Bob Evans Farms, Inc.

Response to The Corporate Library Governance Rating Information

March 23, 2010


Classified Board

TCL correctly notes that Bob Evans’ Board of Directors is currently classified.  In both 2007 and 2009, Bob Evans’ management included proposals in the proxy statement to declassify the Board of Directors.  In each case, the proposal failed to receive the requisite support from the company’s stockholders. 


Tenure of Directors

Bob Evans’ Board of Directors currently has 10 members.  TCL’s report gives the impression that Bob Evans’ Board is entrenched and long-tenured.  Half of Bob Evans’ directors have been in office for less than four years (Steve Davis – 2006, Bryan Stockton – 2006, Paul Williams – 2007, Eileen Mallesch – 2008 and Dr. E. Gordon Gee – 2009).  Bob Evans finds it extremely beneficial to have a mix of the “fresh viewpoints” provided by its newer directors and the historical knowledge, experience and perspective provided by its long-standing directors.  All of Bob Evans’ directors have been re-elected by a wide majority.  Moreover, Bob Evans is a leader is board diversity.  Two directors are African American and two are women.   


Bob Evans does not believe that there is a possible “board within a board” and “potential director and managerial entrenchment” as noted in TCL’s report.  With respect to “managerial entrenchment,” please note that most members of Bob Evans’ senior management team were put into their functional positions by the Board within the past few years (CEO Steve Davis – May 2006, CFO Tod Spornhauer – September 2009, President and Chief Restaurant Operations Officer Harvey Brownlee – February 2009, President and Chief Concept Officer – Bob Evans Restaurants Randall Hicks – February 2009, President and Chief Concept Officer – Mimi’s Café Timothy Pulido – December 2007, President – Food Products J. Michael Townsley – November 2006, General Counsel Mary Garceau – July 2006, Senior Vice President – Human Resources Joe Eulberg – March 2008, Senior Vice President – Supply Chain Management Richard Hall – August 2006).  It is difficult to understand the concern/characterization of an entrenched Board and senior management team when the majority of these individuals have been in office for only a few years.


Executive Compensation

TCL’s report states that CEO Steve Davis “failed to achieve two of four performance targets (operating income and total sales) but was still able to earn a cash bonus of $651,420, nearly 100% of his targeted bonus.”  This statement is misleading because it implies that Mr. Davis was rewarded despite his “failure” to meet half of his performance goals.  As clearly outlined in Bob Evans’ CD&A, performance targets are based on a sliding scale which allows each executive to receive anywhere from 0 to 200 percent of their bonuses (i.e., no payout for performance below the minimum, 100 percent payout for performance at target and up to 200 percent payout for performance at or above the maximum).  Given the economic recession and extremely difficult operating environment, Bob Evans’ performance for an “increase in operating income over prior year” and “total sales” did not achieve the target performance metrics for a 100% payout with respect to these performance goals.  However, Bob Evans’ performance for these two goals was above the minimum performance metric, thus there was some payout for these goals based on the sliding scale described above.  Moreover, total sales performance was very close to the target performance metric, and the target performance metrics for Mr. Davis’ other two performance goals (increase in EPS and return on stockholders’ equity) exceeded the performance metrics for 100% payout for these goals.  The economic recession has been especially challenging for restaurant companies.  Bob Evans has weathered this economic storm better than most of its peers (see the Performance Graph included in the 2009 Form 10-K).  The Compensation Committee strives to set performance goals that promote consistently improved performance/stockholder value without fostering excessive risk taking.  Mr. Davis and Bob Evans performed admirably in an unprecedented economic environment.


TCL’s report also states that “[t]he granting of market-priced stock options raises concerns over the link between executive compensation and company performance, given that small increase in the company’s share price (which can be completely unrelated to management performance) can result in large increases in the value of the awards.”  Bob Evans disagrees with this position.  Stock options are a valuable and commonly used tool to reward performance and ensure alignment with stockholder interests.  Stock options are of no value to the executive who holds them unless Bob Evans’ stock price increases – which benefits all of Bob Evans’ stockholders.  Bob Evans does not understand how an increase in the company’s share price can be “completely unrelated to management performance” or how a small increase in stock price can result in a large increase in the size of an award.  An increase in stock price will have a proportionate increase in the value of the award.  The only value associated with a stock option is the increased value of the stock, because the exercise price is equal to the closing price of the stock on the grant date. 


TCL’s report criticizes Bob Evans for using “one of the same performance metrics (Percentage Increase in EPS Over Prior Year) to determine annual bonuses and performance-based restricted stock grants.”  TCL states that this provides for “double-dipping” by being paid twice for the same performance metric.  Again, this is somewhat misleading.  Annual cash bonuses are based on a variety of performance metrics, with each performance metric being assigned a specific weighting.  For example, only 30% of Mr. Davis fiscal 2009 bonus was based on the percentage increase in EPS over the prior year – not his entire cash bonus.  (Four of the six named executive officers did not even have an EPS metric for their cash bonuses.)  EPS is a critical performance metric because it directly drives stockholder value.   


TCL’s report also notes that Mr. Davis was allowed personal use of the corporate aircraft in fiscal 2009.  Mr. Davis used the corporate aircraft for one round-trip flight (when his work schedule did not accommodate a commercial flight to a meeting in another city) and one additional leg on business trip. As stated in the proxy statement, Bob Evans’ incremental cost for these flights was less than $10,000.  (If permitted by FAA regulations, Mr. Davis would have reimbursed Bob Evans for the cost of these flights.)  TCL’s report gives the impression that Bob Evans provides Mr. Davis with unfettered personal use of the corporate aircraft.  This is hardly the case.


Lastly, TCL’s report notes Mr. Davis’ long-term performance-based incentive (“LTPBI”).   TCL does not mention that the purpose of the LTPBI is to increase stockholder value by establishing additional compensation incentives linked directly to Bob Evans’ performance over a five-year performance period (fiscal year 2010 - 2014).  Mr. Davis ultimately will earn performance shares pursuant to the LTPBI award agreements ONLY if:  (1) Bob Evans’ net income growth for each fiscal year during the five-year performance period meets specific performance goals that the Compensation Committee establishes at the beginning of each fiscal year; (2) Bob Evans’ total stockholder return (“TSR”) is at or above the median of the peer group over the five-year performance period; (3) he remains employed as Chief Executive Officer; and (4) any other criteria the Compensation Committee deems appropriate are satisfied.  Mr. Davis will only receive compensation under the LTBPI program if the Company’s performance over the performance period is superior to that of its peers and provides increased value to Bob Evans’ stockholders.  This is the essence of “pay for performance.”



Bob Evans is surprised and disappointed by TCL’s current governance rating.  Bob Evans strives to provide its stockholders with increased value through outstanding performance and strong corporate governance.  Bob Evans urges TCL to reconsider its “D” rating in light of the foregoing response, Bob Evans’ performance and Bob Evans’ corporate governance practices.  As of January 3, 2010, Bob Evans’ ISS Corporate Governance Quotient is better than 95.9% of S&P 400 companies and 99.5% of Consumer Services companies. 


Thank you for your time and attention.