Beleaguered Stewart resigns from NYSE board

She says stepping down `was appropriate'


Martha Stewart, under ever-increasing scrutiny over the trading of her ImClone Systems Inc. shares, resigned yesterday from the board of the New York Stock Exchange -- prompting questions from analysts about whether she will also step down as chief executive of Martha Stewart Living Omnimedia.

Stewart's resignation arrived in a note and was presented at a regular meeting of the 27-person board, along with that of Michael Carpenter of Citigroup, who was ousted as head of the company's investment bank, Salomon Smith Barney.

Carpenter could not serve because he no longer led a major company; Stewart's resignation was "voluntary," said the chairman of the stock exchange, Richard A. Grasso.

"Her resignation was accepted; there was no discussion," Grasso said.

Analysts said that after Douglas Faneuil, the assistant to Stewart's stockbroker at Merrill Lynch, pleaded guilty Wednesday to lying about her ImClone trades, she had little choice but to quit.

Stewart, in a news release issued late yesterday, said she resigned because she did not want "the media attention currently surrounding me to distract from the important work of the NYSE and thus I felt it was appropriate to resign." After Grasso's announcement, shares of Martha Stewart Living Omnimedia fell, closing down more than 8 percent, to $6.21, their lowest price ever.

Sources inside the exchange said Grasso had stood by Stewart, who was made a member of the board last June, only a few days before the ImClone insider trading scandal broke.

Even after the story broke, the sources say, Stewart personally assured Grasso she was innocent -- and legal experts emphasized yesterday that Stewart has not been charged with any crime.

"As a board member, she had fiduciary responsibility," said Charles Elson, the director for the Center of Corporate Governance at the University of Delaware. "The exchange must be run on trust and integrity, and the role of a director is to contribute to public confidence."

"She finally realized the walls are closing in," said John Coffee, a professor at Columbia University Law School who specializes in corporate and securities law. "There obviously has to be a discussion going on in her own board -- every other CEO who has been indicted has resigned." Even though Stewart has not been indicted, he said, "the board has got to be indulging in contingency planning."

"The problem for the board is a particularly sticky one," he continued, since Stewart holds the vast majority of shares in Martha Stewart Living Omnimedia, which owns Martha Stewart Living magazine, the Martha Stewart franchise at Kmart, the franchise for her new line of furniture through Ethan Allen and the rest of an empire largely based on finding happiness through home cooking, crafts and good taste.

If her board voted to remove her, Coffee said, she could then fire all the directors because she has control of the stock. But that type of corporate bloodbath would be unlikely. As a major shareholder, she has to think of her own investment. "That would really send the stock into a tailspin," Coffee said.

Douglas M. Arthur, an analyst for Morgan Stanley (which was the lead underwriter for Stewart's company when it went public in 1999), said Thursday afternoon that he was upholding his buy rating on the shares.

"Ad sales for Martha Stewart Living are up for October, and the sales at Kmart are pretty good," Arthur said, labeling Stewart's brand "resilient."

"Not many companies could handle all this without folding up shop -- there's a lot of cash on the balance sheet."

Several other analysts disagreed, saying that Stewart should quit as chief executive.

T.K. MacKay, an analyst who covers the stock for Morningstar, a research firm in Chicago, said his company's recommendation was clear: "The stock should be avoided," he said.

"We have seen evidence that her disintegrating reputation is taking a toll on the company's business," MacKay said.

Whether she will resign as chief executive is "everybody's $69,000 question," he said.

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