Skin-deep disclosure at Obagi Medical Products …

October 18, 2010

Companies have to disclose significant events. Apparently, however, nothing requires them to actually explain why they’re doing what they are.

At first glance, Steve R. Carlson’s resignation as chief executive of Obagi Medical Products (OMPI), a Long Beach, California, maker of creams for the dermatology market, seemed a little abrupt, but otherwise unremarkable. The press release included praise from the chairman, the name of his interim replacement, and the rest of the usual ingredients. (Though, curiously, we only found the release in the SEC’d database, not on the company’s Web site, either under News/PR or under News Releases.)

But that was on October 11. Now, a full week later, we get more information, thanks to the 8-K that Obagi filed this morning. And there we see that Carlson stands to collect a little more than $1.9 million as a result of his “resignation. What’s particularly curious about this is that, under Carlson’s employment agreement, if he resigns or voluntarily terminates his employment,

“Executive shall have no further rights against the Company hereunder, except for the right to receive (i) any unpaid Base Salary with respect to the period prior to the effective date of termination, (ii) Base Salary during the 60 day notice period whether relieved of his duties or not, (iii) any accrued but unused vacation, and (iv) reimbursement of expenses to which Executive is entitled…”

Instead, he gets much more. Obagi hasn’t filed its October 15 separation agreement with Carlson, but says in the 8-K that it plans to pay him $970,553 — representing 18 months’ salary and a pro-rated 2010 bonus — and 18 months’ health-care premiums. That’s on top of the $65,716 in accrued but unpaid salary and vacation it would have owed him under the terms of his employment agreement. It adds up to “the payments and other benefits to which he would have otherwise been entitled had his employment been terminated without cause” under his employment agreement.

As if that weren’t ambiguous enough, however, Obagi goes further still:

“Although there were no provisions for repurchase in the options to purchase the Company’s common stock held by Mr. Carlson … the Company has agreed to make to Mr. Carlson no later than November 8, 2010, a lump sum payment of $874,858 to extinguish all of his rights in all options to purchase shares of the Company’s common stock outstanding .. without regard to whether such options were then vested and exercisable, would have become exercisable or would have expired subsequent to the Effective Date.”

In other words: We had no obligation to nearly double his payout by shelling out another $874,858 of shareholder cash, but we did so anyway — without further explanation.

In any other sphere of commerce, most people would expect an explanation when a company spent more than $1.8 million of their money — after all, in this case it works out to nearly 64% of the company’s net income from the quarter ended June 30. But most shareholders in similar situations just seem to sit back and take it.

In the meantime, there are any number of possible reasons for Obagi’s largesse — maybe the board forced him out, or maybe he wanted to go but the board felt it worth rewarding him for a job well done on the way out, to name just two. Much of the coverage of Carlson’s departure was routine, but Deborah Crowe at the L.A. Business Journal notes that the CEO had “taken heat from Wall Street over the company’s deteriorating relationship with its founder, Dr. Zein Obagi…” (The article has a few more details of the spat, a lawsuit, and a a discarded consulting agreement.)

It’s just too bad Obagi’s board didn’t bother to explain why it decide to open its checkbook to such an extent.

Image source: Obagi website

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