Patrick S. McGurn, with ISS, continues his excellent coverage of the options issue in the 8/21 edition of the ISS Friday Report. He points out that the proposed treatment of option repricings (see FASB below) is consistent with a 1972 accounting rule (APB Opinion 25) that distinguished between “fixed” option plans and “variable” plans. While fixed option plans were not considered a business expense, variable plans were…repricing makes it a variable plan. If all goes according to plan, they might have the new policy in place around January 2000. We expect to see a lot of pressure on FASB to back off and hope our readers will help them hold firm.
Writing about the Board’s 1993 proposal that options be charged to earnings as an expense Edmund Jenkins, Chairman of the Financial Accounting Standards Board, notes “the Board was wrong to back away from what some are belatedly recognizing was a good standard.” “Unfortunately, only a few stepped into the fray on our behalf.” Now, in an exclusive op ed piece to Corporate Governance, Jenkins argues we are again in danger of putting the politicians in charge of accounting standard setting. Read his “Private Sector Accounting Standard Setting At Risk-Again” in our Forums section.
An editorial, Loosening the Grip Of the ‘Dead Hand,’ speculates that continuing director clauses authorizing only incumbent boards to remove a target company’s poison pill may be nearing their end. Delaware Chancery Court Vice Chancellor Jacobs rejected the a motion by Toll Brothers to dismiss a case by Carmody, allowing the suit to proceed. He ruled that the plaintiff’s allegation that the dead hand “purposefully disenfranchised” Toll Brothers shareholders required the board to demonstrate a “compelling justification” for adopting the measure–a very difficult legal standard to satisfy, according to the Wall Street Journal. A 1997 study by Donald Margotta of Northeastern University found that 280 out of 1,600 poison pills reviewed had dead-hand provisions. (WSJ, 8/24)
CEO’s averaged compensation of more than $3 million, 30% above their 1996 level, according to a William M. Mercer survey whereas the average white-collar worker got a 4.2% raise last year. Just under half CEO compensation came from realized option gains but the average CEO is sitting on another $9 million or so in unrealized gains. Rep. Martin Sabo (D-Minnesota) is sponsoring a bill that would limit the tax deductibility for executive compensation to 25 times the salary of the company’s lowest-paid full-time worker. Perhaps the recent downturn will lead to pressures to reprice options. (Fortune, 9/98)
Financial Accounting Standards Board may be on the verge of putting and end to option repricings by forcing companies that reprice their options to consider, as an operating expense, the difference between the new lower price and any subsequent increase in the share price. Reflecting such costs would likely lead many firms to drop the practice. (San Jose Mercury News, 8/20) To help you congratulate the board for thinking about moving in the right direction, the following is a list of board members with their names hyperlinked to their e-mail addresses: Joseph Anania, Anthony Cope, Neel Foster,Edmund Jenkins, Gaylen Larson, James Leisenring, Gerhard Mueller. (entire board)
About 38% of large US firms that announced stock-repurchase plans failed to buy back any shares during the following 5 years and 2/3 of those that did bought less than 1/2 the number authorized. “In announcing buyback plans, increasing the stock price may be their first objective and, once met, implementation may become less critical,” said James Westphal, University of Texas management professor who is one of two authors of the study which looked at buybacks announced from 1985 to 1991 by 409 companies. Last week US companies announced a total of $11.6 billion in proposed buybacks, the biggest weekly total this year. (The Arizona Republic, 8/20)
According to a recent Conference Board report, institutional investors control about 60% of the stock in the 1,000 largest U.S. corporations, up from 46.6% in 1987. Those 25 largest investors controlled 19.7% of the total outstanding stock in 1997, up from 16.7% in 1996. The top 25 institutional investors include large mutual fund companies such as Fidelity Investments, Putnam Investment Management and T. Rowe Price Associates; big insurance companies, including the Equitable Companies, Travelers Group and Prudential Insurance; and broad-based retirement funds, such as the California Public Employees Retirement System and the New York State Common Retirement Fund. Carolyn Kay Brancato, principal author of the report, indicates that “only 10.7% of the top 1,000 companies had institutional ownership in excess of 70% in 1987, but by 1997, 38.9% of these companies were more than 70% controlled by institutions.” One negative result is the greater likelihood that movement by a single fund manager can create ripples through an entire segment of the market. (Detroit Free Press, 8/21) For a copy of the report contact Carolyn Kay Brancato at 212.339.0413.
Money managers continued to have the highest average turnover, at 53.0%, while public pensions that manage their own funds continued to have the lowest average turnover, at 19.3%. Banks have the next lowest level of turnover, 29.9%, followed by insurance companies, 34.3%, and corporate pension funds, 36.3%. Institutions with “aggressive growth” strategies recorded a 95.1% turnover in 1997. Public pensions managing their own indexed funds had only a 16.4% turnover. (PRNewswire, 8/20) The largest 25 institutions increased their share in the largest 25 corporations, going from 19.8% in 1985 to 28% in 1997. Indexation has grown from 15.9% in 1993 to 17.2% in 1997.
Corporate Governance International has joined our growing list of “stakeholders.” Their July 1998 edition carries articles on Corporate Governance, Stakeholding and Globalisation; Cadbury Bites the Dust?; The Hampel Report; Relationship Agreements with Controlling Shareholders; and Little Reforms for Shaping Smarter Boards. John Brewer, the editor, calls for global corporate governance standards to include the existence of a fully independent general counsel or corporate secretary and for well defined safe harbor protections which perhaps even allow immunity from whistle-blowing. Articles are selected by primarily for their practical relevance. Take a look; the publication has a distinguished editorial board and the two issues I have seen have been on target.
Back to the topCalPERS consultant alleges State Controller Kathleen Connell repeatedly solicited campaign contributions and shunned her firm when the requests were denied. In response to a lawsuit challenging the board’s right to restrict campaign contributions, CalPERS contends Connell has “place(d) advancement of her own political career ahead of her constitutional duty to serve the interest of millions of public employees and retirees.” In an earlier press release, board president William Crist indicated the policies adopted were proactive since there was not “even suspicion of corruption because of political contributions or gifts.” Now CalPERS admits the policies were motivated by state and federal inquiries into potential conflict interest violations. A hearing on the lawsuit is scheduled on September 4th. (Sacramento Bee, 8/14)
Ken Winans, president of Winans International, concludes that portfolios over $75,000 are less costly to hold than mutual funds, given turnover, transaction costs and tax consequences. There are plenty of questionable assumptions in his study but if more investors did purchase shares directly, it is also likely that they would begin to think like owners and take more interest in wealth creation through effective governance. Both the investor and the market would likely benefit. (WSJ, 8/14, B1)
Can Prudential salaries hold up to public scrutiny? A Wall Street Journal analysis indicates 176 individual Prudential executives received $350,000 or more in salary and bonus. Despite a falloff of income, average compensation of the 100 top Prudential executives doubled from 1994 to 1997, to about $820,000. (see table) (The Top 100 Executives Average $820,000 As Firm Prepares to End Mutual Status, WSJ, 8/14)
- A mission statement on the board’s purpose and responsibilities.
- Board structure (size, independence, committees, and specific issues, such as splitting the jobs of CEO and chair, or lead directors).
- Director selection and evaluation. Director pay, age and term limits, elections, and whether directors should offer to resign after a major job change.
- Board operational rules. Frequency of meetings. How are agendas set? Access to management. Committee charters.
- Board and management relations. CEO succession policies and responsibilities, CEO evaluation plans, and how CEO and top manager pay will be set.
- Board self-evaluation. How and when will the board grade its own membership, effectiveness, and policies?
Pacific Enterprises placed #1 in Fortune’s Best Companies for Asians, Blacks and Hispanics. (August 3)
Korn/Ferry Annual Board of Directors Study finds management succession responsibilities biggest problem followed by identifying and recruiting enough qualified, diversified and talented new directors. (BUSINESS WIRE)
McKinsey & Co. surveyed company officers, top executives, and human-resource managers at 77 companies whose financial performance ranked them near the middle or top of their industries. Top performing companies delivered twice the annual shareholder return as middle-of-the-pack firms. Top performers more often
- recruited executives from the outside;
- made effective use of performance reviews;
- encouraged candid feedback;
- paid strong performers far more than weak managers;
- offered generous long-term performance incentives;
- emphasized management development in staffing decisions;
- fostered the careers and cultures that managers value.
The study concludes that the “right group of senior executives is the most valuable asset a company has,” and securing the right group has become a critical priority among the top performing companies. Many are tapping new sources…internships, raiding competitors, hiring military officers. Executive search business expanded from $800 million in revenue in 1980 to $4.4 billion in 1995. Source:Wharton Leadership Digest, McKinsey War for Talent Team, “Winning the War for Talent,”
McKinsey & Co., 1998.
CEO’s as pigs is the image WSJ (8/10, B1) uses in its “Great Moments at the Options Trough,” which provides several examples of excess and repricing. We continue to urge readers to write to the FASB (entire board) and demand they require the value of option expenses to be reflected on company income statements
Chrysler Corp. / Daimler-Benz AG merger will generate huge payouts to Chrysler executives. Top 30 Chrysler executives will get a combined $395.8 million in cash and stock. Chairman Robert J. Eaton receives $69.9 million and 2.3 million shares. In addition, his “golden parachute” is $24.4 million. (The Detroit News)
Royal Dutch Shell, having been the focus of criticism for human rights issues in its operations in Nigeria and for environmental issues related to its North Sea activities, is now setting the pace for a new style of management in global business ethics. (The Earth Times)
International conference, “New Corporate Governance for the Global Company” will be held on the 1st-2nd December 1998 at the Conrad International Hotel, Brussels. Speakers include Chris Swinson, James Cochrane, Professor Bob Tricker, Ralph D Ward, Leif Edvinsson, and Joanna Shelton.
American Bar Association failed to endorse a controversial recommendation which would have banned lawyers from accepting legal work from state and local governments if the attorneys made political contributions to public officials. (see July below and Pensions&Investments, 7/27 editorial) Instead, the ethics committee is to come up with a model rule to prohibit making a political contribution with the purpose of obtaining legal work. (WSJ, 8/5, B17)
Back to the topIndian government to review role of institutional nominee directors on the boards of companies put in place corporate governance code for financial institutions (FIs). “Sources said there were two schools of thought. One side felt that financial institutions should not interfere in the day-to-day functioning of companies as long as their interests were not harmed, while the other side feels that FIs should play the role of policeman for protecting shareholder interests.” (The Times of India, 8/6,Parliament panel to discuss FI role in cos)
The current slide in small stocks is throwing up a new crop of shareholder activists, according to a report by Linda Sandler in the 8/4 WSJ. “They may play on a smaller scale than raiders of old such as Carl Icahn. But, like them, they are taking advantage of low share prices to buy up big stakes and demand change.” Mentioned are Jonathan Vannini, LaSalle Financial Partners and Gotham Partners.
CalPERS shows paper loss of $2.7 billion on fund’s Asia-10 stock portfolio — book value of slightly more than $7.6 billion. Sacramento Bee editorial of 7/26 highlights the need for greater diversity in California’s export markets. Will the losses be reflected in reducing investment officer, Sheryl Pressler’s whopping $437,500 maximum salary and incentive awards?
With Michael Price exiting Franklin Resources, Robert McGough asks where can an investor go for the same type of strategy? Answer seems to be slim pickings. One option is to stay with Mutual Series. Third Avenue Value Small Capmanaged by Martin J. Whitman, is “willing to mix it up with company management.” Another combative value investor is Mario J. Gabelli, Gabelli Funds. (WSJ, 7/30)
Options and their mistreatment by the FASB are subjects of Robert A.G. Monks’ humorous “Executive and director compensation – 1984 Redux.” (Corporate Governance: An International Review, July) It’s humor that will make your blood boil. Citing Lincoln’s riddle, “how many legs does a dog have if you call his tail a leg?” (four), Monks points out that just because the Business Roundtable successfully pressured the FASB so the value of options aren’t required to be reflected, doesn’t mean they are free, anymore than calling a tail a leg makes it a leg. One of the results of this absurd policy is that CEOs, the prime beneficiaries of option grants, now hold options worth about $10 billion. The average CEO now makes about 209 times what factory employee earns. Operating under the traditional governance rules, which have the appearance of democracy and independence but not the substance, shareholders have been robbed blind in an utter reversal of the legal rights of property. If you don’t subscribe to Bob Tricker’s wonderfully edited Review, you’re missing some of the best work in the field.
After reading the article by Monks, take the opportunity do something to relieve your increased blood pressure. Write to the FASB and tell them to end this legal fiction; require the value of option expenses to be reflected on company income statements. To help you, the following is a list of board members with their names hyperlinked to their e-mail addresses: Joseph Anania, Anthony Cope, Neel Foster,Edmund Jenkins, Gaylen Larson, James Leisenring, Gerhard Mueller. (entire board)
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