Corporate Governance & ESG
IMGT 8619
March 7, 2012
Cheng Qiao
Nathalie Marin-Gest
Dennis Petersen
Abercrombie & Fitch Co. and The Gap, Inc.
Abercrombie & Fitch Co. (ANF) and The Gap, Inc. (GPS) are two corporations, which both offer
apparel, accessories and personal care products for men, women and children. Each corporation sells its products
under multiple brand names and does so through its stores, websites, catalogues and direct-to-consumer
operations in the US, as well as worldwide. ANF was originally founded in 1892 in New York City by David
Abercrombie and Ezra Fitch. GPS was founded in 1969 by Donald and Doris Fisher in San Francisco. Both
corporations have grown into huge apparel providers. Especially Gap had exceptional growth in the 1990s due to
a complete reinvention of the company’s product lines and stores. Currently, ANF has over 9,000 employees and
GPS has over 135,000, so there is a size difference between the two companies, but we believe a comparison of
the two companies is possible since they operate in the same way in the same market.
If we look at the financial performance of the two companies, we see a clear difference. We have listed
some financial data and ratios of ANF and GPS in Exhibit 1. We look at market value related to the stock price
and other relevant financial ratios during a three-year period (2008-2010). The stock price of GPS has been
increasing, but it is important also to look at the amount of total outstanding shares. If we multiply these two
numbers, we get the market capitalization. The market cap increased by $5 billion from 2008 to 2009 but
decreased $1 billion in 2010. It makes sense that the stock price has been going up, because the financial ratios
tell us that the company has been doing very well. They have managed to avoid being affected by the financial
crisis in 2008. In the three-year period they have had increasing sales, income, net profit margin, earnings per
share, ROA, and ROE, and that is considered really good. The picture is different when we look at ANF. The
market cap of ANF has been increasing throughout the period, but their financial ratios are not as impressive as
GPS. They have had a really bad financial year of 2009, and therefore it can seem odd that the market cap has
continued to go up. Their assets and equity have been pretty constant, but in 2009 their sales went down, and
their net income practically disappeared. The financial crisis can be the explanation. In 2010 they improved, and
their sales were back to the level of 2008. However they were still doing worse than in 2008 since their cost had
gone up, and the net income had decreased.
1
Corporate Governance & ESG
IMGT 8619
March 7, 2012
Cheng Qiao
Nathalie Marin-Gest
Dennis Petersen
ANF – Board of directors
The company has a combined chairman and Chief Executive Officer (CEO) structure. The practice of
having the same person as CEO and Chairman of the board is constantly disputed and partiality is always a main
concern. Therefore together with the CEO and the board, the company also sets a position of a Lead Independent
Director. The board adopts the staggered director institution. This means directors are divided into three classes
and elected every third year. This is a common takeover defense that makes it difficult to acquire control
immediately after obtaining share majority. Only non-associate directors receive compensation for services as
directors. The compensation package includes an annual retainer (including an addition for each standing
committee Chair and member) and an annual grant of restricted stock units, which the highest director
compensation for fiscal 2010 was $245,836 (refer to Exhibits 2 & 3 for information on the compensation for
Directors). The board has five standing committees and the average number of directors in each committee is
four. Some of the directors hold multiple positions in different committees (refer to Exhibit 4).
ANF - Ownership
As of the end of 2011, Michael Jeffries owns 1,011,142 shares and is by far the largest major direct
holder, which is expected due to his doubly high rank. The next highest major direct holder is Leslee K. Herro,
the Executive Vice President of Planning and Allocation, who owns 38,127 shares. As of September 2011, the
top institutional holder is FMR, LLC, with 13,149,942 shares, which is actually the top holder of ANF shares
overall. Following FMR is Columbia Wanger Asset Management, LP, with 5,814,850 shares. The top mutual
fund holder is Fidelity Low-Priced Stock Fund with 6,500,000 shares, with Columbia Acorn FD coming in
second with 3,510,000 shares. See Exhibits 5, 6 & 7 for a list of the top shareholders.
ANF - Compensation
The overall objective of the executive compensation is to align executives’ goals with shareholders’
goals. Therefore they try to link the compensation to long-term returns. However they also have a short-term
focus. The purpose of the short-term focus is to attract and retain talented executives. ANF’s executive
compensation consists of four elements: Base salary, Annual Incentive Compensation Plan, Long-term Incentive
Program, and benefits. One of the benefits is a retirement program or pension that secures payments to the
2
Corporate Governance & ESG
IMGT 8619
March 7, 2012
Cheng Qiao
Nathalie Marin-Gest
Dennis Petersen
executives the rest of their lives. ANF has an employment contract with their CEO. This means additional
obligations to him, but he is valued very highly in the corporation. As a measure of severance the CEO would
get $114 million in case of a change of control and a termination without a cause.
GPS – Board of directors
Mr. Glenn Murphy serves the combined role of chairman and CEO. In the same way as ANF one of the
independent directors acts as the Lead Independent Director. The board met seven times during fiscal 2010 and
the independent directors are typically scheduled to meet without the presence of management during each
regularly board meeting. All directors are elected at the annual meeting to serve for one year. Then they need to
be reelected to continue. In the compensation package, in addition to annual retainer and stock units, the
company also provides meeting expense reimbursement and other benefits, such as deferred compensation plan
and gift match program (see Exhibits 2 & 3). Among all the directors, the highest compensation is $266,289. The
company has three standing committees and the average number of committee members is three. The committee
members are all independent directors because of the company policy that employee directors are not eligible to
serve on committees or as committee chairs (refer to Exhibit 4 for information on Board Committees for GPS).
GPS - Ownership
The Fisher family has held its roots in Gap from the beginning and continues to do so to this day. John
Fisher is the top major direct holder with 16,421,658 shares. His mother, Doris Fisher, comes in second with
10,564,349 shares, and the other Fisher son, Robert, comes closely behind with 10,489,431 shares. The fourth
largest major direct holder of GPS shares is Arthur Peck, the President of Gap North America Operations, with
181,576 shares. The top institutional holder for Gap is RBS Partners, LP, with 31,172,156 shares, which is
actually the top holder of GPS shares overall. Following RBS is Hotchkis & Wiley Capital Management, LLC,
with 21,272,700 shares. The top two mutual fund holders are T. Rowe Price Mid-Cap Value Fund with
5,529,000 shares and Thornburg Value Fund with 5,238,700 shares. GPS’ Class B common stock can be
converted into shares of common stock on a share-for-share basis and the holders of this stock can have six votes
per share on most matters and are entitled to a lower cash dividend. Refer to Exhibits 5, 6 & 7 for a list of the top
shareholders of GPS.
3
Corporate Governance & ESG
IMGT 8619
March 7, 2012
Cheng Qiao
Nathalie Marin-Gest
Dennis Petersen
GPS - Compensation
GPS’ object of compensation is the same as it is for ANF. GPS’ executive compensation consists of
three elements: (1) Base salary, which is based on peer-group data and the base salary of other executives; (2)
Annual bonus, which is based on performance, mainly earnings performance, but also subjective objectives for
all executives except the CEO; (3) The long-term compensation is stock based, typically in the form of stock
options. A new incentive plan (LGP) focuses on multi-year performance. It means you have to achieve certain
performance goals over 3 years. This incentive should motivate the executives to achieve corporate goals and
secure long-term growth, especially because GPS does not offer any supplemental executive retirement plan, and
severance is relatively conservative. The CEO would get $27 million in case of a change of control and a
termination without a cause. Additional interesting factors about GPS’ compensation policy are that all
compensations are reviewed annually, there are no employment contracts with any executives, they have a clawback policy in case of intentional misconduct by executives, no tax gross-up payments, no re-priced stock
options, and there is a stock ownership requirement.
Comparison
Regarding the board of directors, these two companies have many of the same features. They have the
same board structure with a combined chairman and CEO structure, together with a Lead Independent Director.
They both have the policy that employee directors do not have compensation serving as a director. They both
only have one finance expert in the board, which seems not enough effective dealing with audit and finance
issues. However, one important difference is that ANF adopts the staggered director institution that is regarded
as an anti-takeover strategy while all the directors of the board of GPS are elected at the annual shareholders
meeting. For ANF, Mr. Jeffries, the Chairman and CEO, also serves as a member in one of the board committees
(The Executive Committee), while in Gap, employee directors are not eligible to serve on committees or as
committee chairs. For GPS, it has many more benefit policies than ANF. About the oversight, both companies
have three independent but interconnected links: internal auditors, the board/audit committee and the outside
public accounting firm.
4
Corporate Governance & ESG
IMGT 8619
March 7, 2012
Cheng Qiao
Nathalie Marin-Gest
Dennis Petersen
The ownership of both companies is comprised of direct, institutional and mutual fund holders, yet some
differences set them apart. GPS’ founding family still holds strong roots in the company and is reflected well in
direct ownership listings, which ultimately allows for strong foundations to remain. Abercrombie & Fitch’s
founders on the other hand, have been out of the picture for decades. Regarding the institutional holders, Black
Rock Institutional Trust Company holds over two million shares in both ANF & GPS, although it holds over 9
million shares in GPS. In terms of mutual fund holders, Vanguard Total Stock Market Index Fund owns over a
million shares in both ANF & GPS, although it holds over 4 million shares in GPS. Having mutual holders of
shares in both companies demonstrates that these investors are interested in the industry in general, versus
particular companies.
Regarding compensation the two companies have the same objects and almost the same structure, but
there are differences. Compensation is more related to financial performance at GPS. As an example the CEO of
GPS voluntarily lowered his base salary in 2009 because a tough year was expected. However it turned out to
become a good year and he was awarded a special bonus that made up for the lower base salary. The long-term
return factor of the compensation is much more evident in GPS. They offer no supplemental executive
retirement program. Therefore the executives need their stocks and stocks option to be their long-term
investment, and that aligns their goals with the shareholders’ goals. Another difference is that GPS has no
employment contracts with any executives. Therefore they are no obligated to offer any continuous increasing
salaries, bonuses or long-term incentives, and furthermore it makes it easier to replace the management if that is
necessary. Regarding severance the golden parachute is 4.2 times bigger at ANF than GPS.
Conclusion
We believe that GPS has superior governance. Based on the factors in the comparison above we see that
GPS has an advantage in especially board and compensation. Furthermore their governance is related much
better to their financial performance. Our result is in order with an independent assessment from ISS (see Exhibit
8). ISS also believes that GPS is superior, because ANF has some issues within compensation and shareholder
rights. Issues with shareholder rights could be the takeover defense of a staggered board and a very strong CEO,
who has a lot of rights because of his contract and a very strong position in the board.
5
Corporate Governance & ESG
IMGT 8619
March 7, 2012
Cheng Qiao
Nathalie Marin-Gest
Dennis Petersen
Sources:
NASDAQ
SEC Company Filings
Wall Street Journal – Finance/Quotes
Yahoo! Finance
Exhibit 1:
Financial Data and Ratios of ANF and GPS
Source: Yahoo Finance and company fillings with the SEC
6
Corporate Governance & ESG
IMGT 8619
March 7, 2012
Exhibit 2:
Cheng Qiao
Nathalie Marin-Gest
Dennis Petersen
Regular Director Compensation Package for ANF & GPS
Type of Compensation
Annual Retainer
Additional Annual Retainer for Committee Chairs
Special: for Audit Committee
for Compensation and Development Committee
Additional Annual Retainer for Committee members
Special: for Audit Committee
Additional Annual Retainer for Lead Independent Director
Fee per Board meeting
Fee per regularly scheduled Committee meeting
Annual stock
Expense reimbursement and other benefits
ANF
55,000
25,000
40,000
GPS
70,000
10,000
20,000
20,000
0
12,500
25,000
30,000
120,000-300,000
N/A
20,000
2,000
1,500
125,000
Employee merchandise
discount policy;
Deferred Compensation Plan;
Gift Match Program;
Board Service Program
Source: Yahoo Finance and company fillings with the SEC
Exhibit 3:
Director Compensation for Fiscal 2010 for ANF & GPS
Company, Directors
ANF
James B. Bachmann
Lauren J. Brisky
Archie M. Griffin
John W. Kessler
Elizabeth M. Lee
Edward F. Limato
Robert A. Rosholt
Craig R. Stapleton
Fees Earned
or Paid
in Cash ($)
107,500
105,000
90,960
92,500
57,672
20,000
60,227
128,228
Stock
Award
($)
117,608
117,608
117,608
117,608
153,181
117,608
—
117,608
Option
Award
($)
—
—
—
—
—
—
—
—
Change in
Pension
Value ($)
—
—
—
—
—
—
—
—
All Other
Compensation
($)
—
—
—
—
—
—
—
—
Total ($)
225,108
222,608
208,568
210,108
210,853
137,608
60,227
245,836
GPS
Adrian D. P. Bellamy
Domenico De Sole
Robert J. Fisher
William S. Fisher
Bob L. Martin
Jorge P. Montoya
Mayo A. Shattuck III
Katherine Tsang
Kneeland C. Youngblood
James M. Schneider
105,000
77,500
70,000
70,000
115,000
88,500
106,500
39,000
82,000
58,500
124,992
124,992
77,042
124,992
124,992
124,992
124,992
124,997
124,992
124,992
0
0
0
0
0
0
0
0
0
0
21,547
0
0
0
0
0
0
0
0
0
14,750
15,000
15,000
15,000
10,000
6,500
15,000
0
0
0
266,289
217,492
209,992
162,042
249,992
219,992
246,492
163,997
206,992
183,492
Source: Yahoo Finance and company fillings with the SEC
7
Corporate Governance & ESG
IMGT 8619
March 7, 2012
Cheng Qiao
Nathalie Marin-Gest
Dennis Petersen
Exhibit 4:
Board Committees for ANF & GPS
Company
Committee
Committee
Members
ANF
Audit
Compensation
Nominating and Board Governance
Corporate Social Responsibility
Executive
4
4
4
4
3
GPS
Audit and Finance
Compensation and management development
Governance and Nominating
3
3
4
Fiscal 2010 Meetings
9
10
5
3
3 plus one action by
written consent
9
6
3
Source: Yahoo Finance and company fillings with the SEC
Exhibit 5:
Top Major Direct Holders for ANF & GPS
GPS
ANF
REPORTED
HOLDER
1,011,142
Dec 23, 2011
Doris F. Fisher
10,564,349
Jan 21, 2011
Leslee K. Herro
38,127
May 19, 2011
John J. Fisher
16,421,658
Mar 8, 2010
Edward F. Limato
24,886
Jul 6, 2010
Robert J. Fisher
10,489,431
Sept 30, 2011
Lauren J. Brisky
20,492
Jun 9, 2011
Arthur L. Peck
181,576
Aug 20, 2011
Diane Chang
16,114
May 26, 2011
John T. Wyatt
97,976
HOLDER
Michael S. Jeffries
SHARES
SHARES
REPORTED
Feb 3, 2012
Source: Yahoo Finance and company fillings with the SEC
8
Corporate Governance & ESG
IMGT 8619
March 7, 2012
Exhibit 6:
Cheng Qiao
Nathalie Marin-Gest
Dennis Petersen
Top Institutional Holders for ANF & GPS
ANF
HOLDER
SHARES
OUT (%)
VALUE ($)
REPORTED
Columbia Wanger
Asset Management, LP
5,814,850
6.76
357,962,166
Sep 30, 2011
The Vanguard Group, Inc
4,631,242
5.39
285,099,257
Sep 30, 2011
Winslow Capital Managmnt
4,035,327
4.69
248,414,730
Sep 30, 2011
Welington Management
Company, LLP
3,661,787
4.26
225,419,607
Sep 30, 2011
State Street Corporation
3,123,215
3.64
192,819,155
Sep 30, 2011
Rainier Investment Mngmt
2,822,070
3.28
173,726,629
Sep 30, 2011
Pennant Capital
Management, LLC
2,767,800
3.22
170,385,768
Sep 30, 2011
Bank of NY Mellon Corp.
2,250,402
2.62
109,909,633
Dec 31, 2011
Black Rock Institutional
Trust Company, NA
2,162, 479
2.52
133,122,207
Sep 30, 2011
FMR LLC
13,149,942
15.30
809,510,429
Sep 30, 2011
GPS
HOLDER
SHARES
OUT (%)
VALUE ($)
REPORTED
RBS Partners, LP
31,172,156
6.38
578,243,493
Dec 31, 2011
Hotchkis & Wiley Capital
Management, LLC
21,272,700
4.36
384,608,585
Dec 31, 2011
The Vanguard Group, Inc
14,373,768
2.94
266,633,396
Dec 31, 2011
State Street Corporation
13,820,303
2.83
256,366,620
Dec 31, 2011
Thornburg Investment
Management, Inc
10,616,648
2.17
196,938,820
Dec 31, 2011
LSV Asset Management
9,961,540
2.04
184,786,567
Dec 31, 2011
Black Rock Institutional Trust
Company, N.A.
9,033,048
1.85
167,563,040
Dec 31, 2011
RS Investment Management Co,
LLC
7,199,764
1.47
133,555,622
Dec 31, 2011
T. Rowe Price Associates, Inc
7,079,242
1.45
131,319,939
Dec 31, 2011
JP Morgan Chase & Company
5,991,838
1.23
111,148,594
Dec 31, 2011
Source: Yahoo Finance and company fillings with the SEC
9
Corporate Governance & ESG
IMGT 8619
March 7, 2012
Exhibit 7:
Cheng Qiao
Nathalie Marin-Gest
Dennis Petersen
Top Mutual Fund Holders for ANF & GPS
ANF
HOLDER
SHARES
OUT (%)
VALUE ($)
REPORTED
Fidelity Low-Priced
Stock Fund
6,500,000
7.56
483,600,000
Oct 31, 2011
Columbia Acorn FD
3,510,000
4.08
216,075,600
Sep 30, 2011
Variable Insurance Products FD
II-Contrafund Portfolio
1,590,684
1.85
76,209,670
Nov 30, 2011
Fidelity Growth
Company Fund
1,585,000
1.84
75,937,350
Nov 30, 2011
Mainstay Large Cap
Growth Fund
1,390,700
1.62
66,628,437
Nov 30, 2011
Fidelity Balanced Fund
1,291,571
1.50
61,879,166
Nov 30, 2011
Fidelity Series All
Sector Equity Fund
1,145,968
1.33
54,903,326
Nov 30, 2011
Vanguard Mid-Cap
Index Fund
1,067,234
1.24
65,698,925
Sep 30, 2011
Vanguard Total Stock
Market Index Fund
1,016,878
1.18
62,599,009
Sep 30, 2011
950,000
1.11
58,482,000
Sep 30, 2011
Columbia Acorn Select FD
GPS
HOLDER
SHARES
OUT (%)
VALUE ($)
REPORTED
T. Rowe Price Mid-Cap Value Fd
5,529,000
1.13
102,562,950
Dec 31, 2011
Thornburg Value Fund
5,349,500
1.10
86,875,880
Sep 30, 2011
American Beacon Large Cap
Value Fund
5,238,700
1.07
97,177,885
Dec 31, 2011
Vanguard Total Stock Market
Index Fund
4,723,070
0.97
76,702,656
Sep 30, 2011
Vanguard 500 Index Fund
3,095,567
0.63
50,272,008
Sep 30, 2011
JP Morgan Mid-Cap Value Fund
2,860,760
0.59
53,067,098
Dec 31, 2011
SPDR S&P 500 ETF Trust
2,859,643
0.59
53,046,377
Dec 31, 2011
Vanguard Institutional Index
Fund-Institutional Index Fd
2,840,943
0.58
46,136,914
Sep 30, 2011
Vanguard/ Winsor II
2,638,600
0.54
49,869,540
Oct 31, 2011
RS Investment Trust-Value Fund
2,387,996
0.49
44,297,325
Dec 31, 2011
Source: Yahoo Finance and company fillings with the SEC
10
Corporate Governance & ESG
IMGT 8619
March 7, 2012
Exhibit 8:
Cheng Qiao
Nathalie Marin-Gest
Dennis Petersen
ISS - Governance Risk Indicator (GRI®)– January 1, 2012
Source: Yahoo Finance
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