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New York Times, June 11, 2008 article

 

The New York Times

 

 

 


June 11, 2008
 

Vetting a Vetter: Obama’s Pick Fuels G.O.P. Criticism

In choosing James A. Johnson for his vice-presidential selection committee, Senator Barack Obama tapped the ultimate Washington insider: a nationally recognized business executive who also helped Walter F. Mondale and John Kerry pick their Democratic running mates.

But now some of the business ties that made Mr. Johnson so attractive to Mr. Obama are being used against him.

Republicans and their presumed presidential nominee, Senator John McCain, have criticized Mr. Johnson, the former chairman of Fannie Mae, accusing him of getting favorable rates on three home mortgages totaling $1.7 million as a friend of the chief executive of the Countrywide Financial Corporation, the troubled mortgage lender that has became a symbol of the excesses that led to the crisis in subprime mortgage.

Mr. Johnson was also involved in some of the more controversial executive compensation decisions in recent years, serving on the board of five companies that granted lavish pay packages to their executives — and often playing a key role in approving them.

One of the more well-known cases involves UnitedHealth Group, a Minnesota company, where Mr. Johnson was a board member and later head of the compensation committee.

The company came under fire after the chief executive was granted more than $1.4 billion in stock options — some $618 million of which was returned as a result of settlements with federal regulators and shareholders.

The executive, William McGuire, resigned, but he kept $800 million from the package.

Because of cases like UnitedHealth Group, Mr. Obama, Democrat of Illinois, introduced legislation in the Senate last year to restrict runaway compensation.

The measure, informally called “Say on Pay,” would give shareholders an advisory role in setting executive pay packages. It passed the House and is pending in the Senate.

In introducing the measure, Mr. Obama said it was intended to “force corporate boards to think twice before signing over millions of dollars to C.E.O.’s.”

He added that “the rate at which executive pay has grown, as compared to stagnating wages among American workers, is rightfully frustrating shareholders and employees alike, especially given the lackluster performance of many of the companies paying these high salaries.”

Mr. Johnson is one of three people vetting possible running mates for Mr. Obama. His appointment has created a wave of negative publicity just as Mr. Obama has begun his general election campaign and is challenging Mr. McCain on economic issues.

“Jim Johnson is an unusual choice for Obama to have heading up his vice-presidential selection committee,” said Charles M. Elson, head of the Weinberg Center for Corporate Governance at the University of Delaware.

“Johnson found himself in the middle of the controversy that spurred the introduction of the Say on Pay bill,” Mr. Elson said. Given that Mr. Obama is leading the effort to rein in such excesses, “that makes it more strange,” he added.

Say on Pay is directed at the kind of decisions that led to enormous compensation packages at UnitedHealth Care and at four other companies where Mr. Johnson headed the compensation committees. One of them was Goldman Sachs, where Mr. Johnson defended a pay package granted to Henry Paulson, now the treasury secretary, that allowed Mr. Paulson to keep an extra $26 million in stock options.

At some of the companies where Mr. Johnson sat on the board, controversy erupted after packages were approved that included the backdating of options — or the practice of granting options to corporate executives on dates when the company’s share price was low, to guarantee the maximum profit when the options were exercised.

UnitedHealth Care reached a settlement with the Securities and Exchange Commission and shareholders over the issue in December.

In return for his work on the UnitedHealth Care board, Mr. Johnson received more than 3.1 million stock options, with an underlying value of about $175 million. He also received a director’s fee of $400,000 a year.

Oversight groups have also raised questions about the number of boards on which Mr. Johnson served while holding a full-time position at Fannie Mae. Besides UnitedHealth and Goldman Sachs, he served on the boards and compensation committees of KB Homes, the Gannett Corporation and Temple Inland. He was also a board member at Target.

“He was on the boards of five companies at the time we had flagged him in our reports,” said Paul Hodgson, senior research analyst at the Corporate Library, a company that analyzes corporate governance issues. “Two of those were involved in the backdating of stock options, and the levels of executive compensation at four of them were considered excessive.”

The Obama campaign did not directly respond to questions about Mr. Johnson, nor did it provide additional information about the terms of the mortgages that he received from Countrywide.

On Tuesday, Mr. Obama responded by saying, “I am not vetting my V.P. search committee for their mortgages.”

The senator said that Mr. Johnson had a “very discrete task” to gather information about potential vice-presidential candidates, that he was performing his job well and that he was not being paid for his work.

John M. Broder contributed reporting.

 

 

Copyright 2008 The New York Times Company

 

 

 

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