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South central kansas |
ADM accounting mess highlights risky exec comp
Archer Daniels Midland Co (ADM) logo is seen displayed in this illustration taken, April 10, 2023.
23 Jan 2024 | By
Robert Cyran
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Oversized carrot. Archer-Daniels-Midlands is going to have a long winter. The company said on Sunday it had placed Chief Financial Officer Vikram Luthar on administrative leave pending an investigation into accounting practices at its Nutrition segment. As a result, it cut its 2023 forecast and delayed fourth-quarter results. Investors sold the stock hard, driving its single biggest one-day drop in nearly a century. No matter the outcome of the investigation, the company’s governance could change.
That the accounting mess has hit ADM’s Nutrition business, which supplies plant-based protein, flavors and supplements, is particularly worrisome. Once touted by management as the company’s growth engine because of projections for items like meat substitutes, it notched 21% expansion in operating profit annually between 2020 and 2022 and double the operating margin of ADM’s core Agricultural Services & Oilseeds segment. At a 2021 investor day, the company predicted as much as $1.5 billion in operating profit by 2025, nearly double analyst expectations at the time, according to Jefferies.
Recently, though, things have gone awry. In the first nine months of 2023, Nutrition’s operating profit fell by 23%. These new troubles pile on the woes. The company said it is investigating accounting in the Nutrition unit and pointed toward certain related intersegment transactions.
This is still a small part of the company, accounting for 10% of total adjusted operating profit at ADM in 2023’s first nine months. And that unit’s intersegment sales are even smaller, at less than 1% of revenue last year. ADM says it still expects to deliver $6.90 in adjusted earnings, compared to around $7 previously.
Even with that, nutrition loomed large in executive compensation. In 2020, ADM awarded Performance Share Units that vested according to both the company’s adjusted return on investment and profit growth in the Nutrition segment, with a small modification for share performance. A 10% return on invested capital and, more crucially, 21% average growth in Nutrition’s operating profit over three years ensured a 200% payout. Over 800,000 PSUs were awarded to seven executives including the CFO.
Whatever emerges from the investigation, putting so much weight on a small part of the business is a bad idea, as small shifts can change payouts substantially in a way that isn’t tied to meeting bigger-picture goals. Volatile returns in the commodity business generally are hard to square with investors’ desire for consistent growth. Combine this with putting lots of carrots in a small basket, and shareholders may not like the performance they receive.
Context News
Archer-Daniels-Midland said on Jan. 21 that the company’s board of directors had placed Chief Financial Officer Vikram Luthar on administrative leave, effective immediately. The company is investigating accounting practices at its Nutrition segment in response to a document request by the U.S. Securities and Exchange Commission. The grain trading and processing company also cut its 2023 profit forecast and said fourth-quarter results would be delayed due to the investigation. It also withdrew guidance for the Nutrition segment. The company now expects to deliver above $6.90 in adjusted earnings, compared to $7 per share previously.
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