Public company, private perks: diagnostic products tests limits of corporate rules.

When Diagnostic Products Corp. first became a public company in 1982, its board approved a lucrative deal that stands today: the leasing of its sprawling headquarters near Los Angeles International Airport from a partnership composed of founder Sigi Ziering, his wife and children.

To date, the Ziering family has reaped millions of dollars from the lease, only one example of cozy dealings that have benefited family members and their associates over the years.

Loans were extended to employees so they could exercise stock options, board members were paid generous consulting fees, and the wife of the late founder still gets paid $168,000 a year in an executive position--though former employees say her role is unclear. She is also chauffeured around by a company-paid driver.

"This is not unusual in a family-run (public) business," said corporate governance expert Ed Merino, president of the consulting firm Office of the Chairman. "You have all the dysfunctional things that happen in a family, and a history of running them like private piggy banks."

In an era of greater corporate accountability, Los Angeles-based Diagnostic Products typifies the challenges faced by a family-run business in fulfilling its fiduciary responsibilities on behalf of all shareholders.

While the family has taken steps since the death of its founder to professionalize the growing medical diagnostics company, the changes may not have come soon enough.

Diagnostic Products acknowledged that the U.S. Attorney's Office had issued a grand jury subpoena requesting documents related to possible insider trading and an FDA review, confirming a report in the Business Journal last week.

Earlier this year, the Food and Drug Administration prohibited the company from submitting new product applications while it investigated problems with the company's clinical trials. Last year, the U.S. Justice Department and Securities and Exchange Commission opened an investigation into alleged illegal kickbacks paid by managers at its Chinese subsidiary.

The company has completed an internal investigation of the insider trading allegations and will tell the SEC that no laws were broken. Meanwhile, it says it is cooperating with the FDA probe, and has declined to comment on the criminal investigation.

A company official defended the quality of current management, although he acknowledges steps have been taken to improve it.

"We have added a lot of management to the company," said Chief Financial Officer James Brill, who also serves as chief spokesman. "I think we are doing a much better job with regard to maybe formalizing processes."

None of the three Ziering family members, including Chief Executive Michael Ziering, general counsel Ira Ziering or their mother, 72-year-old Senior Vice President and Secretary Marilyn Ziering, would comment for this story.

Typical history

In many ways, Diagnostic Products is a typical family-run business, although it was started by an atypical man: Holocaust survivor Sigi Ziering who immigrated to the United States in 1949 and attained advance degrees in physics.

In 1973, the entrepreneurial Ziering learned about a chemist who had created a diagnostic test kit in his garage. He invested $50,000, bought out the chemist and ran the company with Marilyn.

Diagnostic went public in 1982 with revenues of over $10 million, 160 employees and a battery of 52 different tests capable of detecting thyroid problems, anemia and other conditions.

Ziering told Fortune magazine in 1998 that he wished he had never taken the company public because he didn't really need the capital. He said he disliked market volatility and analyst second-guessing.

Even running a public company, Ziering appears to have retained a family orientation, placing his wife on the board. That year, the board approved the headquarters lease, concluding it was fair for the company.

Securities and Exchange Commission filings show that the family earned $472,000 on the lease in 1985 (the first time the payments were in public filings) and $1,035.000 in 2003.

The board in 1982 also allowed the Zierings to buy the company's interest in a furnished condominium for $176,705, property Diagnostic Products had acquired in 1979 for $152,000. An independent board committee deemed the transaction fair, according to the 1983 proxy.

Proxies also point to generous benefits for the inner circle and their families. In 1983, the chief operating officer's wife was granted 2,000 stock options, while a decade later two directors were paid "consulting" fees totaling $60,00 (the consulting services were ended in the late 1990s). The services of Marilyn Ziering's driver cost $22,000 in 1993, according to the proxy for that year.

Merino said that while such practices are frowned upon today, they were fairly standard just a few years ago--and certainly not surprising for a family-run company.

Some former employees question Marilyn Ziering's continued use of the car, maintaining that the wife of the founder has little involvement with the company anymore. But she's still the largest shareholder, with 16.4 percent of outstanding shares. Brill acknowledged that she might not be as active as she was 10 years ago, but remains involved. "She is very active in the marketing programs," he said, noting she created the company's Zebra marketing logo.

Sigi Ziering also brought his children into management.

Michael, a former public defender in Orange County, joined in 1986 as legal counsel and within two years was elected vice president of administration. Ira, a civil attorney in Los Angeles, joined in 1996 as manager of international business and was elected vice president of international operations in 1999.

"Sigi was an old-fashioned guy. It was a public company, but it was basically a family run company," said one medical industry executive that requested his name not be disclosed. "There was a clique there."

Even so, Diagnostic Products grew over the years, providing the elder Ziering with a fortune that he used in charitable donations, including more than $1 million to the Los Angeles-based University of Judaism.

Growth and challenges

Ziering died in 2000 and Michael took over as chief executive and chairman. As of 2003, the company had earnings of $62 million on revenues of $381 million.

Last year, following an audit that turned tip the overseas kickbacks, it added its first outside director in seven years: Kenneth Merchant, a chaired professor of accounting at the University of Southern California.

Merchant said he believes the company is "squeaky clean," but has trouble managing its operations, which stretch from Asia to Europe and South America.

"It's a relatively small firm struggling to control a worldwide empire," said Merchant. who now chairs the company's audit committee. "It's just very difficult for a small company to set up highly reliable internal control systems to protect themselves from the kind of problems they have faced recently."

This past May, shareholders approved a management proposal to add two more outsiders who have yet to be named.

The moves come at a critical time, federal investigations notwithstanding. The company, like competitors such as Abbot Laboratories, is lacing huge changes in its field sown by the revolution in biotechnology.

On the horizon are expected advances using new molecular-level technology that should allow even the most sophisticated tests to be completed rapidly within a doctor's office. This will require companies such as Diagnostic to develop new, cheaper systems to accommodate the changes.

Frank Pinkerton, a Banc of America analyst, said bringing in additional outside directors can be nothing but beneficial to the company as it makes these decisions. "I think a little fresh blood would be good for shareholders," he said.