Ralph Andy, head of Spartech Corp.'s compensation committee and a member of its board, is also minority owner of a small side business that buys most of its materials, about $1 million a year, from Spartech.
In the post-Enron era, that's the kind of extracurricular financial relationship between boards and companies that is drawing a lot of scrutiny.
Andy and Spartech officials maintain that financial interest does not cloud his ability to be objective in setting pay for company executives. But such situations raise questions among some corporate governance experts - who, while not commenting directly on Spartech, say such ties may not pass muster with tough new rules on corporate governance.
``Those kinds of relationships raise questions about a potential compromise of your independence,'' said Charles Elson, executive director of the corporate governance center at the University of Delaware in Newark. ``That's not to say that the compensation that is arrived at will be corrupted. It simply means it will be questioned.''
The New York Stock Exchange, where Clayton, Mo.-based Spartech trades, came out with new rules on board independence in June. It was a move designed to reassure investors nervous about the quality of corporate books and the oversight provided by corporate boards. Nasdaq also has proposed new rules.
The relevant new requirement is that all compensation committee members must be independent, which is defined as not being a partner, shareholder or officer in an organization that has a ``material relationship'' with the company on whose board they sit. In theory, that means board members should not have any other financial ties with a company beyond their compensation as board members.
The key word, Elson says, is ``material.'' A close look at Spartech reveals some of the intricacies involved in making that assessment.
The company Andy is part owner of, Plastimerics Inc., is a home business run by a former employee of Spartech, Kiyo Hattori. Hattori said the company buys essentially all of its products from Spartech and resells them. It has annual sales of less than $2 million a year, he said.
Spartech inherited Andy's relationships in 1998 when it bought Polycom Huntsman Inc., where Andy was president, said Randy Martin, Spartech's chief financial officer. At the time Andy also was majority owner of trucking, recycling and warehousing companies that did about $1 million a year in business with Polycom.
``At that point there were interrelationships with other companies,'' Martin said. ``We evaluated all those relationships and found them to be independent and at arm's length.''
Andy has had other financial relationships with Spartech since joining the board in 1999. Besides the trucking, warehousing and recycling companies, he received $750,000 over three years for consulting, an arrangement that was part of the Polycom Huntsman purchase.
According to company filings, companies Andy is involved with had financial relationships totaling $6.2 million with Spartech in 1999, 2000 and 2001. Spartech had more than $930 million in sales last year from its sheet, compounding, and molded and profile products divisions.
Since 1999, Andy has served on Spartech's audit committee. NYSE rules say an audit committee member can have a direct financial relationship like Andy's only if the company determines it does not interfere with a person's ability to exercise independent judgment. Elson said the same questions about director independence would apply.
Andy said he always has considered himself an independent director. He said he stopped operating the trucking, warehousing and recycling companies in 2001, and his last payment in his consulting contract was made last year. He retains his interest in Plastimerics.
``I feel very confident that the new rules would permit this relationship,'' Andy said. ``Plastimerics is not a significant part of my income.''
He said his stake in Spartech stock is a larger part of his income.
Andy is not the only member of Spartech's compensation committee that experts say may not meet the new NYSE guidelines. Richard Scherrer, managing partner of the company's chief outside law firm, Armstrong Teasdale LLP, is also on the committee.
Paul Lapides, director of the corporate governance center at Kennesaw State University in Kennesaw, Ga., said the NYSE long has said lawyers with financial ties to a company are not independent. Now, its new requirements will prevent them from sitting on compensation committees, he said.
Martin, however, said Spartech considers both Andy and Scherrer independent. Scherrer did not respond to a request for an interview.
``The reality is again that I feel we have an independent relationship,'' Martin said. ``Now, they are making more stipulations about what does and doesn't fall into independence. We have to consider whether that changes how we'll operate.''
Martin said Spartech formed a corporate governance committee in March, before the exchange came out with rules, because it wanted to be ahead of the issue.
Companies that do not follow the new rules could be given a strong public reprimand letter or they ultimately could be delisted, although the latter is a very serious decision, a NYSE spokesman said. The NYSE declined to comment on Spartech specifically.
NYSE estimates that about one-quarter of the companies on the exchange do not meet the new rules, which also cover other aspects of corporate governance.
Other plastics firms have had board members with financial ties to the company beyond their fees for sitting on boards:
* Until last year, plastics foam manufacturer Foamex Inc. had a compensation committee chairman who also had a $10,000-a-month consulting contract, owned 5 percent of the firm's Asian subsidiary, and got a rent-free apartment worth $200,000 a year for company business.
But Foamex said in government filings that it reorganized its compensation committees in August 2001, and the former chairman, John Tunney, was not put on the new committee. Company officials did not respond to an interview request.
* Intertape Polymer Group Inc. removed two members of its compensation committee in May because they would not be considered independent under new voluntary director-independence guidelines from the Toronto Stock Exchange.
Intertape Chairman and CEO Melbourne Yull and Michael Richards, a senior partner in a firm that does legal work for Intertape, were replaced by independent directors, said Andrew Archibald, Intertape's chief financial officer.
The Montreal-based company does not think there was a substantive conflict, but Archibald said it wanted to avoid the appearance of a conflict.
While most observers said the new corporate governance rules are positive steps, some raised questions about whether they will have unintended consequences.
They could, for example, make it harder for companies, particularly small and midsize firms, to recruit good directors, said Michael Baroody, executive vice president of the National Association of Manufacturers in Washington.
Beyond getting more independent directors, what is equally important, said Kennesaw State's Lapides, is to provide directors with education on their oversight role and hope they act.
All of the companies that granted interviews for this story said that, in their opinion, the outside financial interest of directors was not a real conflict.
Indeed, some observers said that what matters most to shareholders is not how the corporate board is made up, but what return shareholders get.
Consider Spartech again.
Chairman, President and Chief Executive Officer Brad Buechler is among the best-paid executives at publicly held plastics firms. While his pay dropped in 2001 - because the company's net profit dropped and he did not get a cash bonus - he still had the second-highest compensation on this year's Plastics News ranking.
But the company also has been a strong performer. Andy praised Buechler's stewardship, and the company's long-term financial results have been good. If $100 had been invested in the company in 1996, it would have been worth $206 at the end of 2001, handily beating both Standard & Poor's Specialty Chemicals Index and the S&P 500.