The evening of May 6 2019 should have been a nice night out for Mark Watson III and his wife. The couple was attending the Met Gala, one of New York’s hottest parties of the year, known for the ridiculous outfits of its celebrity guests. Also in attendance was Hollywood actor Jared Leto, who brought a replica of his severed head.
Mr Watson had led specialist insurer Argo Group for almost two decades, during which time it had built up a market valuation as high as $2.7bn. But just a few days before the soirée, a small San Francisco-based activist fund called Voce Capital Management, released a harshly-worded investor presentation criticising Mr Watson’s tenure.
While Argo’s stock price performance was decent, Voce highlighted its middling return on equity. The activist said the shortfall was partly down to Mr Watson using company money to fund his jet-setting lifestyle. Yet even Voce did not know that the insurer itself had spent $60,000 for Mr Watson’s tickets to the Met Gala that month — and $70,000 so he could attend in 2018.
Mr Watson stepped down as chief executive last November, after the company acknowledged that the Securities and Exchange Commission was investigating its pay practices. This past March, Argo published the results of its own inquiry admitting that between 2017 and 2019, it had not properly disclosed perks totalling more than $3m that had been collected by Mr Watson, in apparent violation of SEC rules.
According to Argo’s findings, the spending went well beyond the often controversial private jet travel for the chief and his family. Dozens of questionable expenditures included the purchase of furniture for corporate residences occupied by Mr Watson in New York and Bermuda, costs for maintaining his own personal website, personal credit card fees and even a new car for Mr Watson, who already had access to company-owned vehicles.
Early last month the SEC announced that its own investigation showed that Argo had understated Mr Watson’s perks by more than $5m over a five-year period — on top of nearly $10m in annual cash and stock remuneration.
The regulator also noted that the company had, among other control failures, allowed Mr Watson to approve his own expenses. Argo settled with the SEC for $900,000, the latest in a string of cases involving blue-chips such as Dow Chemical and Nissan, where companies failed to accurately disclose in filings the full extent of executives’ pay.
A lesson of the Argo affair is that safest route for a company’s board is to plainly disclose executive compensation, allowing shareholders to make up their own mind on what is inappropriate.
Mr Watson’s benefits at Argo might never have been exposed had it not been for the shoe-leather work of Voce, a $250m-in-assets firm founded by Daniel Plants, who previously worked as a corporate lawyer.
Mr Plants had wondered why an obscure insurance underwriter, which focuses on the property and casualty market, was spending so much money sponsoring professional yacht and auto races. He began digging into flight logs to track Mr Watson’s movements and followed his prolific activity on social media.
The activist said of Mr Watson last year in a letter to other shareholders: “His tastes in art, architecture, racing, yachting and luxury travel, among other things, are well documented, and he appears to be quite the bon vivant . . . But we’re deeply concerned that Mr Watson’s hobbies, pet projects and the cult of personality he apparently wishes to create for himself have commandeered and corrupted Argo’s priorities.”
At the time, Argo accused Voce of “fabricating a narrative of excess”. The company re-elected its entire board in May 2019, after state insurance regulators withdrew their approval for Voce to wage a board fight. However, in October, Bloomberg reported that the company had been subpoenaed by the SEC over an executive pay inquiry.
Later that month Argo announced its own probe and Mr Watson stepped down as CEO a few weeks later. The departing chief was granted a $2.5m severance package but Argo kept 35,000 of his shares to satisfy any reimbursements due.
“It is genuinely a hard question deciding what is a legitimate business expense and what is a perk,” said Rob Cohen, an attorney at Davis Polk who previously served at the SEC and is not involved in the case.
In a memo this year to clients, the law firm suggested a good rule of thumb for companies deciding how to classify an executive expenditure: how embarrassing would its revelation be, in a major newspaper?
People close to Mr Watson argued that his perks were in service to helping the company prosper. They say the company’s performance over two decades vindicates his tenure.
Argo early this year entered into a settlement with Voce in which the fund and the company agreed on three new directors. The company has since overhauled its pay procedures.
The campaign, however, has so far not been a particularly profitable one for the fund, in large part because the Covid-19 crisis has driven up claims for business interruption. Argo’s share price has halved since the start of the year.
this column was amended on 10 July to clarify that the residences in Bermuda and New York were not owned by Mr Watson; and to note that Mr Watson resigned from Argo, rather than being “removed.”
Mr Watson and his representatives declined multiple opportunities to comment ahead of publication. Afterwards, Mr Watson’s lawyer Marc Kasowitz said in a statement that his client’s global travel was known to the company and the reporting of his “perquisites . . . was directed by the Argo board’s Audit and Human Resources committees . . . Mr Watson disagrees with the company’s characterisation of these expenses, which are the subject of an ongoing arbitration.”
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