Investor uprising
Amalgamated's attempt to recoup ill-gotten bonuses from CA execs fell
short, but it set a huge precedent
By Aaron Elstein
Published on August 30, 2004
Efforts to rein in runaway executive compensation are at last making some
progress, despite appearances to the contrary.
At first glance, last week's crushing 3-to-1 defeat of a shareholder effort
to force former executives at Computer Associates International Inc. to
return ill-gotten pay may have looked like a setback. Instead, corporate
governance experts insist, the vote represents a major step forward--one
that could ultimately affect a number of New York-based companies.
Experts note that the proposal marked the first time that a company had been
asked to recoup performance-based compensation that may have been inflated
by accounting shenanigans.
"We'd never seen a shareholder proposal like this before," says Greg Taxin,
chief executive of Glass Lewis & Co., a firm that advises institutional
investors on how to vote in corporate board elections and other proxy
matters.
For years, shareholder resolutions have been used to express displeasure
over executive compensation. The proposal drafted by institutional investor
Amalgamated Bank of Manhattan opened a new front in this battle by
specifically targeting ill-gotten performance-based pay.
The opportunities for other shareholders to follow in Amalgamated's
footsteps would seem vast. After all, accounting glitches forced publicly
traded companies to restate financial results 1,372 times over the past five
years, according to Huron Consulting Group.
Even companies' own boards recently have begun to rally to the cause.
Several have inserted new "clawback" provisions in executives' contracts to
force them to return any pay based on corporate performance data that prove
to be inflated.
Meanwhile, former Securities and Exchange Commission Chairman Harvey Pitt
has gone so far as to propose putting all bonus and discretionary
compensation paid to CEOs into an escrow account until they have left
office.
"It took a long time for executive compensation to get the way it is, and it
will take a long time to work itself out," says Jannice Koors, a managing
director at Manhattan compensation consulting firm Pearl Meyer & Partners.
"But I think things are changing."
The new investor crusade to reclaim undeserved pay could make things
uncomfortable for a number of prominent New York-area companies and their
top executives.
Local examples
Time Warner Inc., for example, currently has its accounting under
investigation by the SEC and the U.S. Justice Department, and Lucent
Technologies Inc. earlier this year settled regulatory charges that it
improperly booked $1.1 billion of revenue in 2000, and agreed to pay $25
million in fines.
Long Island-based Computer Associates is part of that besmirched group.
Earlier this year, CA said it had improperly reported more than $2 billion
in sales in 2000. That year, former CEO Sanjay Kumar was awarded a bonus of
$3.2 million plus 80,000 CA shares based on that inflated figure.
In the past, companies have been loath to demand what amount to refunds from
former executives. Officials at Amalgamated Bank, which owns nearly 250,000
CA shares, thought the time had come.
"The basic principle is: If you didn't earn the money, you shouldn't keep
it," says Con Hitchcock, the lawyer for Amalgamated Bank who presented the
resolution at CA's annual shareholder meeting last week. The loud, sustained
applause from the audience of angry individual investors suggested that his
idea made sense to many.
Even Lewis Ranieri, CA's new chairman, said at the annual meeting that he
agreed with Amalgamated's proposal in principle. In the end, he said, he
opposed the measure only because it was drafted so broadly that it could
hurt executives who weren't party to any accounting restatements.
Tweaks could help
Some experts think that with a bit of retooling, though, such proposals
could go far. "If Amalgamated recrafts its proposal a bit, when it finds a
board that isn't being responsive, it will get a bigger vote," says Mr.
Taxin of Glass Lewis.
Some companies aren't waiting for shareholders to rise up against them.
Nortel Networks Corp. said earlier this month that it would try to get back
about $10 million in bonus payments made to 10 former executives who were
rewarded on the basis of inaccurate financial data. Closer to home, early
this year, the New York Stock Exchange moved to have former Chairman Richard
Grasso return $150 million of what the exchange called "inappropriate" pay.
To make such recoveries easier in the future, some corporate boards are
thinking ahead. "Companies are trying to set the rules upfront," says Ms.
Koors of Pearl Meyer. She notes that some companies are starting to demand
clawback provisions in contracts to make it easier to reclaim pay based on
doctored financial results.
COPYRIGHT 2004 CRAIN COMMUNICATIONS INC. |
