April 2002

ExxonMobil

A major study from Claros Consulting will show that ExxonMobil’s attitude towards global warming could cost the company’s shareholders billions of dollars in coming years. The Claros Consulting report finds that ExxonMobil’s climate-change strategy involves unnecessary risks and missed opportunities – and is helping its competitors more than ExxonMobil itself. Commissioned by shareholder activist Robert A.G. Monks, CERES and Campaign ExxonMobil, the study also details the five steps shareholders can take to encourage ExxonMobil management to act responsibly on climate change. The release of the report comes about one month before ExxonMobil shareholders will vote on two related resolutions at the company’s annual stockholder meeting on May 29, 2002. Speakers during the live, two-way media briefing (including Q&A) will be:

• Shareholder activist Robert A.G. Monks, publisher of RAGM.com and founder of Institutional Shareholder Services.
• Report author Mark Mansley, Claros Consulting of London, England.
• Peter Altman, national coordinator of Campaign ExxonMobil.
• Ariane van Buren, senior project manager of the Sustainable Governance Project at CERES.

TO PARTICIPATE: A live, two-way telenews media briefing will take place at 1-800/966-6338 (or 1-415/217-0050 outside the U.S.) at 1:30 p.m. EDT on May 2, 2002. Ask for the “ExxonMobil study” or “global warming” call. To ensure that you hear the media briefing from the beginning, make sure to call in by 1:25 p.m.

CAN’T PARTICIPATE?: A streaming audio recording of the news event will be available on the Web as of 6 p.m. EDT on May 2nd at www.hastingsgroup.com/shareholderstudy.html.

FOR MORE INFORMATION, CALL: Stephanie Kendall, 703/276-3254 or skendall@hastingsgroup.com.

Options Aren’t Free

Stock options accounted for 58% of CEO pay at big American companies last year and diluted corporate equity at America’s top 200 corporations by 16.4% of total shares outstanding as of 2000. Accounting treatment of options has overstated profits by a little over 10% in 1998 but this has risen to an average of 19.7% in 2000 and a staggering 72.8% in the case of information-technology companies. Unlike wages and other benefits, options are not subtracted from current earnings. President Bush’s suggestions for improving corporate governance avoided the issue. But the International Accountancy Standards Board will produce a new draft standard on options in the autumn. According the The Economist, “There are no good arguments for continuing to pretend that options cost nothing. The rules should at last reflect reality.” (An expense by any other name, 4/4/02)

Without Warning

According to a report by Bloomberg News, Andersen’s apparent unwillingness to sound warnings about Enron’s financial health was not unusual. In 54% of the 673 largest bankruptcies of public companies since 1996, auditors provided no warning in annual financial statements before the bankruptcy filing. System Software Associates, for example, was given a clean audit, even though the company was being investigated by the SEC for alleged accounting fraud.

Investors lost $119.8 billion in the 10 largest bankruptcies following audits that raised no concerns. Bloomberg also noted that Andersen actually issued audit warnings before bankruptcies more often than any of the Big Five accounting firms. Bloomberg also found that auditors are much more likely to raise concerns with small rather than large companies. The implication: professional services firms don’t want to risk losing big accounts by issuing warnings. In the 50 largest bankruptcy cases since 1996, only 14 of those companies received an auditor’s caution letter. Auditors issued caution letters to 70% of the 50 smallest companies that declared bankruptcy. (seeTeetering on the Brink at CFO.com)

Survey Results on Board Compensation

BoardSeat, a Silicon Valley search firm that specializes exclusively in board director and advisory board searches and consulting, published a report on the compensation and administration of boards of directors and advisory boards of venture capital-backed companies. Call 415-648-0808 to order. A few highlights are as follows:

• 68.8% of companies that had raised $10 million or less have an advisory board as compared with only 37.5% of companies that had raised $50 million or more. There is a wide range in the number of advisors retained by companies, with the average advisory board size being about five members.
• 84% of companies compensate independent directors with stock options only
• Only 6.6% of companies compensate investors for sitting on the board of directors
• 38% of companies have no independent directors
• Just over half the companies surveyed hold directors and officers’ insurance
• 73% percent of very early stage companies hold monthly board meetings

CalPERS Focus List

CalPERS’ new Focus List consists of only five companies. They include: Lucent Technologies of Murray Hill, New Jersey; NTL, Inc. of New York, New York; Qwest Communications of Denver, Colorado; Cincinnati Financial Corporation of Cincinnati, Ohio; and Gateway Computers of San Diego, California. However, CalPERS is closely monitoring four other companies. Possible actions regarding the companies will be disclosed throughout the proxy season.

“Focus List” companies were selected from the pension fund’s investments in more than 1,800 U.S. corporations, and was based on the companies’ long-term stock performance, corporate governance practices, and an economic value-added (EVA) evaluation. EVA measures a company’s after-tax net operating profit, minus its cost of capital. By using EVA and stock performance, CalPERS has pinpointed companies where poor market performance is due to underlying financial performance problems as opposed to industry or extraneous factors.

Gateway Computers, for example, has some of the worst performance in its industry. The California developer of desktop and portable personal computers underperformed all comparison indices and its direct competitors last year. The company turned in a loss of 55% for the one-year period ended 12/31/01 and showed little profitability between 1998 and 2000. An EVA evaluation performed for CalPERS by Stern Stewart & Associates revealed that Gateway’s cumulative EVA for the three-year period was a negative $141 million.

Gateway’s poor governance practices include a lack of complete independence on the company’s audit and nominating committees, a classified board and a recently adopted poison pill. The CEO and Chairman Theodore Waitt also chairs the Nominating Committee. Gateway has not answered requests from CalPERS to meet, citing that letters take a month to read and are responded to if they are “worthy.”

CalPERS filed a shareholder proposal to declassify Gateway’s Board and require annual elections of all directors. It also filed the same proposal at NTL, Inc., but given the company’s restructuring, a vote may never come to pass.

CalPERS is also outraged at recent reports that Qwest’s Chief Executive Joseph P. Nacchio received a $1.5 million bonus last year and a $24 million cash payout, during a period when the company is cutting jobs and its performance has fallen. “These decisions demonstrate blatant disregard for shareholders,” said Mark Anson, CalPERS Chief Investment Officer. “We have lost complete confidence in Qwest’s management and board.”

Qwest also has a number of egregious conflicts of interest. There have been multiple reported business transactions between Qwest and the Anschutz Company, where Qwest’s Chairman and Founder Phillip F. Anschutz also sits as a director and Chairman. CalPERS plans to vote against any Qwest director up for re-nomination this year.

NTL, Inc. has corporate governance issues that show particular disregard to its shareowners. The owner and operator of broadband communication networks has underperformed its peers by approximately 292% for the five-year period ended 7/31/01 and has underperformed the broad market by nearly 144%. NTL also recently announced a massive debt-for-equity swap that CalPERS believes will severely impact common stock holders.

NTL’s Board does not allow shareowners to call special meetings, has re-priced options in recent years for a handful of executives, and is replete with interlocking directors.

Lucent Technologies is refusing to adopt a shareholder proposal to declassify its board that passed by a shareholder majority vote last year. CalPERS has already voted against Lucent compensation committee directors Paul A. Allaire and John A. Young for awarding the company’s former CEO, Richard McGinn, an excessive severance package.

Cincinnati Financial Corp. is also on the list for poor corporate governance pitfalls. More than half of Cincinnati Financial Corporation’s Board is comprised of inside or affiliated directors.

Paper Tigers

A PricewaterhouseCoopers survey reported in Investor Relations Business found that, although institutional investors hold 60% of the shares at most major companies, they don’t wield much influence. Of company executives surveyed, 34% said the influence of institutional investors is neutral and over a quarter said they have no influence at all! The vast majority put this down to good investor relations – keeping institutional investors informed about long-term strategies. The 10 largest institutional investors typically own 27% of large firms; the top 5 own just under 20% and the largest holds a 9% stake. (IRB, 4/22/02, Many Institutions Take a Back Seat)

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