Caliber Collision Probe Puts Spotlight on Tight-Knit Auto Club
By KATE BERRY
In an age of rising corporate scrutiny, the Automobile Club of Southern California is a throwback.
As a mutual benefit corporation, members own the Costa Mesa-based club. But other than the annual renewal bills that land in their mail, members have few details about the club’s finances, its executive pay or its other business activities.
That’s created friction not unlike what has occurred at two other similarly structured entities: AARP and the New York Stock Exchange.
“One of the things we’ve been upset about is their secrecy,” said Carl Olson, a finance professor at California National University who unsuccessfully ran for an Auto Club board seat.
“They’re classified as a nonprofit, but that does not mean they don’t make a profit,” Olson said. “It means they don’t distribute the profits as dividends to their members. They give it back to themselves and no one really knows what they’re doing with the money and how much they’re paying themselves.”
The Auto Club has moved in recent years toward owning the products and services it sells to members. Critics charge that peddling Auto Club-owned travel packages, collision repair and other services to members compromises the club’s integrity.
“One of our core competencies that members rely on us for is sifting through whole lots of things, putting our brand on it and providing it to them,” said Thomas McKernan, Auto Club’s chief executive.
Critics See Conflict
The most recent example of what critics say are conflicts flared in December, when Attorney General Bill Lockyer filed a $50 million lawsuit against Caliber Collision Centers of Irvine and six subsidiaries. Lockyer claims that the centers committed fraud by over-billing customers for services and parts.
The Auto Club has been referring members to Caliber for years. The club’s insurance arm bought a 19% Caliber stake for $30 million in 2001.
The Auto Club also has come under fire for failing to disclose its $100 million buy of the Pleasant Holidays travel agency in 1999. Trade publication Travel Weekly reported the transaction two years later.
Pleasant Holidays sends 400,000 people to Hawaii each year.
“The problem is they don’t really let their members know what their policies are and what they’re all about,” said Todd Silberman, who founded travel agency Lifeco Services and who recently started Better World Club of Portland, Ore., as an alternative to AAA.
Silberman devotes a section of his company’s Web site to criticism of AAA’s national policies. The Automobile Club of Southern California is the largest of 77 affiliates of AAA, once known as the American Automobile Association.
Unlike the NYSE, which ended up ousting Chairman Richard Grasso last year when his contract became a symbol of conflict for the self-regulatory body, the Auto Club has closed ranks amid criticism.
Several activists have made runs for the club’s board. Rather than risk a possible shakeup, the club held a vote last year in which its 5.3 million members in Southern California agreed to have the 12-member board appointed rather than elected.
McKernan has a bare-knuckles defense for the club’s actions. “The club is not going to get into trouble under my watch,” he said. “It’s ethical, it does the right thing. It is an institution in Southern California.”
McKernan has worked his entire career at the Auto Club, where he started behind a service desk in Pasadena, fielding questions about travel and Department of Motor Vehicles services.
He’s a director at several companies, including Los Angeles money manager Payden & Rygel, whose founder, Joan Payden, sits on the Auto Club board.
McKernan became chief financial officer at the Auto Club in 1985 and then enrolled in the doctorate program in business at the Peter F. Drucker Graduate School of Management in Claremont. By 1991, he was named president and chief executive.
The Auto Club has expanded at a rapid rate under McKernan. Its for-profit insurance arm has nearly doubled in the past eight years and now writes auto insurance in Texas and New Mexico, as well as Southern California.
The club also has amassed a $286 million reserve, known as a “membership protection fund,” which could be distributed to members in the unlikely event that the group dissolves. The fund is used to expand its lines of business and to keep dues low, spokeswoman Carol Thorp said.
Nonprofit Is Taxed
The Auto Club is taxed but retains nonprofit status because it does not issue stock or dividends, said Denise Azimi, a spokeswoman for the Franchise Tax Board. It also is restricted from raising money.
During McKernan’s tenure, the Auto Club has acquired clubs in Texas, New Mexico and Hawaii, adding 1.3 million members to the rolls. It also has an affiliation with the Auto Club of Northern New England. “We have to get a larger scale to keep pricing competitive,” McKernan said.
The club has sold 2% stakes in Pleasant Holidays to Auto Club South and to the national AAA organization. It also reaps millions by selling its travel services to other auto clubs around the country.
The move into the auto repair business came in 2001 after Allstate Corp. bought Sterling Collision Centers and restricted service to its own customers. McKernan feared more consolidation would shut members out of the industry.
“That’s why we have control over some content,” he said.
The Auto Club does release some financial information. It employs 8,500 people and is the sixth-largest personal auto insurer with a lobbying arm in Sacramento. In 2002, it reported $1.1 billion in revenue, up slightly from 2001. Of that, $434 million came from travel services, $300 million from insurance and $289 million from membership dues.
Berry is a staff writer for the Los Angeles Business Journal.
