Stern words in State Auto Financial’s boardroom …

July 6, 2010

As far as we can tell, no one keeps formal track of director departures from corporate boards, much less those that occur amid public words of disillusionment and chastisement. So let us take an informal stab at it: Through the first half of 2010, we here at footnoted have logged at least four noisy director departures: WellCare Health Plans (WCG), UIL Holdings (UIL), BioMarin Pharmaceutical (BMRN) and Myers Industries (MYE) — plus Amerisafe (AMSF) last fall.

And now a fifth on Friday. This most recent one came at at State Auto Financial (STFC), where director Richard K. Smith wrote a brief resignation letter in which he expressed both disappointment in the company’s performance and disagreement with its strategy for turning things around. Smith is no dilettante, at least where State Auto Financial is concerned: He was an audit committee member and a former KPMG accountant who had served on the board for 11 years, according to the company’s April 6 proxy filing.

The letter is brief enough to quote most of it:

“After over 10 years of service on the State Auto Financial Corporation Board of Directors, I am hereby tendering my resignation effective July 2, 2010.

As you know, I am disappointed with the company’s recent ratings downgrade by Standard & Poor’s and the negative outlook change by A.M. Best, both of which I think were based on lack of rate increases and lack of earnings. I do not believe these bode well for the company. While we have increased rates, I believe we need to be even more aggressive, even at the loss of policies, and more aggressively exiting unprofitable business. I also don—t believe that our expense reduction policies are showing the results that they should.

I wish the Board success in implementing the appropriate practices and policies to turn things around.”

He closed with the polite thank-you to his fellow board members for their friendship and the education they apparently provided him.

In its 8-K filing disclosing the letter — filed at 5:01 p.m. on Friday, the same date on Smith’s letter — State Auto Financial doesn’t do much to dispel Smith’s arguments. It starts by recapping his reasons for going:

“The Company believes Mr. Smith resigned because of his disappointment with the Company’s recent rating downgrade … He also expressed dissatisfaction with the Company’s aggressiveness on rate increases and exiting unprofitable business and the results of its expense reduction policies.”

But then it responds with a sort of non-sequitur, declaring its belief that “its Board of Directors is strong, talented and diverse.” It continues:

“The Company shares Mr. Smith’s disappointment with its recent financial results, and it is diligently working with its Board to implement the previously announced plans to improve results.”

Shareholders can make of that what they will. Meantime, we have the suspicion that this streak of resignations may in fact be significant. Certainly, the requirement that companies disclose board resignation letters makes it harder to sweep these kinds of disagreements under the rug, should a company be so inclined.

We’ll keep you posted.

Image source: Loui Loui via Flickr

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