The following report is copied with permission from Corporate Governance Highlights, a private weekly newsletter for clients of Investor Responsibility Research Center ("IRRC"), the leading not-for-profit research organization for institutional investor interests in corporate governance and proxy voting issues.

Corporate Governance Highlights

Vol. 13, No. 48  

December 6, 2002

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Coffee Maker Accused of

Filtering Out Shareholders’ Best Interests

SHAREHOLDER DISSENT IS PERCOLATING. Franklin Mutual Advisers is sponsoring a shareholder proposal at Farmer Brothers’ upcoming annual meeting that would designate the company as an “investment company” under the Investment Company Act of 1940 (ICA). Investment companies must comply with requirements related to board independence and investment management disclosure that are more stringent than those placed upon other public companies. Based on IRRC’s criteria for independence, Farmer Brothers’ board is 17 percent independent, and its audit and compensation committees are each 33 percent independent. 

Companies generally register under the ICA when cash and investments reach 40 percent of assets. Farmer Brothers’ most recent fiscal year-end financial filings indicate that the company’s cash and short-term investments comprise approximately 70 percent of assets. The firm currently is not designated as an investment company because the ICA excludes government securities when calculating the percentage. As of the most recent fiscal year end, U.S. treasury bills made up 40 percent of Farmer Brothers’ assets. Some shareholders have said that management’s decision to maintain such a sizable stake in low-yielding government bonds proves the company’s lack of commitment to maximizing shareholder value, and that the reason for this unorthodox allocation is a desire to dodge ICA standards.

After the SEC denied the company’s request to keep the proposal out of the proxy statement, the company scheduled the meeting to be held the day after Christmas. Adoption of the proposal would require a majority of outstanding common shares, which is not likely to occur given that directors and officers beneficially own 52 percent of common stock. CEO Roy F. Farmer’s sister, who supports the proposal, is a former director holding 11 percent of the company’s stock. The sponsor of the proposal holds 10 percent.

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