Daily Blog

Circuit City--Shaft Workers, Reward Exec

    This doesn't surprise anymore, does it? Even though it is obscene beyond belief.

After firing 3,400, Circuit City enriches CFO
By Michael Rapoport, Dow Jones Newswires

NEW YORK — Even as Circuit City Stores (CC) pushed 3,400 purportedly
overpaid employees out the door, the company went out of its way to
make the departure of its outgoing chief financial officer a lot more
pleasant.

What Circuit City did for Michael Foss last week says a lot about the
haves-over-the-have-nots way executive compensation works.

By leaving, Foss would have abandoned thousands of unvested stock
options. But Circuit City revised the terms of many of those options
to make sure he could still exercise them after leaving the company —
a move that would mean a profit of nearly $250,000 for Foss if he were
to cash them in today.

    What's interesting is the tone of the article. It is pretty harsh on the company. Maybe it's just obvious too even the business press that normal people can't even bring themselves to soft-peddle these outrages anymore. There is hope,

It Pays For A CEO To Run A Loser

    There was an eye-opening package of stories about CEO pay on Friday in The New York Times. I was traveling so I didn't have a chance to read all of it. But as a UAW member, this one did jump put:

The Ford Motor Company paid its new chief executive, Alan R. Mulally, $28.18 million in his first four months on the job, the automaker said in a regulatory filing yesterday.

His compensation included an $18.5 million bonus that Ford, which reported a record $12.7 billion loss last year, disclosed in September when it hired him from Boeing.

Figures in Ford’s annual proxy statement show that his pay was more than three times that of any other executive at the company. That includes the executive chairman, William Clay Ford, Jr., who has kept a 2005 promise not to accept any new salary, bonus or stock awards until Ford consistently earns a profit.

      

    Great approach: company losing billions but pays CEO millions...do we live in a great country or what?

Have They No Shame

    Obviously, the answer is no, is you caught today's story in the The Wall Street Journal:

For the first time since 2003, General Motors Corp. is giving bonuses in the form of stock to Chairman and Chief Executive Rick Wagoner and other top executives, a move that could complicate GM's efforts to get further concessions from its biggest U.S. labor union this year.

Mr. Wagoner received restricted stock valued at $2.8 million and 500,000 options, according to disclosures GM made to the Securities and Exchange Commission. A total of 18 executives disclosed equity grants in separate filings yesterday. The company will disclose full compensation details in its annual proxy, which will be released in late April.

GM's board made the stock grants, which will vest over time, even though the Detroit auto maker has lost a total of $12.4 billion in the past two fiscal years: $10.4 billion in 2005 and $2 billion in 2006. The company hasn't formally provided guidance on its 2007 earnings expectations and likely won't, due to a recent policy to not give detailed forecasts.

    Ridiculous. And predictable. And wait until negotiations start with the UAW--Wagoner and his minions will be out working the press, explaining how dire the company's finances are and how it is so important for the union to give concessions. Mr. Wagoner, can you see my middle finger now?

The Movement Against CEO Pay

    Sort of an interesting article in today's Wall Street Journal about the alliances developing among various players opposed to the obscene CEO pay packages.

These activists sometimes form loose networks to share strategies and lobby for each others' causes. A few are uncomfortable with the "activist" label. John A. Hill, chairman of the board of trustees at mutual-fund giant Putnam Funds, says he joined the debate partly because he didn't "want to cede the terrain" to traditional activists with little business background.

Some are driven by professional motives, others by political ones. Uniting them all is distaste for large exit packages given to ousted chief executives and recent revelations about rigged stock options. Executives who collect sky-high pay despite poor corporate performance are a particular target. Unlike the public grandstanding common to some activists in the past, this crowd prefers to work behind the scenes, often through persuasion rather than confrontation.

    Who are they?

In late 2003, Berkeley, Calif., lawyer Jesse Brill received an email from a compensation consultant urging directors to "tally up" what they would owe a departing CEO. The message followed Dick Grasso's resignation as CEO of the New York Stock Exchange amid a furor over his $187.5 million compensation package.

Mr. Brill, who has been publishing newsletters about corporate law since the 1970s, seized the idea. He suggested directors include current and future compensation, and dubbed the result a "tally sheet." Then he aggressively promoted the notion to the 30,000 readers of his newsletters and Web sites, who include corporate lawyers, pay consultants and directors.

    And...

Harvard Law School Professor Lucian Bebchuk is one of the intellectual engines of the pay-restraint movement, producing studies arguing that weak boards are paying executives without regard to company performance...

In 2000, Mr. Bebchuk, who holds doctorates in both law and economics, began working on compensation issues, using as a base his previous work on boards' lack of accountability during takeovers. In 2004, he co-wrote a book, "Pay Without Performance," which criticized boards for offering CEOs sizable pay deals.

"I view the problem of executive pay as being partly the product of excessive insulation of boards from shareholders, and the weakness of shareholder rights," says the Polish-born, Israeli-raised academic, whose gold-rimmed glasses perch halfway down his nose.

Mr. Bebchuk, 51, is playing a pivotal role in promoting a tactic for curbing compensation: revising corporate bylaws, the rules that govern companies' internal affairs. Last year, he submitted amendments at two companies, including Home Depot, that would have required more disclosure about pensions. Each received more than 40% of votes cast, a significant tally, albeit a losing one. This year, he proposed bylaws at four companies to require that CEO compensation packages be approved by at least two-thirds of independent directors.

    And Meredith Miller:

Ms. Miller is an assistant treasurer for the state of Connecticut. In October, she drafted a letter to 25 large companies seeking information about whether compensation consultants hired by the board had conflicts of interest. Activists worry that a consulting company won't give the board impartial advice on pay packages if the firm is also advising executives. The new SEC disclosure rules don't address such conflicts...

Ms. Miller says she has drawn on Mr. Bebchuk's writing about potential conflicts. She traces her interest in shareholder activism to the late 1970s, when, as a Cornell University graduate student, she heard a campus speaker suggest that unions invest solely in pro-labor businesses. She worked for organized labor and gave her daughter a middle name of "Debs," after union leader Eugene V. Debs.

    And a guy named John Hill:

Mr. Hill and the Putnam trustees, who oversee the firm's $123 billion in mutual-fund assets, represent an important new voice for restraint in executive pay. Big institutional investors have traditionally sided with management on governance and pay issues, and tended to sell shares rather than protest if they disagreed. In 2006, 29 mutual-fund companies surveyed by governance tracker Corporate Library supported, on average, 92% of management resolutions and 91% of management-backed director candidates.

    And, finally, a guy who I've known about for some time and has been in the game for many years on this issue:

In 1995, Edward Durkin, an official of the United Brotherhood of Carpenters and Joiners, rose to speak at the annual meeting of Archer-Daniels Midland Co. Then-CEO Dwayne Andreas cut him off, banging the gavel and yelling, "This is my company, my meeting," recalls Mr. Durkin

These days, Mr. Durkin, 53, who oversees governance issues for the union's pension fund, says he's more effective when lobbying corporate executives in private. He spends hours on the phone discussing the minutiae of pay plans and exploring compromises. Mr. Durkin often withdraws shareholder resolutions the union has backed when companies agree to make changes, or even to talk.

He calls the process "mind-numbing and labor intensive," but necessary to enhance the value of the union's $40-billion pension fund. "Compensation is clearly the most demanding and frustrating area of advocacy," he says.

    There is much more detail in the article if you are a subscriber. But, it does a decent job of showing the interesting alliance coming together because of the pure greed of CEOs and the irresponsible behavior of corporate boards of directors.

Another Twist on CEO Pay

    I think I've mentioned this before that Gretchen Morgenson is one of the consistently rare New York Times reporters who breaks ground and is a damn good reporter. She believes in capitalism but is appalled by the obscene greed of the CEO class. Virtually every column she writes each week in the Sunday Times Biz Section digs into the robbery underway in the executive suites.

    And, today, she has a new one:

Buried in these figures is one of the most contentious items in all of payland: the “tax gross-up.” That is the amount shareholders must pay to cover excise taxes arising when a top manager pulls the ripcord on his or her golden parachute.

“This number has never been disclosed to shareholders in the past, but new proxy requirements will force it into public view,” said Michael Kesner, principal at Deloitte Consulting in Chicago. “Boards are now just getting a sense of how big that number is. People are surprised.”

    And...

Excise taxes came into being in 1984 with federal legislation intended to rein in excessive parachute pay. A tax of 20 percent kicks in when an executive’s exit package exceeds 2.99 times his or her average annual pay over the last five years. Once the 2.99 multiple has been exceeded, the executive’s entire pay is taxed, not just the excess amount.

The gross-up provisions that came after the law are yet another example of the unintended consequences of trying to legislate executive pay. With their armies of accountants and lawyers, chief executives almost always find ways around any law created to tamp down their pay. Close the door, they’ll open a window.

This creativity on behalf of corporate executives winds up costing shareholders a lot of green. That’s because combining federal, state and excise taxes usually puts an executive in a 60 percent tax bracket, Mr. Kesner explained. A company would therefore have to spend $100,000 to cover $40,000 in taxes generated by a parachute payment.

“Gross-ups are very expensive to shareholders,” Mr. Kesner said. “The board has an obligation to look at them and see whether they are reasonable.”

    So, there are going to be some very surprised shareholders--the hit on companies who have blindly given huge pay packages to CEOs is going to be a very unpleasant surprise.

Ben Riffs on the CEO Pigs

    From time to time, as readers know, I've tended to praise Ben Stein, a columnist for The New York
Times (among his endeavors), because he is one of those market-loving capitalists who is appalled by the absolute greed exhibited by the captains of industry. Today, he has another lament about the disgusting self-enrichment of people like Robert Nardelli and Steve Jobs:

THE current state of corporate ethics, and the governmental and public policy response to that state, are so bewildering, so upsetting, so impossible to understand except in terms of the famous phrase, “Follow the money,” that it makes my poor old head spin.

    Yes, indeed. He seems quite unconvinced, for example, about the clearing of Steve Jobs of Apple by an internal company committee which found that Jobs did not know about the "back-dating" of his stock options. Just to remind everyone, back-dating is a convenient little maneuver:

That’s where you — if you’re a big wheel at a corporation — get to choose the date and price of the options after you have seen when the yearly low was and seen how much recipients could make starting the options from times earlier on the calendar than the dates when the awards were actually awarded. It’s sort of like getting to pick lottery numbers after the winning numbers are drawn — and your stockholders supply the prize money.

    Besides Apple, though, there is a huge scandal brewing at dozens of companies. But, the most important passages in Stein's column are found in the section where he expresses astonishment that, in light of Enron and a myriad of other scandals, there is serious talk of WEAKENING oversight of the internal goings-on of corporate America:

And now let’s look at the Committee on Capital Markets Regulation, a k a the Paulson committee. It’s the group of academic and finance worthies that was sponsored informally by Treasury Secretary Henry M. Paulson Jr. and studied the harsh burdens under which the corporate pooh-bahs and Wall Street chieftains labored.

Recently, that group, along with many others of the hired intelligentsia of the management class, came out with their report that said that the Sarbanes-Oxley law was too strict on corporate America, and was hurting Wall Street by making companies register and do their initial public stock offerings in Europe. (Quelle horreur!)

In particular, Sarbanes-Oxley was supposedly too strict in requiring audits of internal controls. This was supposedly a painful, unnecessary burden in a world where a corporate boss’s word is his bond and the word of any corporate boss is worth more than all the bonds in Christendom. And the Sarbanes-Oxley section on internal controls was supposedly cruelly tormenting Wall Street to the detriment of the whole world of decent people.

But hold on. Isn’t backdating precisely an example of a failure of internal controls? Haven’t we just found out that internal controls are far too lax, not too strict? For the Paulson committee to say that we need less stringency in corporate audits is a bit like the War Department saying we needed less watchfulness at our naval bases after Dec. 7, 1941. It’s also a bit like Willie Sutton saying it would be good as a matter of national financial policy to have fewer guards at banks.

The amazing thing is that intelligent people are taking it seriously, this matter of rolling back corporate controls to make life even easier for misbehaving corporate wheeler-dealer types. What’s more amazing is that anyone is even thinking of rolling back corporate controls to make life richer for Wall Street.

    We know this isn't so shocking. But, when you hear the shock coming from people like Stein, you know we must continue to expose and talk about the vast greed and corruption inside corporate suites. Because when people like Stein worry, you know that many elites are concerned that the behavior of the greedy are awakening the people.

 

Nardelli The Pig

    So, another failed CEO takes a fall over excessive pay. It was pretty amusing to watch the press frenzy over his crash and burn because of his refusal to even take a modest cut in his pay package. Robert the Hog, who took home $64 million over six years and was in line to pocket hundreds of millions more. That pissed off even some of the company's board members--though, be clear, it was the board that had already approved his deal. So, Nardelli, who did a pretty poor job at Home Depot, will still get $210 million as severance.

    It is amusing that the press now is piling on. After all, the huge pay Nardelli was pulling down was no secret. Take Business Week's take in its issue that just popped into my mailbox:

In the end it came down to the headstrong CEO's refusal to accept even a symbolic reduction in his stock package. Home Depot Inc.'s (HD ) board of directors wanted their controversial chief executive, Robert L. Nardelli, to amend his whopping compensation deals for recent years. After he pulled down $38.1 million from his last yearly contract, angry investors were promising an ugly fight at the company's annual meeting in May. Nardelli agreed to give up a guarantee that he would continue to receive a minimum $3 million bonus each year. But that's as far as he would go. When board members asked him to more closely tie his future stock awards to shareholder gains, he refused, according to people familiar with the matter. Nardelli has complained for years that share price is the one measure of company performance that he can't control. After weeks of secret negotiations, things came to a head at a board meeting on Jan. 2, leading to Home Depot's stunning announcement the next day that the company and Nardelli had "mutually agreed" that he would resign.

"The board loved him and hates the way this ended up," says a person familiar with the matter. But in a season of growing antipathy toward extravagantly paid executives, the directors felt they had no choice. On his way out the door, however, Nardelli negotiated another jaw-dropper: a $210 million retirement package that assures that he and his former employer will remain at the center of the swirling debate over CEO compensation. Nardelli declined to comment.

    This particular greed may be an example that pushes some sort of move to curb executive pay.

Others remain outraged, even with Nardelli gone. A group of unions whose pension funds own shares in Home Depot plans to challenge his $210 million payout at the annual meeting in May. Meanwhile, in Washington, Representative Barney Frank (D-Mass.), the incoming chairman of the House Financial Services Committee, said in a statement on Jan. 3: "The actions of Home Depot's Board of Directors to simultaneously dismiss Robert Nardelli and provide him with $210 million in severance is further confirmation of the need to deal with the pattern of CEO pay that appears to be out of control."

    We'll see. But, really, the bigger point is that boards of directors are stocked with buddies and allies of CEOs who are happy to open up the piggy bank for the top guy. That's what has to change.