'Clean Stock' in a Sullied Business: T. Rowe Price

Chico's Leadership Is Lacking

Whether Chico's FAS qualifies as a Clean Stock comes down to how you evaluate the quality of the company's board of directors. The board is especially important right now because the company, which has been able to grow sales by 48% annually over the last five years, has launched an ambitious range of new ventures to keep sales growing.

The biggest is the acquisition of the White House/Black Market brand in 2003. That deal will let Chico's expand its customer base to include women in their mid- to late-20s. The company isn't simply buying sales, however, but the opportunity to grow sales: The plan is to double the number of White House/Black Market stores over the next five years.

As if that's not enough on the company's plate, Chico's also is introducing a new line of sleepwear, bodywear and activewear under the Soma label in its Chico's stores. At the same time, Chico's has to keep its existing, very loyal customer base happy: In fiscal 2003, about 75% of sales came from customers in its frequent-buyer club.

Is management up to the challenge? The board seems light on the kind of independent voices with deep industry experience I'd like to see at Chico's right now.

Four of eight board members are independent in my judgment, but of those, one is a venture capitalist specializing in technology and life sciences, one was the chairman of Federated Department Stores (FD Quote) back in 1990, another has a background dominated by a career in publishing, and the fourth was CEO of the Limited Stores division of Limited Brands (LTD Quote) back in 1991.

That group's just not strong enough for my money. Chico's FAS fails to make the cut.

Cincinnati Financial Gets Help From Its Board

My first reaction on putting Cincinnati Financial to the Clean Stocks test was, "Oh, no, not another board dominated by family members and the company founder." Three Schiffs sit on the board: Robert, 80, the company co-founder; John J. Jr., 60, CEO; and his brother Thomas, 56.

This, however, is not your standard family-dominated company. First, the board of 15 has, by my count, only four insiders, including the three Schiffs. It's a board with a strong local flavor (the president of the Cincinnati Bengals is a member), but it's also heavy on working CEOs.

And boy, are these guys cheap. In 2002, CEO John Schiff Jr. received a salary the compensation committee notes was just 66% of that paid to his peers. And that represented a raise from the 60% of peer salaries he received in 2001. In 2003, he got a jump of 15% to close some of that gap.

Options? In October 2003, reviewing the company and the CEO's performance, the compensation committee decided that in recognition of "excellent results" for 2003, Schiff would receive a bonus of -- ready? -- $287,500. That's a lot to you and me, but Lennar's CEO got a $12 million bonus. Oh, and it came with a suitably stingy grant of 50,000 options.