farmer, have stacked the 11-member board of directors with friends and close associates that too closely follow the family’s directives. Cintas began as a private company started by Richard Farmer’s grandfather in 1929, before it was taken public in 1983.

Another institutional shareholder, CtW Investment Group, first proposed blocking Phillips’ appointment to the board due to what it described as an undisclosed conflict of interest and weak leadership in his role as the company’s Nominating and Corporate Governance Committee chairman.

“As lead director and chairman of the Nominating and Corporate Governance Committee, Mr. Phillips bears responsibility for many of the company’s questionable governance practices, which include … inadequate response to legitimate governance concerns,” Michael Garland, a CtW executive, wrote in an Oct. 1 letter to other shareholders. “As discussed above, nominee Phillips serves as trustee of Cincinnati Works, which received over $200,000 in charitable contributions from foundations controlled by insiders and affiliates of the Company. We question the need for the Company to engage in such significant charitable contributions with one of its directors, especially considering the amount of such contributions as a percentage of Cincinnati Works’ annual revenue.”

Trainer points out that several successful companies “rely on the vision, wisdom and participation of its founders and their families on their Board of Directors,” among them J.W. Marriott Sr., Chairman and CEO of Marriott hotels; Arthur Sulzberger, Chairman of The New York Times Company; and Bill Wrigley Jr., Executive Chairman of the Wrigley Company.

In addition, Trainer says, “Cintas is privileged to be served by a director of the business stature and acumen of Dave Phillips. His extensive business expertise, leadership skills and experience on two other corporate boards are invaluable assets to Cintas’ Board. In fact, Phillips was just named 2008 Private Company Director of the Year by the National Association of Corporate Directors.”

The donation to Cincinnati Works, Trainer says, was made by the Farmer Family Foundation, not Cintas.

“The donation was disclosed and discussed with the Board,” she says, “and it was determined that the Farmer Family Foundation’s contribution to Cincinnati Works in no way conflicted with the independent relationship that Cintas has with Dave Phillips.”

Concerns over safety record

In July, yet another institutional shareholder — the Manville Personal Injury Settlement Trust — filed a lawsuit alleging the firm’s board of directors isn’t fulfilling its fiduciary duties and fosters a corporate culture that ignores safety regulations.

At least 10 Cintas facilities nationwide have been cited for safety violations by the U.S. Occupational Safety and Health Administration (OSHA) in just over the past year.

OSHA imposed a $2.78 million fine against Cintas last year for violations that led to the death of Eleazar Torres- Gomez at the company’s laundry facility near Tulsa, Okla., in March 2007. Gomez died after he jumped onto a conveyor belt to dislodge clothes and was dragged into an industrial dryer, where he burned to death. 

Federal and state inspectors have issued citations against Cintas facilities in Alabama, Arkansas, California, Illinois, Indiana, Ohio, Texas and Washington.

Since 2003 Cintas has been cited for more than 170 OSHA violations in its facilities, including more than 70 citations that OSHA deemed could cause “death or serious physical harm.”

Cintas representatives say the company has adequate safety procedures and blame the accidents on workers who don’t follow their training on how to handle machinery.

Last month Cintas also lost a legal battle in California involving back wages for workers. The company must pay more than $1.6 million in back wages, interest and penalties for violating a “living wage” law in Hayward, Calif., after the California Supreme Court rejected its appeal.

More than 200 Northern California laundry workers will be affected by the decision, which experts say is one of the largest living wage awards in U.S. history and will strengthen cities’ ability to enforce local labor standards. In June the California Court of Appeals upheld a September 2005 ruling by the Alameda Superior Court that found Cintas had violated the Hayward law.

Cintas workers filed the lawsuit in 2003 in an attempt to enforce Hayward’s living wage law, which required employers to pay higher wages to workers who worked on city contracts. That means employees without health insurance should have been paid $10.71 per hour. Instead of paying the living wage, Cintas cancelled the city’s contract.

The city of Cincinnati has a similar law.

In the Hayward case, Cintas fought against paying workers the required wage, unsuccessfully raising constitutional and procedural challenges to the workers’ lawsuit. The 2005 judgment awarded $805,243 in back wages plus $375,000 in interest to 219 workers, including current and former employees from Cintas’ San Leandro and Union City laundries.

The final amount will be higher because more than $250,000 in interest has accrued over the past three years while Cintas fought the ruling, according to a statement issued by the Union of Needletrades, Industrial and Textile Employees (UNITE), an organization trying to unionize Cintas workers.

Additionally, Cintas must pay $258,900 in civil penalties, which will be split between the workers and the state of California. The court further ordered Cintas to pay the workers’ legal fees and other costs associated with the litigation.

Based in Mason, Cintas is the largest uniform supplier in the United States. The company reported $531 million in profits for the 2008 fiscal year, which ended in May.

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