Chapter 4

Charles Sanders did not like the way the meeting was progressing.  It was not a good sign at all.  But then again, he might not necessarily care much longer how the circus turned out.  Not anymore.  Those phone calls and the one meeting, originally coming as such a shock and turnoff, now increasingly intrigued him. 

At least he had an option, pun intended, because he might not have many other options after this meeting.  That was all he cared about really, today.  The option grants from the past, so numerous, and yet about to expire worthless. These options were under their respective grant prices, set originally out of the market to provide incentive for management to get the stock price up, and were now coming up rapidly against their common expiration date, a date now twice extended from the original one by the former gratuitous nature of the Board.  It was standard practice of Club Easy.  The problem was not the grant prices as much as it had been the poor performance of the stock price.  He could care less about the company’s financial health at the moment; what he cared about was his future financial health.

Please extend the expiration date of those grants just one more time.  Now, with the oil markets pointing upward.  Finally, the TREMCO stock price looks ready for takeoff.  Please, just one more time.

In his gut he knew they wouldn’t, though, and certainly not after Jarrett warned him.  Not now, with the new Board membership.  He had to be realistic; the Board was turning on him, unhappy with the company’s past performance.  Patience was wearing thin; with the stock price of the company in the doldrums, the stockholders hadn’t been rewarded for years.  There had been a series of refinery explosions, a staggering environmental fine, heavy maintenance expenses and just plain bad luck, all under his watch, of course.

If I weren’t in Houston, it might be different.  But after Enron, people here want to make an example of perceived corporate excess.  I could be the fall guy.

However, in Houston, or anywhere else for that matter, nothing much had changed.  Corporate biggies were still lining their pockets even when they ran their companies into the ground.  Arranging mergers based on existing stock prices, bringing nothing to the table for stockholders at that point, and still getting wads of cash based on change of control provisions in fat cat employment agreements with compliant, sycophantic boards stuffed with their buddies.  Changes of control they arranged or manipulated in the first place.

Of course, there was always the example to be made.  And Sanders knew, just knew, deep down that he would be the one.  Someone in Houston had to pay after Enron; someone had to go down so a board could say they were awake.  He had fought against the outsiders coming in, but he couldn’t hold them off.  Now it would bite him. 

The intended routine meeting with the Board of Directors of Texas Refining and Marketing Company, more commonly referred to as TREMCO by both the general public and the petroleum industry, was increasingly becoming uncomfortable.  It was bad enough they hadn’t even come to the new report from the Board’s Executive Compensation Committee.  Sanders was getting zapped right and left with questions on the recently concluded past year’s financials, even as he was trying to steer the discussion to the new year’s income and operating expense forecasts.  Fortunately, he had been through the wars long enough to hold his own with the Board.  He could still snooker them but it wasn’t getting easier.

He didn’t have the heart to tell the Board that the company’s future financial position might be in terrible shape if he didn’t get his way.  That is, if he went through with the plans thrown out on the table.  They would deserve it for shafting him.  And, some of the smug idiots sitting around the table might really be petrified if they knelw the value of their own stock holdings might plummet.

Yes, Charles, TREMCO stock options might not be such hot items in the future.  Not if I go through with the plans, which are looking better to me by the moment.

He had been CEO and Chairman of the Board of TREMCO for the past six years.   In the past, he had played the Board like a fiddle, as they would say here in Houston, where the present meeting was being held at the top of the headquarters office building in Greenway Plaza.  What irritated him the most was that the majority of the directors had been handpicked and were supposed to understand the rules of the game: perform the role of oversight in a perfunctory manner, don’t ask the hard or embarrassing questions, get paid a handsome fee for doing essentially nothing and make sure the CEO in question gets invited to sit on your own board.  In other words, American corporate incest at its best.

TREMCO was a large, independent petroleum refiner in the U.S., distilling gasoline, heating oil, jet fuel, and other products from crude oil at its refineries.  Profitability from the enterprise had been mediocre for the past few years thanks to the crushing burden of compliance with EPA and other environmental regulations, to say nothing of capital costs to maintain and improve the complicated refinery operations. 

But the worm was starting to turn.  Increasing worldwide demand for petroleum products and the fact that no new refineries were being constructed, at least in the U.S., limited the overall supply of refined products available to domestic markets.  As a result, refining margins, or the difference between prices received for the products versus the cost of crude oil purchased and refined, were steadily perking up. They could see a light ahead in terms of making a lot more money.

TREMCO had a large refinery in the Houston area, another in Mississippi, and several more on the U.S. East Coast.  The company was also recognized as a marketer of gasoline through its tidy and distinctive blue and white chain of service stations along the Gulf Coast and up the eastern seaboard to the fringe of New England. The service stations were Sanders’ pride and joy, as he had always been a marketing man and had risen in that sector of the business within TREMCO, much to the chagrin of the refiners, or oil boilers, as he derisively called them.  Today, along with gasoline, one could buy a bagel or gossip magazines and a host of other goodies, or have their clothes pressed and cleaned at the service stations’ convenience stores.  Some intrepid planners had even considered tanning salons before Sanders squelched the idea.

The situation at the board level had changed dramatically in the past few years.  Sanders had unenthusiastically been forced to allow the Empire State Civil Servants Pension Fund, of all people, a seat on the board due to their acquisition of close to 20 percent of TREMCO shares.  John Pirelli, a money manager of some note who had been retained by the Fund to manage their pension investments, had engineered that acquisition over time.  Coleman Investments LLC, a hedge fund with about 18 percent of the shares, followed.  These investors had scooped up TREMCO stock at rock bottom prices during its low-margin era in past years, eagerly awaiting their salad days in the tightening gasoline markets.  Placating these people was becoming a challenge, and some of the old-line board members were starting to listen to these upstarts because they were taking heat from their own restive constituencies.

“Charles, can you summarize again some of the primary factors in the improvement of refining margins foreseen for this year?”

The question came from Elizabeth Mosely, resplendent as ever, sitting in the midsection of the conference table.  As she gently lifted the fine china cup to sip her coffee, awaiting his reply, Sanders suddenly wished they had only provided paper cups for the Board.  If they had to start cutting costs somewhere, they could start with these morons.

Liz, why didn’t you pay attention when the slides went around the first time?  I have a cast of thousands behind the scenes working into the wee hours to put these slides together and you weren’t awake.

In the milliseconds before responding, Sanders reflected that this same Liz Mosely wouldn’t have dared to ask any questions only a year ago before she became empowered by Pirelli and company.  As the token female on the Board, her only job was to show up and look pretty, which she certainly did.  That, and the fact that her husband, Richard Mosely, a prominent and wealthy trial attorney in Houston, could arrange for Sanders to sit on all the civic and cultural boards of note in town.  It looked good for a corporate bigwig to be on the art museum board even if one didn’t know the difference between a Monet and a Manet.

“Great question, Liz,” Sanders smoothly replied, not missing a beat.  “Global demand for petroleum fuels in general has been surging, thanks in large part to the rapidly expanding economies in China and India. All surplus inventories have been taken off the market in essence.  Combine that scenario with the unrest in the Middle East, due to the Iraqi war aftermath, and the tension due to terrorist threats all over the globe, and you have a tight and higher-priced market in general.  Risk premiums, if you will, are being built into petroleum prices, whether crude oil or refined products, on top of the supply/demand factors.  Add to that mix the fact that a new refinery hasn’t been built in this country in more than thirty years and, all of sudden, stuff is starting to hit the fan.  Refining margins will rocket due to the bottlenecks in supply versus the strong demand.  Contrast the current situation with past years when we still had supply overhangs depressing the global market.  Terrorist threats didn’t seem so imminent as well.”

“It’s about time we started to cut a fat hog at the pump,” responded Howard Duff, a Sanders appointee for all the wrong reasons, and somewhat porcine himself.  He was a member of a prominent Houston family but had never hit a lick in a workplace in his life.

“Howard,” Sanders tried to modulate his voice to not sound so condescending, “We are finally beginning to reap the rewards of our efforts over the last three to four years.  We finally have our maintenance costs stabilized at our plants, we have spent a lot of time and money getting our retail marketing network optimized, we have decent crude oil supply arrangements in place, and we have cut overhead by 10 percent over the last three years.  We have taken the right steps to position ourselves for an upturn in the marketplace.  If gasoline prices firm, as we believe they will, with the U.S. economy improving after the Iraqi conflict, we could make a killing.”

Some of the Board members twitched in their seats, while others tittered with laughter at that last comment.  The corporate secretary would make sure that Sanders’ unvarnished comments, along with Duff’s, would not find their way into the final minutes of the meeting.

Pirelli was unmoved by Sanders’ optimism.  Yes, the market was thankfully improving and TREMCO’s outlook was brightening.  But, he knew that Sanders was only covering his rear end for TREMCO’s sloppy performance in the last few years.

“We are gratified with the improved outlook for TREMCO.  However, the issue for the Board should remain our performance relative to our peer group of competitors.  TREMCO’s financial performance still is in the lower one-third of the total refiner-marketer universe we compete against.  I want to see some improvement there.”  John Pirelli spoke in his usual take-no-prisoners style.  He was not a man humored easily and probably didn’t have any cowboy boots in the closet.

“TREMCO has made some improvements in our relative performance, John.  There is no debate we have our work cut out for us and we remain focused on that.”  Sanders wished he sounded more convincing.  They had moved up in their peer group ranking against a few other refiners, on a profitability per barrel basis, only because other companies had experienced recent plant disruptions or other misfortunes.  Only in the retail service station area could they engage the competition on more or less equal footing.  TREMCO’s refineries were decrepit, held together with Band-Aids, and no one really wanted to know exactly what was in the soil and groundwater beneath them.

“But we do control some key infrastructure and other assets that will come to our aid in a tight market,” chimed Curtis Farber.

“Good point, Curtis,” Sanders drew a comfortable breath.  He knew he could count on Farber to come through and get the buzzards off his back.  “Thanks to our import terminal network, particularly the major facility in the New York harbor area, our refined products pipeline system, and other key terminals in the country, we can capitalize on any bottleneck situations where prices may really escalate.  The only thing we need to ensure, with respect to these critical facilities, is that we take proper precautions and terrorist-proof everything to the extent possible.  Expect some major developments in the near future as we upgrade TREMCO’s response plan on terrorism.” 

“Any hints of planned terrorist activity at any of our critical facilities, including the refineries?”  This offering came from Rick Coleman, head of the hedge fund bearing the family name, a fund originated by his father.

“Nothing at all, Rick, but I plan to put a rocket under everyone’s rear end in the company and put this issue squarely on the radar screen.”

“Good,” Coleman responded tersely.

At this stage in the meeting, most directors’ eyes were starting to glaze over after wading through a pile of financial and operating data.  Sanders took his cue. “Okay, if there are no more questions on the financials, let’s move to the next item on the agenda, recommendations from the Executive Compensation Committee.  Cliff, you’re up.”

The room sprang back to life.  Sanders could feel his heart pumping harder.  He had already been tipped off as to the leaning of the forthcoming recommendations, not that it necessarily made things easier.  At least the shock value had worn off.  Still, the thought of what was likely to transpire hit him like a baseball bat in the gut. 

At least I have taken a proactive step or two to thwart what this Board might do to me.  I’ll get the upper hand no matter what it takes. 

Cliff Jarrett fumbled through some papers before speaking.  He was the trustee of the Jarrett Trust and a longtime friend of Sanders.  Sanders felt a twinge of sorrow for his friend’s obvious discomfort.  Well, maybe former friend henceforth.  Jarrett was starting to succumb to pressures exerted by family members within the trust.  They wanted more transparency from the Board, more performance from TREMCO and accountability from Sanders.  In their view, the party was over.  Jarrett couldn’t resist these pressures anymore with Pirelli and Coleman in the same room.

Jarrett cleared his throat.  “As the Board knows, I have already preliminarily discussed some of the Committee’s thoughts with Charles, so it is hopeful that what is difficult news can be passed over quickly and we can move ahead.”  The latter were expressed with a forceful flourish with Jarrett squarely looking at Sanders. 
“But, it is the view of the Committee and its recommendation to the Board that a number of your stock options, Charles, which have been in effect for some years, and even extended twice on the expiration date, not be renewed.  They will likely expire worthless in several months’ time, as the prospect of them being exercised is unfortunately not very good, not at current stock prices.” 

Jarrett continued, “Charles, we recognize that you have worked hard and long to achieve TREMCO’s objectives.  And call it bad luck if you wish, but over the last few years the company’s performance has been nothing to write home about.  We can’t keep extending the time frame for you, not after Enron and the others.   My own beneficiaries in the trust are giving me fits for the stock price not going anywhere.  They would have my head if they thought the Board was going to just keep feathering upper management’s nest.  And, our recommendations apply also to the senior management beneath you.”

Sanders was not going to let his former friend off that easily.  “You mean, Cliff, that just as the stock price has a very good shot of exceeding the grant prices down the road, the Board wants to take the upside away?  After all the hard work to get there?  All I need is another extension.”  He might as well be as dramatic as possible.  Now was not the time for introspective honesty.

This action on the option grants was anticipated but still stings me to the core.  Really frosts me.  If Cliff hadn’t broken the possibility of bad news ahead of time, no telling what I would have done or said now.  They have taken potential millions out of my pockets.  I am determined to get every penny back of what I deserve and more.  Much more.  I will run this company into the ground, along with their investment, if it is the last thing I ever do!

Sanders struggled to maintain a professional demeanor at the table, very difficult at the moment with millions of dollars at stake.  He had been given hundreds of thousands of share equivalents in option grants over the years, which were now likely to expire worthless.  Just another extension was all he needed.  Just one more. 

The stock price for TREMCO had lounged in the 20s for a long time.  The grant prices commencing at thirty dollars per share, and then slightly higher in a range, were beckoning, however, with any improvement in earnings, easily foreseeable within a year.  Sanders needed one more expiration date extension on the option grants to get there and he had enough grants, in terms of shares, to make potentially a lot of money.  Enough to make a difference.

“Yes, regrettably, that’s what we mean,” Pirelli responded.  He was a member of the Committee also and would take it from here.  Jarrett was fumbling around too much.  He wouldn’t mince any words as he didn’t like Sanders and, if it were up to him, would fire him as well.

“I realize, Charles, that some of your counterparts in other companies here in town, and elsewhere, are still getting their pockets fattened even though they haven’t performed well or, in fact, accomplished anything.  There are some reasons for that, of course.  In some cases, the executives have contracts covering them, which the boards had foolishly granted.  In other cases, the boards were brain dead.”

The corporate secretary had stopped taking notes for some time now.  She would lean back and listen to all the comments, as terse and blunt as some were, and then sanitize them.  The casual reader afterward, if that interested in the first place, would have thought a garden party had taken place instead.

Continuing before Sanders could catch a breath, Pirelli was warming to his theme, “But this Board has to tighten up.  My own stakeholders want to see corporate giveaways come to a halt.  They are not happy with TREMCO’s performance.  You have had more than enough time, Charles, to get the stock price up and it hasn’t happened.  Therefore, you have to take your lumps like everyone else.  You are still being paid a very good salary, complemented by current option grants and bonuses and, if we find that the stock does indeed start to climb, I’m sure the Board will be generous the next time around.”

Surprisingly, Coleman spoke up again, unusually active for him, “Frankly, Charles, I think the Board is sending a message and I will expand upon that.  Bottom line, we want much better leadership from you at TREMCO.  On this, I probably can’t speak for everyone in the room, but John agrees with me and Cliff perhaps, although I certainly don’t represent him.  And, of the ones I have referenced, that is more than 50 percent of the voting stock.”

This was new news to Sanders and it hit him like a ton of bricks.  It was one thing to have option grants expire worthless, but it was another matter to have your own management capability called into question.  That made his blood turn stone cold.

“Well, Rick, and John for that matter, where did that come from?  I mean, none of you have made any comments previously that you were unhappy with the management of TREMCO,” he responded coldly.  Sanders focused his gaze on Coleman.  He wanted to see if he had any backbone.  The only reason he was in the room was because of Daddy.

Coleman shrugged his shoulders diffidently.  “We are getting tired of waiting for results, Charles, nothing more.  Yes, we can see your case that business conditions are improving.  But, it is always mañana around here.  Always tomorrow, next month, next quarter and so forth.  The Board needs results starting now.”

“Or,” Pirelli was up now, “You can tender your resignation, Charles, if you want to put the cards on the table.  That’s where we are heading if we don’t see immediate progress.”

Sanders sank into his chair deeply.  He knew the board members were getting restless.  Nonetheless, he had thought, with the gathering momentum in the business cycle foreseen, he could buy at least another year, a better year from which to build even more momentum.  It was bad enough that he could see the way clear to the grant prices and taste the millions.  Now, that had been denied him and, on top of it, he couldn’t count on keeping his job.

Coleman interjected, “It’s not just our lack of patience waiting for a turnaround, Charles.  Some major missteps have also been made along the way.  The acquisition of the Mississippi refinery was botched up and, in hindsight of course, your decision to sell the former TREMCO production properties at the bottom of the cycle has cost us valuable cash flow going forward.”

“I will remind you that all were present on the Board when these decisions were made,” Sanders responded evenly.  He was just suppressing his rage below the surface. 

Pirelli threw his hands in the air.  “True enough, Charles, but we were relying on the expertise of you and your management team regarding these decisions and projected outcomes.”

Sanders lightly tossed his pen on the table.  In reality, he wanted to fling it across the room. “Okay, fair enough.  However, I will not tender any voluntary resignation to this Board.  I remind all of you of the employment contract, which I signed in the past and still effective in terms of severance benefits.  You may fire me, but must pay me.”

“Now, now, Charles.  Let’s everybody cool down,” uttered Jarrett with a sigh.  “Charles, we are aware of your efforts on behalf of TREMCO.  I, for one, want to see you stay on, so you may hopefully taste some fruits of success down the road.  Neither you or the Board should do anything rash.”

Looking over at Pirelli and Coleman he continued, “I will remind John and Rick that they are always entitled to their opinions, but they have not fully consulted with the rest of the Board as to all of their views.  Admittedly, certain of their views have merit.  But, I take it that the rest of the Board is not willing to do anything else at present?  Allowing senior management options to expire says enough for now.”

Jarrett glanced around the table at the other members.  They nodded acquiescently.  They would side with Sanders for the time being, if nothing else to spite the New Yorkers, but it was obvious Sanders didn’t have a lot of time.  There was a look of pity on Liz’s face as she barely met Sanders’ gaze.

Keep your cool, Charles, and Jarrett on your side.  Besides, if you stay on with TREMCO, you will reap even greater rewards.  Stay in control of the company at all costs, but nail Pirelli and Coleman to the wall if it is the last thing you ever do.

“Charles,” Jarrett said softly, “You can see that we need to turn the company around.  We need results.  We hope you are right with respect to a turn in the business cycle.  Unfortunately, the world has changed.  We all have claimants on our backs wanting improved results.  The marketplace is not a patient place.  The old days are gone.  I’m sorry about the stock options thing but the Board has to draw a line somewhere.  At least this Board feels it must.”

“Understood, Cliff,” Sanders responded firmly, more than he felt inside.  “I will reiterate to the Board that my team and I are confident of improved conditions going forward.  If not, then the Board may always terminate me at its convenience.”

He made it clear he would not go gladly into that good night if that were to occur.  Sanders brutally looked over at Pirelli and Coleman, having just barely escaped the serpents’ clutches.  “If you two are not happy with your investment in TREMCO, I can make some calls around town and see if I can arrange a buyout team and take you out.  It wouldn’t take long.”  Sanders didn’t even extend the courtesy of addressing them formally.  It was getting very uncomfortable in the room.

Pirelli and Coleman glared at Sanders in silence.  Finally, Coleman summoned the courage to speak up, “No thanks, Charles.  The Coleman Fund is interested in reaping due rewards for its investment in TREMCO.  We are willing to ride with you a little longer to catch the upside.”

Sanders resumed, as calmly as he could, “I think it fair to say we have all had enough for today.  I pledge to the Board that you will see a different management style from me henceforth.  I will entertain a motion to adjourn.  Good day, everyone.”  Without looking to see if the cursory motion had even been attained, let alone seconded, Sanders gathered his notes, nodded to Jarrett, and walked out the room. 

Still, the rough handling today had been very educational.  TREMCO really wasn’t his company anymore.  His kingdom had been usurped thanks to the likes of Pirelli and Coleman.  Even his old supporters had turned or were turning against him.  It was obvious and stared him in the face: he would have to ponder that decision more seriously than ever. 

He needed to think, really think, about the next phone call.

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