NEW YORK TIMES ON THE NEW VULNERABILITY
OF COMPENSATION COMMITTEE MEMBERS OF BOARDS.
THE AGENDA Can the Buck Stop at the Directors' Table? By PATRICK MCGEEHAN Published: October 24, 2004 NOTHING so concentrates the minds of corporate directors
as the prospect of a shareholder lawsuit. So last week, as Michael D. Eisner and the board of the
Walt Disney Company went on trial in Delaware, corporate directors and their advisers gathered at a conference in San Francisco to learn
how to avoid ending up in the dock. From lawyer after lawyer, they heard a consistent theme: the sun has set on the era of the
imperial chief executive and his royal court of cronies. Independent directors now know that if they are foolish
enough to cede crucial compensation decisions to the chief executive, as Disney's directors are accused of having done, they risk
not only their shareholders' investments but also their own reputations – and
wealth. If the shareholders prevail in the Disney suit, they could win
damages that would come out of the directors' own pockets. That case centers on Mr. Eisner's
hiring of Michael Ovitz as president of Disney in 1995. When Mr. Eisner
decided to dismiss him 14 months later, the contract the two had worked out
yielded Mr. Ovitz $140 million. Lawyers for shareholders have argued since
1997 that the directors shirked their duties by granting Mr. Eisner carte blanche
to deal with Mr. Ovitz, who was then his good friend. The huge pay and lavish perks collected by some senior
executives have long stirred shareholders' ire, but as Patrick McGurn,
special counsel to Institutional Shareholder Services, said
Wednesday at the conference, some are resetting their targets. "The
anger is not being focused on the overpaid executives anymore," he said.
"It's being focused on members of compensation committees." Institutional Shareholder Services, which advises big
investors on proxy votes, has started advocating the withholding of votes for
director candidates whom it blamed for "a disconnect between pay and performance,"
Mr. McGurn said. Four out of five of its clients said in a recent survey that
they expected to withhold votes for members of compensation committees in the
next round of corporate annual meetings. Shareholders are "going to try to go after more
boards," Mr. McGurn said, adding that investors might give those
responsible for setting and monitoring executive pay a chance to "get
out of the penalty box" by adopting reforms. The first step they advocate may seem obvious: Directors
should find out exactly how and how much senior executives are paid and
explain it all to shareholders. At most big companies, that is no longer easy. C.E.O.'s
are compensated in a multiplicity of ways, some of which can be tricky to
measure. Honeywell International took a step forward in its latest
proxy statement by tallying a variety of benefits its executives received on
top of their salaries, bonuses and stock awards. At a glance, shareholders
could glean that they had allowed David M. Cote, the chairman and chief
executive, $174,000 of personal use of company planes and cars last year,
$319,000 in above-market interest on deferred income and $137,000 in reimbursements
to cover taxes on various benefits. Critics of the planeload of perks granted to C.E.O.'s hope
that securities regulators will demand more detailed disclosure of these benefits
and that companies will be shamed into excising them. Alan Beller, director
of the division of corporate finance at the Securities and Exchange
Commission, showed up at that conference to reinforce that notion. Companies
have been "overly creative," Mr. Beller said, in efforts to slip
through perceived loopholes in rules on disclosing executive pay and perks.
"A perk by any other name is still a perk," he said. MR. BELLER hinted that the commission might bring more
accusations like the ones it leveled at General Electric a month ago,
contending that the company failed to describe fully the rich package of retirement
benefits it gave to John H. Welch Jr., its former chairman and chief
executive. The commission found that the benefits Mr. Welch received in his
first year of retirement, including jet travel and use of an $11 million apartment
in Manhattan, were worth $2.5 million. (Without admitting any wrongdoing,
G.E. settled by agreeing not to violate the disclosure rules.) Mr. Beller said executives often resist calls for details by asking: "Where does it say we have to disclose that? Show me the words."He had a terse rejoinder: "Let me help. Disclosure is required of all compensation earned or paid from all sources for all services." |
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