Martha Stewart’s lucrative living

By James T. Madore Staff Writer

July 2, 2002

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NEW YORK - When Martha Stewart's magazines and television programs show homeowners how to arrange flowers, cook dinner for 20 or organize closets, chances are the photographs were taken at one of her half dozen or so estates.

There's the vacation home in East Hampton near famed Georgica Pond. A farm in Westport, Conn. that has served as her primary residence for nearly 30 years. And in Maine, there's Skylands mansion, once owned by Henry Ford's son. Between them all, there are about 20 kitchens.

As chief executive of Martha Stewart Living Omnimedia Inc., Stewart is well compensated, receiving $2.1 million in salary and bonus last year. But there's another benefit that helps to maintain her collection of fine homes – a yearly rental fee of $2 million, paid by her company for use of her properties.

It's a payment that raises some eyebrows in the publishing industry and among business experts. But disclosure of the rental fee in federal securities filings also provides a glimpse into the unique intertwining of Stewart's public and private lives, now in the spotlight more than ever as she is investigated in the ImClone stock trading controversy.

"This [rental fees] is not unusual at corporations ... that is a different question from whether it is ethical,” said Susan S. Samuelson, a professor at Boston University's management school.

When asked about the arrangement, she and others questioned the propriety of deals between Martha Stewart Living Omnimedia and its founder because she owns more than 62 percent of the company and heads up its board of directors. "Essentially, chief executive officers are using public companies as their own personal piggybanks,” Samuelson said.

A company spokeswoman defended Stewart, saying her "overall compensation package decreased substantially” after the company began selling stock to the public 2½ years ago. The spokeswoman also said transactions between the company and Stewart are in the company's best interests and are subject to approval by the six-member board, which includes two employees.

"This is not a question of ethics,” the spokeswoman said. "Everything here has been approved by the board and fully disclosed to investors.”

Stewart's self-dealing isn't problematic to some business ethicists.

"I just don't think this is outrageous when you look at what other people are doing,” said Patricia Werhane, a professor at the University of Virginia's Darden Graduate School of Business Administration. "Martha Stewart is that company. I think she isn't getting enough out of it.”

Documents filed this spring with the Securities and Exchange Commission detail compensation Stewart receives for use of her homes in photo shoots for her magazines and TV programs, along with further development of her product lines found at Kmart and elsewhere.

The filings show that Martha Stewart Living Omnimedia pays a "rental fee” of $2 million a year to MS Real Estate Management Co., which is owned by Stewart. The company also reimbursed MS Real Estate last year for $255,000 worth of undisclosed expenses.

The current five-year agreement, which went into effect after Stewart took Martha Stewart Living Omnimedia public in October 1999, increased the annual rental fee by $500,000. The hike "reflects our access to additional properties, increased property values and additional usages of these properties,” the company said in documents. Should Stewart leave the company, it would be obligated for unpaid rental fees and would lose access to the residences.

Stewart's homes play a leading role in most of her ventures. Recent issues of Martha Stewart Living magazine have featured articles on faux bois objects, which look as if they were wood, and terraced gardens. The stories were lavishly illustrated with photos taken at Skylands, her island estate in Maine.

The queen of the domestic arts owns at least six properties in three states, including a multimillion-dollar vacation home in East Hampton. She is renovating and expanding a large farm in the Westchester County community of Bedford. She bought it in 2000 for about $15 million. Forbes magazine estimated Stewart was worth $650 million last year.

A spokeswoman for Martha Stewart Living Omnimedia said, "Ms. Stewart has paid for these properties herself, many of which she has owned for years, and a failure on the part of the company to recognize this over-and-above contribution to the company would not be appropriate, and would not recognize the fact that [the company] would otherwise be making comparable payments to third parties.”

No one has suggested rental payments that Stewart requires from her company are illegal. However, two competitors said they provide little or no compensation to homeowners for use of their property in photo shoots.

"The nepotism in her media kingdom is not unusual in our unregulated era but it isn't ethical either,” said Lee Jolliffe, a professor of magazine journalism at Drake University.

The Iowa school works closely with Meredith Corp., publisher of Better Homes & Gardens and other titles aimed at homemakers. When Meredith pays homeowners for the use of their property, "it certainly is not in the millions of dollars,” Jolliffe said. "A family may be compensated a few hundred dollars if there's a major disruption of their home life.”

Meredith also doesn't pay its employees for the use of their homes in photo shoots.

At Architectural Digest, spokesman James Humphrey said, "no one is ever paid a cent to appear in this magazine.”

The spokeswoman for Martha Stewart Living Omnimedia confirmed it pays daily "location fees” to other employees and homeowners for the use of their property. The amount of the location fee wasn't disclosed.

The SEC documents also show that the company last year paid $1.1 million in premiums for Stewart's life insurance. She intends to fully reimburse the company at a later date, the spokeswoman said.