Coffee Chief Stirs Unrest

Times Staff Writer

At the conclusion of a recent annual meeting of Farmer Bros. Co., a major stockholder made what he thought was a perfectly innocuous request: Could he tour the coffee company’s sprawling complex in the industrial section of Torrance?

Without looking up from the director’s table, the company’s 86-year-old chairman and chief executive, Roy F. Farmer, killed the idea. “No tours,” he snapped. “No tours for unhappy shareholders.”

As it turns out, more and more Farmer Bros. shareholders are unhappy these days.

It’s not the financial performance of the company, which sells coffee and other staples to restaurants and commercial food service establishments in 29 states, that has people so upset, though its results have faltered some of late. Nor is anyone accusing Roy Farmer, who has made $4.8 million in salary, bonuses and other benefits during the last three years, of mismanaging the business or raiding company coffers for personal gain.

Rather, with Farmer’s health declining from prostate cancer and other ailments, critics have become increasingly restless with his autocratic style -- one that is strangely anachronistic in an age when most corporate boards and executives are scrambling to show how responsive they are to the concerns of outsiders.


Shareholders want Farmer Bros. to add independent directors, provide more financial information, talk to Wall Street analysts and change its bylaws to loosen the grip that Roy Farmer has had on the company for more than half a century. They question whether there is a coherent succession plan for a corporation in which the average age of its closely knit board of directors and top management team is in the mid-60s.

“His conduct is extraordinary,” says Gary Lutin, an investment banker and corporate governance activist working to force more disclosure from Farmer Bros. “This is the only company I have come across where they won’t send you an annual report or return your phone call. It is astonishing.”

Even Farmer’s own kin are fuming. The chairman’s 85-year-old sister, Catherine Crowe, and her children have joined other major shareholders to demand that the company divulge more information about its operations and strategy and end Farmer’s unofficial corporate gag order.

“We are frustrated,” says Steven Crowe, Farmer’s nephew. “Our family owns 440,000 shares. That’s about $150 million, and it is controlled by people who won’t even talk to us.”

Bradley Takahashi, a vice president of Franklin Mutual Advisors, which owns 9.6% of Farmer Bros., says the chairman reminds him of the curmudgeonly bank patriarch portrayed in the film “Mary Poppins.”

“When someone wants to a make a comment at the shareholders meeting, Farmer barks, ‘Stand up,’ ” says Takahashi, who was the one shot down when he asked for a tour of operations. “And if he can’t hear, he yells, ‘Come closer.’ ”

Neither Farmer nor any of his executives would speak to The Times.


Passionately Committed

But interviews with employees, family members and business associates portray Farmer as a conservative businessman passionately committed to maintaining his immediate family’s control over the company.

“Many years ago, I called the company and found out that no one gets to talk to Roy Farmer,” says Alan Kahn, a New York investor and longtime shareholder. “Roy Farmer is somewhat of an enigma.”

Over the last few years, the company’s financial performance has slipped. Sales peaked at $240 million in 1998 but have fallen to $206 million in its most recent fiscal year. Profit hit a record $37.6 million in fiscal 2000 but dropped 16% last year to $30.6 million. The company says increased competition and the slow economy are responsible for the declines.

Nonetheless, Farmer Bros. shares have risen 19% since January, impressive in a market where the major stock indexes have fallen 15% to 30% in the same period. Factoring in dividends, shareholders have earned a 43% return in the last 12 months. The company has a market value of $607 million.

Despite the stock’s performance, Farmer Bros. is not a business many outsiders buy into. It is a public company, but on average, fewer than 1,000 of its nearly 2 million shares outstanding change hands daily.

Roy Farmer owns less than 10% of the company, but through his control of family trusts, which include much of the Crowe family’s holdings, and the employee stock plan, his voting power approaches 50%.

Associates speculate that Farmer never wanted to deal with outsiders but was forced to when his father died at age 59, and he was compelled to sell a portion of the company’s stock to the public in 1952 to cover estate taxes.

Now, many say, Farmer is haunted by that decision.

Whether it is his business or his personal life, Farmer carefully avoids the spotlight. He has lived with his wife, Emily, in the same home in Ladera Heights for at least 32 years, according to property records. He avoids ostentatious spending and likes to keep his cars -- Lincolns and Fords -- for a decade or more. The company doesn’t belong to the National Coffee Assn. or the Specialty Coffee Assn., the industry’s trade groups.

These days, the man who once effortlessly hauled 132-pound burlap sacks of green coffee beans around the roasting plant and who boasted, “Vacations are only for employees,” rarely makes it to the office.

His strategy is simple: Buy low-cost beans, blend them into a decidedly average cup of coffee, avoid debt and rapid growth and communicate as little as possible with outsiders.

Most business is conducted through Kenneth Carson, Farmer’s vice president of sales, or Guenter Berger, vice president of production, say business associates, although his son Roy E. Farmer, 50, is corporate president. The younger Farmer is the only one of the four Farmer children active in the company, which has 1,113 employees.

When Farmer Bros. does open itself to outsiders, it is once a year at its annual shareholder meeting, and the sessions have an atmosphere of an old-fashioned church social rather than a 21st century corporate confab.

“There were about 50 people at the last one I attended,” recalls Jim Mitchell, who runs an investment partnership in Costa Mesa that has owned 1,200 shares since 1990. “Only two of us asked questions, and at the end I realized everyone else was there for the food. It was a buffet, a lot of jello salads and things you would expect to see at a potluck.”

Farmer Bros.’ logo is also a throwback. Its trucks and coffee cans depict an award from the California State Fair given by the “Consumer Reaction Council” in a taste test that was apparently taken in the 1960s, according to one executive.

At the company’s tan and brown headquarters, perched along a rail spur in Torrance, a green mosaic mural depicting coffee industry scenes -- the harvest and the unloading of coffee beans at the port -- serves as decoration. Computers came to branch offices only in the last eight years, according to former employees. There is no corporate Web site.

Although manufacturing coffee-brewing equipment is a critical portion of Farmer’s business, it is rarely the innovator and waits until competitors come up with new designs and improvements before making changes, according to former employees.

In its annual report, the company doesn’t list Starbucks Corp. as a major competitor, even though the Seattle purveyor is moving heavily into the food service and institutional accounts of the type that make up the bread and butter of Farmer’s business.

Steven Crowe, the grandson of the company’s founder, says he once asked if Farmer Bros. should be concerned about the rapid growth of Starbucks and its influence on the industry. A board member, he says, told him Starbucks wasn’t important.

The roots of the family squabble go back two decades, when Catherine Crowe launched a proxy battle to gain a board seat. Farmer then rejected Steven Crowe’s efforts to take over his mother’s seat after she resigned because of health problems.

Farmer’s father started the company in 1912, roasting beans and selling them door to door. It entered the equipment business a decade later and by the 1930s was in the food service business. Today, it sells products such as coffee, stainless tableware, pancake mix and individual packets of pickle relish.

Ted Lingle, executive director of the Long Beach-based Specialty Coffee Assn., says that early on the company understood how the Western United States would grow, opening branches in key areas such as San Francisco and Las Vegas. But the company has long lost its interest in aggressive expansion. “Roy easily could have made Farmer Bros. a national company,” says Lingle, but he chose not to.


An Efficient Operation

Still, Farmer Bros. is not devoid of business know-how and technology. It has a continuous coffee-roasting and packaging system that is regarded as one of the most efficient in the industry.

People within the industry say the company probably will be sold when Farmer dies, possibly to a giant such as Sara Lee Corp., which has gobbled up similar family-run coffee companies and controls 25% of the splintered food service market. Farmer Bros. is second or third, with about a 5% share, Lingle says.

For now, the activist shareholders are pitching incremental change. In July, Mitchell submitted a shareholders’ proposal asking the company to elect a majority of independent directors. It also seeks to reinstate the ability of shareholders to elect directors through cumulative voting, a common balloting procedure that makes it easier for shareholder groups to gain representation.

The company refused to place Mitchell’s proposals on the ballot at the next annual meeting, expected to be held in two to three months. After reviewing the matter, the Securities and Exchange Commission issued a staff report recommending against taking any action against Farmer Bros. That gives the company some breathing room, but not for long. The corporate governance reform act signed by President Bush in July and new Nasdaq rules will phase in all but the cumulative voting provision of Mitchell’s proposals.

The SEC also is considering Franklin Mutual Advisors’ bid to place a proposal on the ballot that would force more financial disclosure by Farmer Bros. The SEC has not ruled on that issue.

Farmer’s fractious relationship with Wall Street goes back decades, but this latest battle erupted over what the company should do with a $293-million cash hoard it has accumulated.

Franklin is trying to use that pile of cash as a can opener of sorts, forcing management to provide more information about how the company is run. The mutual fund says the cash represents a large enough portion of Farmer Bros.’ assets that the company should be classified as an investment firm and be forced to comply with stricter disclosure regulations.

“Essentially, this looks like an old coffee company that has become a pile of cash and a small coffee company,” says David Winters, president of Franklin Mutual Advisors. Generally speaking, he adds, a company with 40% or more of its assets in investment securities and cash needs to adhere to the stricter disclosure rules.

Farmer Bros. has told Franklin that it will open some of its records -- but has not set a date.

Although some shareholders would like to see Farmer Bros. pay out its cash in the form of a giant dividend, others would like to see the money put to use by growing the business through acquisitions or expansion.

“There are some legitimate questions to ask about Farmer, but the answers won’t all be that the management has done a poor job,” says James Lingle, Ted’s brother and president of Lingle Bros. Coffee, a competitor based in Bell Gardens. “Like all family businesses, it is a whole lot easier from the outside looking in rather than actually being there.”