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CORPORATE ETHICS and/or CRIME
12/19/04 <link>
Big stock option awards
precede positive announcements Via
Brad
Delong/CEPR, here is an article on this by Gretchen
Morgenson:
GRETCHEN
MORGENSON
In the Timing of
Options, Many, Um, Coincidences
EVER notice how huge
stock option awards are often given to executives just ahead of
bullish company news? The Securities and Exchange Commission
apparently has.
Last Tuesday, Analog
Devices, a maker of integrated circuits, disclosed that the S.E.C.
had requested information about the timing of option grants given to
company executives and directors during the last five years. In its
disclosure, the company noted that its grants in some years
"occurred shortly before our issuance of favorable annual
financial results." The company added that it believed other
companies had received similar inquiries from the regulator.
The S.E.C., as is its
custom, declined to comment on the inquiry.
As executives have
binged on stock options in recent years, academic studies have
detailed the opportunities for fatter pay that well-timed option
grants represent. By analyzing stock price behavior after option
awards, these studies concluded that corporate managers
systematically receive options at prices that do not reflect
favorable nonpublic information.
Options typically
carry a strike price - the level at which they can be converted into
common shares - equal to the prevailing market price of the
underlying stock on the day of the grant. Any increase in the
underlying stock, therefore, means a potential gain for the option
holder. Because stock options are typically exercisable for 10
years, they are extremely valuable.
Many companies
dispense options at preset times during the year, limiting the
opportunity for timing mischief. But 40 percent of grants were
issued whenever a board chose to do so, according to an academic
study published in 2000. Directors on a company's compensation
committee typically approve option grants, but chief executives
wield significant power among directors in these matters.
Even though most
grants can be exercised only in fractional increments over time,
academics have also found that gains in share prices immediately
after a grant usually hold up over the long haul.
In an article in the
North Carolina Law Review last March, Iman Anabtawi, acting
professor at the School of Law at the University of California, Los
Angeles, called favorably timed option grants "secret
compensation." Grant timing is hard to detect and rarely
analyzed, she said, so shareholders are not aware of the
consequences.
"Allowing a
company to time option grants around inside information," Ms.
Anabtawi said, "is substantively equivalent to allowing a
company to engage in insider trading in the open market and then
secretly pay its executives with the profits."
KENNETH F. BROAD, a
portfolio manager at Transamerica Investment Management, says he is
distressed by these practices because they put the interests of
executives squarely against those of their stockholders. He, like
Ms. Anabtawi, likens the practice to insider trading.
"Even if
technically it's not illegal, shareholders who own stock in a
company that does this should think long and hard about the
management they are dealing with," Mr. Broad said. "Every
dollar lower on the strike price is at the shareholders'
expense."
Analog Devices is a
heavy user of options. A recent analysis by Adam Parker, an analyst
at Sanford Bernstein noted that in each of the last five years, the
company has handed out options representing about 3.5 percent of the
company's shares outstanding.
One option grant that
the S.E.C. may be scrutinizing occurred on Nov. 10, 2000, and
covered 920,000 shares given to the company's top five executives.
The strike price was $44.50 a share, just $2.25 above the stock's
low for all of 2000.
Three days later,
Analog Devices reported that Siemens
A.G., the German electronics maker, had decided to use two of
the chip maker's products in its new wireless phones and devices;
the stock rose 8.3 percent on the news. The next day, the company
announced that its fourth-quarter profit had more than doubled. The
shares jumped to $55.50.
Within a week of the
grant, shares of Analog Devices had risen, up 34.3 percent.
Maria C. Tagliaferro,
a spokeswoman for Analog Devices, said the company was considering
how to grant options without creating the perception of executive
opportunism. She said the options from 2000 could start being
exercised only last year and that at recent prices - $38.66 as of
Friday's close - the options were now underwater.
Still, from October
2003 to July 2004, Analog Devices' shares were above the options'
strike price, meaning that they could have been cashed in at a
profit.
Another example of a
spectacularly timed options grant is the one received last year by
Erik C. Blachford, a founder and former chief executive of Expedia,
the online travel retailer. Mr. Blachford had been named Expedia's
chief executive in February 2003, when the company was partially
owned by USA Interactive, the online conglomerate overseen by Barry
Diller that is now called InterActiveCorp.
On March 17, 2003,
Mr. Blachford received options to buy 253,000 shares of Expedia at
$39.38 each. Two days later, USA Interactive announced that it would
acquire in a stock-for-stock deal the Expedia shares it did not
already own. The offer, at a premium of more than 34 percent to the
prevailing market price, resulted in an immediate increase in the
value of Mr. Blachford's option grant.
Deborah Roth, an
InterActiveCorp spokeswoman, said Mr. Blachford had received the
options as "a bonus incentive for accepting his new position as
president and C.E.O. of Expedia, a standard practice we employ with
many employees in connection with their promotions." She
declined to comment when asked why the company did not wait to give
Mr. Blachford his options until its offer to buy all of Expedia's
shares was made public.
Alan G. Spoon, a
partner at Polaris Venture Partners in Waltham, Mass., is chairman
of InterActiveCorp's compensation committee of the board. He did not
return a phone call seeking comment about the grant's timing.
In August 2003, when
InterActiveCorp completed the Expedia buyout, Mr. Blachford's
253,000 options became 490,503 InterActiveCorp options with a strike
price of $20.31 a share. InterActiveCorp shares now trade at $25.01.
Last month, Mr. Blachford retired from the company. Ms. Roth said
that he was on vacation and not available for comment.
RECENT option grants
at Cypress
Semiconductor have also generated quick value on positive news.
On April 11, 2003, for example, the company granted options on
540,000 shares to four of its top executives at a strike price of
$7.56.
Less than three weeks
later, Cypress said its revenue in that quarter would be higher than
analysts had been expecting. On May 2, 2003, the stock closed at
$10.60.
As of Friday,
Cypress's shares were at $10.29; the options granted in April 2003
have been in the money since they were awarded. They started vesting
immediately in monthly increments of about 1.7 percent of the grant.
Joseph McCarthy,
Cypress's spokesman, said, "There is no incentive for
opportunistic behavior" relating to the grant because the gains
did not represent a windfall.
Managers in corporate
America may argue that handing out options that almost immediately
rise in value generates goodwill among employees, especially those
holding options dispensed during the mania of the late 1990's that
are now underwater. But most options still go to top managers, so
well-timed grants only make the obscenely rich even richer.
Making option grants
subject to blackout periods around the dissemination of
market-moving news, as some pay experts have suggested, would reduce
the opportunities for executive enrichment associated with the
grants.
In any case, because
options handed out just before good news are essentially given at a
discount, the extra value attached to them should be disclosed to
investors as compensation. Sunlight is needed here.
And if the S.E.C.
finds that well-timed option grants are deplorably common in
corporate America, shareholders should revolt. They should vote
against compensation committee members who approve such awards or
sell their shares outright.
Corporate insiders,
alas, can be expected to put their own interests first these days.
But shame on the shareholders who let them get away with it.
11/18/03 <link>
The
Mutual Fund scandal - Paul Krugman and NY State Atty. Gen. Eliot
Spitzer tell us what happened
Mr. Krugman, as usual, makes it easy for commoners like us to
understand the gravity of this scandal.
Funds and Games
By PAUL KRUGMAN
...
You're selling your house, and your real estate agent claims
that he's representing your interests. But he sells the property
at less than fair value to a friend, who resells it at a
substantial profit, on which the agent receives a kickback. You
complain to the county attorney. But he gets big campaign
contributions from the agent, so he pays no attention.
That, in essence, is the story of the growing
mutual fund scandal. On any given day, the losses to each
individual investor were small — which is why the scandal took
so long to become visible. But if you steal a little bit of
money every day from 95 million investors, the sums add up.
Arthur Levitt, the former Securities and Exchange Commission
chairman, calls the mutual fund story "the worst scandal
we've seen in 50 years" — and no, he's not excluding
Enron and WorldCom. Meanwhile, federal regulators, having
allowed the scandal to fester, are doing their best to let the
villains get off lightly.
Unlike the cheating real estate agent, mutual
funds can't set prices arbitrarily. Once a day, just after U.S.
markets close, they must set the prices of their shares based on
the market prices of the stocks they own. But this, it turns
out, still leaves plenty of room for cheating.
One method is the illegal practice of late
trading: managers let favored clients buy shares after hours.
The trick is that on some days, late-breaking news clearly
points to higher share prices tomorrow. Someone who is allowed
to buy on that news, at prices set earlier in the day, is pretty
much assured of a profit. This profit comes at the expense of
ordinary investors, who have in effect had part of their assets
sold off at bargain prices.
Another practice takes advantage of
"stale prices" on foreign stocks. Suppose that a
mutual fund owns Japanese stocks. When it values its own shares
at 4 p.m., it uses the closing prices from Tokyo, 14 hours
earlier. Yet a lot may have happened since then. If the news is
favorable for Japanese stocks, a mutual fund that holds a lot of
those stocks will be underpriced, offering a quick profit
opportunity for someone who buys shares in the fund today and
unloads those shares tomorrow. This isn't illegal, but a mutual
fund that cared about protecting its investors would have rules
against such rapid-fire deals. Indeed, many funds do have such
rules — but they have been enforced only for the little
people.
In some cases fund managers traded for their
own personal gain. In other cases hedge funds, which represent
small numbers of wealthy investors, were allowed to enrich
themselves. In return, it seems, they found ways to reward the
managers. You make us rich, we'll make you rich, and the
middle-class investors who trusted us with their money will
never know what happened.
And there's probably more. During last year's
corporate scandals, each major company that came under the
spotlight turned out to have engaged in some original scams. By
analogy, it's a good guess that the mutual fund industry was
cheating its clients in other ways that haven't yet come to
light. Stay tuned.
Oh, and about that corrupt county attorney:
last year it seemed, for a while, that corporate scandals —
and the obvious efforts by the administration and some members
of Congress to head off any close scrutiny of executive
evildoers — would become a major political issue. But the
threat was deftly parried: a few perp walks created the
appearance of reform, a new S.E.C. chairman replaced the
lamentable Harvey Pitt, and then we were in effect told to stop
worrying about corporate malfeasance and focus on the imminent
threat from Saddam's W.M.D.
Now history is repeating itself. The S.E.C.
ignored warnings about mutual fund abuses, and had to be forced
into action by Eliot Spitzer, the New York attorney general.
Having finally brought a fraud suit against Putnam Investments,
the S.E.C. was in a position to set a standard for future
prosecutions; sure enough, it quickly settled on terms that
amount to a gentle slap on the wrist. William Galvin, secretary
of the commonwealth of Massachusetts — who is investigating
Putnam, which is based in Boston — summed it up: "They're
not interested in exposing wrongdoing; they're interested in
giving comfort to the industry."
I wonder what they'll use to distract us this
time? |
Eliot Spitzer on the other hand tells us exactly
what the Bush administration wants to do about this (you know the
answer) - and how Bush has gutted the Clean Air Act.
|
ALBANY — With two decisions in the last two
weeks, the Bush administration has sent its clearest message yet
that it values corporate interests over the interests of average
Americans. In the Securities and Exchange Commission's
settlement with Putnam Investments, the public comes away
short-changed. In the Environmental Protection Agency's decision
to forgo enforcement of the Clean Air Act, the public comes away
completely empty-handed.
The 95 million Americans who invest in mutual funds paid more
than $70 billion in fees in 2002. These fees went to an industry
that did not take seriously its responsibility to safeguard
investors' money. Investors are now rightly concerned about
whether those mutual funds that breached their fiduciary duties
will be required to refund the exorbitant fees they took, and
what mechanism will be put in place to ensure that the fees
charged in the future are fair.
Unfortunately, the S.E.C.'s deal with Putnam does not provide a
satisfactory answer to these questions. Instead, it raises new
questions.
The commission's first failure is one of oversight. The mutual
fund investigation began when an informant approached our office
with evidence of illegal trading practices. Tipsters also
approached the commission, which is supposed to be the nation's
primary securities markets regulator, but the commission simply
did not act on the information.
The commission's second failure was acting in haste to settle
with Putnam even though the investigation is barely 10 weeks old
and is yielding new and important information each day. Whether
the commission recognizes it or not, the first settlement in a
complex investigation always sets the tone for what follows. In
this case, the bar is set too low.
The Putnam agreement does contain a useful provision mandating
that the funds' board of directors be more independent of the
management companies that run its day-to-day operations. It also
talks of fines and restitution, but leaves for another day the
determination of the amount Putnam should pay.
Most important, the agreement does not address the manner in
which the fees charged to investors are calculated. Nor does it
require the fund to inform investors exactly how much they are
being charged — or even provide a structure that will create
market pressure to reduce those fees. Finally, there is no
discussion of civil or criminal sanctions for the managers who
acted improperly by engaging in or permitting market timing and
late trading.
S.E.C. officials are now saying that they may be interested in
additional reforms. But by settling so quickly, they have lost
leverage in obtaining further measures to protect investors.
After reviewing this agreement, I can say with certainty that
any resolution with my office will require concessions from the
industry that go far beyond what the commission obtained from
Putnam.
It is not surprising that the commission would sanction a deal
that ignores consumers and is unsatisfactory to state
regulators. Just look at the Bush administration's decision to
abandon pending enforcement actions and investigations of Clear
Air Act violations.
Even supporters of the Bush administration's environmental
policy were stunned when the E.P.A. announced that it was
closing pending investigations into more than 100 power plants
and factories for violating the Clean Air Act — and dropping
13 cases in which it had already made a determination that the
law had been violated.
Regulators may disagree about what our environmental laws should
look like. But we should all be able to agree that companies
that violated then-existing pollution laws should be punished.
Those environmental laws were enacted to protect a public that
was concerned about its health and safety. By letting companies
that violated the Clean Air Act off the hook, the Environmental
Protection Agency has effectively issued an industry-wide
pardon. This will only embolden polluters to continue practices
that harm the environment.
My office had worked with the agency to investigate polluters,
and will continue to do so when possible. But today a bipartisan
coalition of 14 state attorneys general will sue the agency to
halt the implementation of weaker standards. In addition, we
will continue to press the lawsuits that have been filed. We
have also requested the E.P.A. records for the cases that have
been dropped, and will file lawsuits if they are warranted by
the facts.
Similarly, my office — while committed to working with the
Securities and Exchange Commission in our investigation of the
mutual fund industry — will not be party to settlements that
fail to protect the interests of investors and let the industry
off with little more than a slap on the wrist.
The public expects and deserves the protection that effective
government oversight provides. Until the Bush administration
shows it is willing to do the job, however, it appears the
public will have to rely on state regulators and lawmakers to
protect its interests. |
5/5/03 <link>
Warren
Buffett flays Bush tax cut plans and corporate greed in the U.S.
"...WARREN
BUFFETT, the US investor whose folksy style masks one of the shrewdest
minds in corporate America, used the annual gathering of his Berkshire
Hathaway vehicle to launch a fierce attack on US executive greed and
President Bush’s planned tax cuts.
The shareholder meeting in Mr Buffett’s home town of Omaha,
Nebraska, which attracts some 14,000 “Buffeteers”, is dubbed the
“Woodstock for Capitalists” and is a fixture in the investment
calendar. But this year’s gathering at times seemed more like an
antiglobalisation rally.
The second richest man in the world, Mr Buffett, known as the “Sage
of Omaha”, criticised plans for tax cuts that he said were designed
to fleece the poor and reward the rich.
“I am not for the Bush plan. It screams of injustice. The main
beneficiaries will be people like me and Charlie,” he said,
referring to the Berkshire Hathaway vice-chairman Charlie Munger. Mr
Buffett said the tax plan was equivalent to “us giving a lesser
percentage of our incomes to Washington than the people working in our
shoe factories”.
He called on investors to rise up and revolt over colossal executive
pay packages, saying in the past 20 years there had been “an
enormous disparity in the rates of compensation between people at the
top and people at the bottom, and a disconnect between people at the
top and the shareowners who give them the money”.
“Arise shareholders,” he concluded, raising both palms skyward..."
5/2/03 <link>
Merrill Lynch and Morgan Stanley chiefs
basically mock prosecutions; in the meantime frauds like Enron and MCI
ask IRS for money back from taxes paid of false profits!
In a remarkable show of corporate dishonesty, the chiefs of two of the
large Wall Street firms show how confident these folks feel in today's
environment in spite of the fraud they committed. In the meantime,
folks like Worldcom and Enron, whose executives made it
super-duper-rich inflating profits, are now asking the IRS to refund a
ton of taxes paid on overstated profits. All-in-all very cheerful
developments. CNN
Money
"...In a letter to U.S. Securities and
Exchange Commission Chairman William Donaldson, Morgan Chief Executive
Philip Purcell said, "I deeply regret any public impression that
the commission's complaint was not a matter of concern to retail
investors ... We fully endorse the settlement." Donaldson
warned Purcell in a letter released on Thursday that remarks Purcell
had made in an April 30 article in The New York Times about the
settlement were "troubling." Donaldson, himself a former
investment bank chief, wrote to Purcell: "Your statements reflect
a disturbing and misguided perspective on Morgan Stanley's alleged
misconduct."...In the Times article published two days after
the settlement was announced, Purcell was quoted as saying, "I
don't see anything in the settlement that will concern the retail
investor about Morgan Stanley." (our emphasis) In his letter,
Donaldson said, "The allegations in the commission's complaint
against Morgan Stanley are extremely serious. In light of these
charges, your reported comments evidence a troubling lack of
contrition and lead me to wonder about Morgan Stanley's commitment to
compliance with the letter and spirit of the law and the high
standards of conduct all investors have a right to expect from their
brokerage firms." Replying to Donaldson's warning, Purcell wrote:
"Morgan Stanley views seriously the allegations that the SEC and
other regulators have made in their complaints and agrees the
allegations are a matter of concern to retail investors." Forbes
"...New York Attorney General Eliot
Spitzer heaped scorn on Merrill Lynch & Co. Chief Executive Stan
O'Neal Monday, accusing O'Neal, whom he did not mention by name, of
running a firm that "committed fraud" and knowingly stiffed
investors. Spitzer made the remarks during a press conference in
Washington in which financial regulators unveiled final details of a
$1.4 billion settlement over biased research with a group of Wall
Street firms. Under the terms of that much-anticipated deal, Merrill
agreed to pay $200 million in fines and restitution. Although Spitzer
did not attack O'Neal by name, he launched an unusually singular
attack against a CEO who authored an opinion-editorial in a major
publication last week. O'Neal wrote an opinion piece for last
Thursday's Wall Street Journal, and a source said he was the target of
Spitzer's remarks. "I saw last week an article in one of the
major publications where one of the CEOs said this (settlement) is
merely an effort to eliminate risk from the marketplace," Spitzer
said. "Risk is inherent in the markets. We all understand that
and we thrive on it. What is not tolerated however, is fraud,"
Spitzer said. "So, Mr. CEO, and I read your article carefully, if
I were you I would reflect. What your company did, and what we have
alleged about your company, is that you committed fraud."...On
April 24, a 522-word article submitted by O'Neal appeared in the Wall
Street Journal. Entitled "Risky Business," the article
stated that risk is essential to capitalism. "If we attempt to
eliminate risk -- to legislate, regulate, or litigate it out of
existence -- the ultimate result will be economic stagnation, perhaps
even economic failure," O'Neal wrote. "Listening to some
oracles in Washington and elsewhere these days, you'd think the
corporate landscape was populated by a bunch of capitalist outlaws,
out to get a buck however they can. Nothing could be further from the
truth," O'Neal said in his article. Spitzer responded sharply
Monday. (our emphasis)
"Indeed, you did not want to tolerate
risk," Spitzer said. "Because what you did was shift the
risk to unknowing investors while you got your fees up front. That's
not fair, that's not equitable, and it's not how the markets should
run." Under the settlement,
former Merrill star Internet analyst Henry Blodget was permanently
barred from the securities industry and told to pay $4 million in
penalties under the settlement.
O'Neal, who added the title of chairman on
Monday, told Merrill employees and investors at the firm's annual
meeting: "We have not always lived up to our ideals, and we have
therefore redoubled our efforts in some areas." " Washington
Post
"...Some companies under investigation for
fraudulently inflating their earnings over the past few years said
yesterday that they have asked or may ask the Internal Revenue Service
for refunds of taxes they paid on fake profits.
MCI, formerly known as WorldCom Inc., has already collected nearly
$300 million in overpayments from the IRS, a company spokeswoman said.
The telecommunications giant's accounting irregularities total $11
billion.
Enron Corp., which concealed mountains of debt in a tangle of
transactions that auditors have yet to unravel, is also talking to the
IRS about past taxes, said Mark Palmer, an Enron spokesman.
In some cases, it appears that Enron is owed a refund; in other cases
it might owe more money. For example, Enron has a $60 million-plus
credit with the IRS based on a complex transaction it reversed before
filing for bankruptcy protection in late 2001, according to sources
familiar with the matter. But lawyers are weighing that credit against
other deals to determine whether the energy company's tax liabilities
will cancel out any tax refund.
The efforts of the two companies, both of which are in bankruptcy,
were reported in the Wall Street Journal yesterday. Another company
named by the Journal, HealthSouth Corp., may apply for a refund of
$300 million at most, said Andy Brimmer, a HealthSouth spokesman.
.." It's
time for our weekly Krugman-shot
"...On Monday, thanks mainly to Mr.
Spitzer, a group of investment banks paid $1.4 billion to settle
charges that their stock analysts had been shilling for corporate
clients. This was, however, a mere slap on the wrist. And it's
increasingly obvious that neither the investment bankers nor corporate
evildoers in general are feeling chastened.
Indeed, last week Stanley O'Neal, the chief executive of
Merrill Lynch
, wrote an op-ed article caricaturing the likes of Mr. Spitzer —
though without naming him — as enemies of capitalism who teach
investors that "if they lose money in the market they're
automatically entitled to be compensated." By the way, Henry
Blodget — the analyst whose internal e-mail famously used a
scatological term to describe a stock he was publicly touting, and who
was permanently banned from the industry under Monday's settlement —
worked for Merrill Lynch.
Mr. Spitzer's scathing reply, addressed to "Mr. C.E.O.," is
a classic. ("Indeed, you did not want to tolerate risk. Because
what you did was shift the risk to unknowing investors while you got
the fees up front.") But it's revealing that Mr. O'Neal felt
empowered to write that piece in the first place. Like the New York
Stock Exchange, which tried to appoint
Citigroup's
Sanford Weill to its board — Mr. Weill is now forbidden to talk to
his own company's analysts unless a lawyer is present — Mr. O'Neal
overreached. But he clearly knows which way the wind is blowing.
And it's not just investment bankers: corporate insiders across
America are feeling their oats. Consider the executives at American
Airlines, who paid themselves big bonuses and secretly set up a
special trust to secure their own pensions, even while demanding pay
cuts from their workers to save the company. Well, why not? Trust
funds protecting executive pensions even when ordinary workers'
pension plans are underfunded, and hefty "retention" bonuses
for executives of near-bankrupt companies, are all the rage these
days.
Warren Buffett has called C.E.O. compensation the "acid
test" for reform. Between 1970 and 2001, in an orgy of mutual
back-scratching by C.E.O.'s and their boards, median pay among the top
100 executives soared from 35 times that of the average worker to more
than 500 times as much. So what happened in 2002, as unemployment
rose, wages failed to keep up with prices and stocks declined — and
stories of corporate malfeasance filled the news? Nothing. O.K., not
exactly nothing: some of the huge options grants at the top went away,
reducing the average among the top 100. But according to Fortune,
which put a pinstripe-clothed pig on its cover, median pay among top
executives rose another 14 percent.
Last summer it seemed, briefly, as if the torrent of scandals — and
the revelations about how closely some of our politicians were tied to
scandal-ridden companies — would bring about a public backlash
against corporate malfeasance. But then the topic largely vanished
from the news, driven out by reports about Iraq's nuclear weapons
program and all that. And after the midterm elections, which put
apologists for corporate insiders back in control of all the relevant
Congressional committees, we might as well have had the sirens sound
the all-clear. Only Mr. Spitzer still has both the inclination and the
power to make trouble..."
4/23/03 <link>
Some recent gems on corporate ethics/crime
Airline
Industry CEOs
CEOs
You Don't Want in the Cockpit
By Harold Meyerson
Tuesday, April 22, 2003; Page A19
It's a good thing that Donald J. Carty, the chairman and chief
executive of American Airlines, doesn't also pilot one of its
planes. If he did, and if the plane went into an uncontrolled
dive and he handled it the same way he's running the company,
he'd bail out as the plane fell to earth, drift dreamily down on
a golden parachute, land lightly amid the carnage and give
himself a nice cash bonus for coming through unscathed.
Over the past week it has become clear that Carty has engaged in
the same kind of double-dealing, to conceal the same kind of
double standards, that last year made his fellow Texan and CEO
Ken Lay a household name.
While Carty was convincing American's pilots, mechanics, flight
attendants and baggage handlers that they had to accept major
pay cuts (ranging from 15.6 percent to 23 percent, and kicking
in on May 1) if the airline was to avoid bankruptcy, he was
secretly crafting a "retention bonus" for American's
top seven executives that would reward them for staying at their
posts until 2005. The bonuses, all but one set at twice these
executives' annual salaries (Carty's would total $1.6 million),
weren't keyed to performance -- a prudent proviso, because
American lost $5.3 billion in 2001-02 and things aren't exactly
looking up yet. Instead, they seem to derive from the maxim of
business guru Woody Allen, who once noted that 90 percent of
life is just showing up. Carty's corollary is that if you run
the company, just being there can be grounds for doubling your
pay so long as nobody's on to you.
Nor was this all. Even as top American executives were telling
the pilots that the company would eliminate their pension plans
if it had to file for bankruptcy, Carty and his crew had
secretly created a special pension trust for the company's top
45 executives that no creditor could even touch during a
bankruptcy proceeding. More wondrous still, Carty and three
other top honchos were to be paid extra for administering this
trust.
It gets worse.
These marvelous new provisions had to be included in American's
year-end report to the Securities and Exchange Commission, but
the company managed to get an extension from the SEC to delay
the filing. Throughout April, American's workers were voting on
whether to accept these pay concessions to stave off bankruptcy.
Voting was to have wrapped up last Tuesday, and on Tuesday
night, in the apparent belief that all three unions had accepted
the cuts, the company finally released the report. In fact, the
flight attendants had narrowly voted to reject the givebacks, so
the polls were kept open Wednesday until a majority had voted
yes.
Then the polls closed, not a moment too soon for management. As
news of the secret deals spread, those American workers still
grappling with the details of their Easter pageants had a
casting director's epiphany: In a pinch, Donald J. Carty would
make one swell Judas. On Thursday, leaders of one of the unions
told Carty they might not sign the agreements that their members
had, in all deliberate ignorance, ratified. Democratic members
of Congress were rumbling too, and with American slated to
receive $410 million from the emergency appropriation that
Congress just enacted, Carty had to backtrack -- a little. He
has now announced that the top seven execs won't be getting that
retention bonus after all. The special pension plan for the
special 45, however, will stay in place.
The real problem, of course, is that Don Carty isn't all that
exceptional among his fellow corporate statesmen -- certainly
not at many of the major airlines. Over at Continental, CEO
Gordon Bethune pulled down a handsome $14.7 million last year --
a 172 percent increase over 2001, though the company lost $451
million. At Delta, chief executive Leo Mullin got himself paid
$13.8 million -- a 104 percent increase over 2001, though Delta
lost $1.27 billion. In this quadrant of American capitalism, at
least, there is indeed a relation between executive pay and
company performance. It's inverse.
Or maybe there's a special problem with Texas CEOs. I know a
former CEO of Halliburton Co., now the No. 2 in a larger
concern, who keeps arguing that the public's legal right to
oversee public business does not pertain to the topmost public
executives when they meet to make energy policy and who knows
what else. Then there's Dick Cheney's boss, who's out stumping
for a budget that will force state governments to increase class
sizes and cut medical care but will reward the richest 10
percent of Americans with massive tax cuts.
When these guys think of shared sacrifice, the saps get the
sacrifice and they get the shares.
The writer is editor at large of the
American Prospect. |
Tenet
Healthcare
Pay For Performance (Dwight Meredith)
Jeffrey C. Barbakow is a very rich man.
According to this USA Today
Barbakow received more than $116 million in compensation
last year. That figure does not include his new stock options
that could bring in an additional $72 million. Even without the
new options, Barbakow’s compensation works out to be about
$22,875 per hour.
What did Mr. Barbakow do to earn his $116 million? He served as
CEO of Tenet Healthcare. Tenet Healthcare is one of the largest
500 companies in the world. It ranks as the 136th largest
company in the U.S.
Tenet Healthcare owns and operates hospitals. As one report
has stated, Tenet is:
one of the largest hospital chains in the
US. Tenet and its subsidiaries own or operate 115 acute care
hospitals in 16 states, as well as one in Europe. The acute
care hospitals serve as cornerstones to vast regional health
care delivery networks. These regional networks include
specialty hospitals, outpatient surgery centers, home health
agencies, rehabilitation hospitals, psychiatric hospitals,
HMOs, and long-term care.
Now, $116 million in compensation for one person
in one year may be shocking on its face to some people. We are
not shocked. Compensation in the business world should be
related to performance. If Mr. Barbakow adds sufficient value to
Tenet Healthcare and its shareholders, he deserves such
compensation.
Since Mr. Barbakow received the highest compensation of any CEO
in the country in 2002, we may presume that his performance as
CEO is reflected in the stock price for Tenet Healthcare. That
assumption, however, would be wrong.
As this is being written, Tenet Healthcare (THC) is trading at
$16.59 per share. It 52 week high is above $52 per share. THC is
currently trading at less than one third of its highest price in
the last year. Mr. Barbakow received more than $116 million in
compensation in year in which the stock price of the company he
runs fell by more than two-thirds.
Stock prices are fickle. Perhaps Mr. Barbakow earned his hundred
million by shoring up the financial condition of Tenet. Well,
no. CBS Money Watch publishes
the “Bottom 10.” The Bottom 10 is a list of companies rated
by corporate credit analysts as being the most likely to suffer
a downgrade of their debt or a default. Tenet Healthcare is in
the Bottom 10.
Perhaps Mr. Barbakow earned his compensation by turning Tenet
into a paragon of corporate integrity. That does not appear to
be the case.
According to the Department
of Justice:
One hundred thirty-nine hospitals currently or
formerly operated by Tenet Healthcare Corporation will pay the
United States and 22 states $17 million to settle allegations
that the facilities overcharged federal health care programs
in connection with laboratory services, the Justice Department
announced today.
In addition, according to the Modesto
Bee:
Tenet is also facing a federal probe into
whether its aggressive pricing policies improperly triggered
supplementary Medicare payments for care.
It has also been charged
that doctors at a Tenet owned hospital were doing unnecessary
heart surgery.
One report
claims that:
federal agents raided offices at a Tenet
hospital in San Diego on Thursday, seeking records related to
possible violations of doctor-recruitment and relocation laws.
And that:
In a separate development, a group
representing California senior citizens sued Tenet for alleged
price gouging.
It has even been charged
that Tenet, prior to its name change was:
holding some patients against their will in its
psychiatric hospitals and treating them until insurance
benefits ran out.
Mr. Barbakow was a member of the company’s
Board of Directors when that allegation arose. Tenet settled
lawsuits by the patients and some insurers.
The Department
of Justice also reports that:
Tenet Healthcare Corporation subsidiary
Lifemark Hospitals of Florida has paid the United States $29
million to settle allegations that Lifemark, Tenet and various
affiliated and predecessor companies violated the False Claims
Act in connection with false claims submitted to the Medicare
Program.
It has also been alleged that Tenet cheated
the California Worker’s Compensation system. Tenet has agreed
to modify the way in which it bills for those services.
While Barbakow was CEO but before its name change, Tenet:
pleaded
guilty to seven federal charges of paying kickbacks and
bribes for referrals and was fined $382.7 million. A former
executive also acknowledged paying doctors for referrals to
psychiatric hospitals and then filing false Medicare claims to
cover the payments.
It does not appear that corporate integrity is
the key to understanding Mr. Barbakow’s compensation.
Perhaps then, Mr. Barbakow was rewarded for running great
hospitals. Or perhaps not. According to this report,
from November 2002 through January of 2003, the Joint Commission
on Accreditation of Healthcare Organizations made unannounced
visits to 19 Tenet owned hospitals. Those visits resulted in 102
negative citations.
Given that under Mr. Barbakow’s leadership, Tenet Healthcare
has lost 2/3 of its share value, is in the “Bottom 10” with
regard to debt downgrade or default, has been ridden with
scandal over its billing practices and medical ethics and has
102 negative citations, what explains the $116 million of
compensation?
Mr. Barbakow seems to have earned his money the new fashioned
way. He used a number of inappropriate billing and other
practices to drive the stock price to temporary highs, exercised
3,000,000 soon to expire options, pocked $111 million in gain
and stood by to watch the scandals emerge and the stock drop
like a rock. As a reward, the company gave him additional stock
options. If he can repeat his performance and once again
temporarily drive the stock price to a high level, the new
options could net him an additional $72 million.
In the world of CEO compensation, pay for performance takes on a
whole new meaning. |
Iraq
profiteering
Crony
Capitalism Goes To War
Arianna Huffington
Filed April 23, 2003
Quick quiz: What's the
most exclusive club in America? How about the Augusta
National Golf Club, whose 300 members withstood the slings and
arrows of Martha Burk with nary a scratch earlier this month?
Or maybe it's the U.S. Senate, where a seat at one of the
historic roll-top desks can go for as much as $60 million?
Nope, not even close. Our proud democracy's most select
body is the tiny group of contenders invited to bid for
capitalism's crown jewel: The Iraq contract.
Talk about cozy. Sneaking a peek through the blackout
curtains the Bush administration has used to cloak the awarding
of contracts to rebuild Iraq is like catching a glimpse of a
very special incest episode of "ElimiDate": a bunch of
muscular, cash-drunk, hand-picked corporate Lotharios vying for
the affection of their governmental kissing cousins.
The relationship between those doling out these fantastically
valuable deals and those receiving them is so intimate taxpayers
should demand that the participants be checked for STDs before
the first mega-buck check is left on the dresser. An orgy of
unsafe corporate intercourse has been going on.
For full impact, this column should be a flow-chart. Like the
ones the FBI uses to show the inner workings of a mafia crime
family. But instead of illustrating the interrelationships
of the Soprano crew, this chart would lay out the connections
that guaranteed that the big winners in the post-Saddam
sweepstakes would be those two ultimate Washington insiders,
Halliburton and Bechtel Group.
We all know about Halliburton and its former CEO in the very
highest of secure and undisclosed places, Dick Cheney. But
the Bechtel chart is really Byzantine -- starting with George
Shultz, former Bechtel president, former Reagan Secretary of
State, and currently both a Bechtel board member and chairman of
the Committee for the Liberation of Iraq.
Then there is Jack Sheehan, a senior VP at Bechtel and a member
of the Pentagon's influential Defense Policy Board. And
then we have chairman and CEO Riley Bechtel, who in February was
appointed by Bush to the hoity-toity President's Export Council.
Of course, using access, influence, and positions of ostensible
public service to make a buck or two -- or, say, 680 million of
them -- off Iraq is nothing new to the fine folks at Bechtel.
They offer their customers the most precious commodity of all:
experience. Back in the 1980s, the company wanted to build
a pipeline to carry oil from Iraq to the Jordanian port of Aqaba
-- a project ardently supported by the Reagan administration,
which included Shultz and a fellow Bechtel alumnus, Secretary of
Defense Casper Weinberger.
Backers of the Bechtel pipeline lined up a veritable Who's Who
of former Reagan-Bush power players to push for the scheme,
including former Secretary of Defense and CIA chief James
Schlesinger, former National Security Advisor William Clark,
former National Security Advisor Robert McFarlane, and former
Attorney General Edwin Meese. I guess the thought being
that all that political star power might help people forget
Saddam's annoying little habit of gassing people.
And even though he wasn't on the Bechtel payroll, one of those
working hardest to convince the Iraqis to hop into bed with the
company was the macho man himself, Don "We Don't Need No
Stinkin' Antiquities" Rumsfeld. While working as
Reagan's special envoy to the Middle East in 1983, Rumsfeld met
with Saddam personally and tried to convince him to sign on to
Bechtel's pipeline pipe dream.
And Rummy isn't the only current administration official with a
close encounter of the Bechtel kind on his CV. Andrew
Natsios, administrator of the U.S. Agency for International
Development, the agency responsible for handing the lucrative
Iraqi rebuilding contract to Bechtel, used to be in charge of
overseeing Boston's "Big Dig," a massive highway
project managed by Bechtel that went from a projected cost of
$4.5 billion to an actual cost of $14 billion.
In a scathing letter sent to Natsios, the Massachusetts
Inspector General called Bechtel's handling of the Big Dig
"an invitation to fraud, waste and abuse."
Apparently, this amounted to a sterling recommendation in
Natsios' eyes because, three years later, when the time came to
draw up the very short list of companies invited to bid on $1.5
billion in Iraq contracts, he didn't hesitate to include the old
gang at Bechtel. Hey, what's a little "fraud, waste
and abuse" among chums?
In today's
business-loving Washington, a propensity for playing fast and
loose with taxpayer money clearly qualifies as "no harm, no
foul." It certainly hasn't hurt Halliburton, which,
despite being fined $2 million for routinely overbilling the
Pentagon, continues to land hugely profitable government
contracts -- like the $2.2 billion it scored to provide troop
support in the Balkans. According to a GAO study, the
company boosted its bottom line by charging the Army $85 for
plywood that cost $14, and racked up profits by cleaning the
same base offices up to four times a day.
It goes without
saying that everyone involved in these cushy deals denies any
impropriety. In fact, they are downright offended by the
suggestion that these contracts -- bid on by a very select group
of well-connected companies, and awarded based on secretive,
unexplained criteria -- were anything but on the up and up.
"We won this work on our record, plain and simple,"
crowed Riley Bechtel in an email to employees, making it sound
as if their record of scheming and insider dealing was something
to brag about. And a spokesman for the company assured
reporters that Bechtel had not "attempted to bring any
political pressure to bear." They didn't have to.
When the fix is in, no one has to remind the referee to count to
10 when the chump takes his dive. It's all done with a
wink and a nod. And sometimes not even that.
The perfect explanation for how this all works came from none
other than Our Man in Baghdad, retired Gen. Jay Garner.
When asked about his uncanny success as a businessman following
his long military career -- especially how he helped Sy
Technology boost its government contracts from $8.5 million in
1999 to $46.8 million in 2001, with much of that business coming
from the Army division he used to run -- Garner replied:
"I do not go to friends for business. I get business
from my friends, but it's not solicited by me." Don
Corleone couldn't have put it any better.
Here's another way of looking at the process: "The purpose
behind the abuse," said Sen. Charles Grassley (R-Iowa),
"was so that cronies of the president could win the spoils
of political gain for themselves." Although
Grassley's description suits the Bechtel pact to a tee, he was
actually talking about Bill and Hillary's Travelgate.
Let's hope Sen. Grassley -- or anyone on his side of the aisle
-- can muster a similar fit of indignation over a case of crony
capitalism that makes Travelgate seems like a tempest in a
Teapot Dome.
|
1/24/03 <link>
Bush
Treasury Secretary nominee John Snow was a target of class-action
securities fraud lawsuit
"...John Snow was a director and a member
of the audit committee of Columbia Gas System Inc., one of the
country's biggest gas utilities, when it reported a massive loss due
to adverse movements in natural-gas prices in June 1991. It filed for
bankruptcy-court protection a month later. Shareholder suits are
common when a company's stock plunges, and there is no indication Mr.
Snow -- who now is chief executive of CSX Corp., and is widely
expected to be confirmed -- played a direct role in causing Columbia's
problems. He "was a recent board member at the time," a
White House spokeswoman said. "Many of the issues in the lawsuit
preceded his directorship. The company denied all the claims and
settled the matter. The Securities and Exchange Commission reviewed it
and didn't take any action."..."
This adds more
controversy to the John Snow appointment.
1/13/03 <link>
Book:
CEO pay, profits link is not what it is made out to be
Thank you. We could have been fooled.
12/20/02 <link>
Record
$1.4+ billion in fines to be paid by top Wall Street firms to settle
fraud cases
We applaud the terms of the settlement, although the fine is piddling
in comparison to what investors got duped out of. Thanks are due in
large part to the leader of the negotiations, New York Attorney
General Mr. Eliot Spitzer.
Here's how much each of the top Wall Street firms
will have to pay up:
Here are some of the key terms of the settlement,
quoted directly from the CNN article:
-
The deal
prohibits compensating stock analysts for bringing in investment
banking deals, putting up walls between the units. It also bars
analysts from accompanying investment bankers on pitches and road
shows.
- For a five-year period, each of the brokerage firms must contract
with no fewer than three independent research firms that will provide
research to the brokerage firm's customers.
- The deal requires that each
firm have an independent consultant, chosen by regulators, with final
authority to procure independent research from independent providers.
- Each firm will make public its
analysts' stock ratings and price target forecasts to allow for more
accountability of stock picks.
11/25/02 <link>
How
N. Y. Attorney General Eliot Spitzer goes about with enforcement
Noam Scheiber of The New Republic has an interesting article about
Eliot Spitzer's philosophy in going after corporate law-breakers. The
bottomline message Scheiber wants to convey is that Spitzer is popular
and effective because his prosecutions have a consumer benefit message
- i.e., he is able to point to the direct consumer costs in going
after corporate polluters or criminals. While this may be easy in the
kind of cases he is involved in, we have also always believed that all
forms of prosecution should first win the PR battles by identifying
specific consumer or public citizen benefits and quantifying them to
the extent possible. (This is particularly true for enforcement of
environmental laws. The environmental lobbies are losing battles
unnecessarily by using only global warming or pollution as descriptors
without bombarding the media with numbers of deaths, injuries or lost
business. This is why they have a long drawn out battle ahead of
them.)
11/18/02 <link>
Corporate
reform being pushed also by some far-sighted Republicans and business
leaders
The Los Angeles Times reports on how at least some Republicans (like
Sen. Richard Shelby) seem to be more than willing (to join many
Democrats) to reform corporate America. Also include some business
leaders like Larry Sonsini (thank God for the fact that there are
some). The article goes on to say, among other things,
"...What the advocates fear is that -- with
the stock market seemingly stabilized and the Republicans victorious
at the polls -- the pressure to complete the reforms will vanish. If
it does, they warn, the result will be the loss of a rare chance to
improve the independence of corporate boards, the accuracy of
corporate accounts and the fairness of capital markets...."
What is astonishing is how terribly lacking mainstream media coverage
is on this issue, among other things.
11/1/02 <link>
Jack
Welch, the pauper
What else could we conclude about the former CEO of GE and
multi-millionaire several times over, given he has been drawing $1000 per month of Social
Security income!
10/31/02 <link>
Time to go, Mr. Pitt
Mr. Pitt creates another
controversy. As highlighted by
Paul Krugman, Mr. Pitt hid the facts that (a) the person he wanted
appointed chief of the new Accounting Oversight Board (William
Webster) was part of an audit committee of a small firm that is facing
a fraud lawsuit, and more seriously, (b) that Webster and his audit
committee fired an external auditor that criticized the company for
its financial controls. This comes on
the heels of the unceremonious treatment of the previous candidate
(a much worthier one) John Biggs. We thought we would give Mr. Pitt
the benefit of the doubt earlier, but no more.
10/19/02 <link>
NYT: President Bush wants to cut SEC funding well below what recent Bill
authorized
No surprises here.
10/13/02 <link>
WP: President
Bush and SEC's Pitt less than lukewarm on real reforms
So much for all the post-Enron reform efforts. Combine this
with the Federal Election Commission's stance (or rather the lack of
it) on campaign finance reform, and it seems to us that this administration would like to send
a clear signal that they would like it to be business as usual. Here's
our 2 cents worth to Mr. Bush.
Mr. Bush, you are in an enviable position today as the
President of this great country. You have in your hands the power to
do enormous good to our free market capitalist system by cleaning up
corruption and fraud. By doing so, you will set an example for all
countries across the globe that the capitalist system is alive, well
and reformable, and that it is the best system of commerce on this planet
(because it is). Do not lose an opportunity to make history. What
is at stake here is the entire economic philosophy and your
decisions today will have far-reaching consequences.
10/7/02 <link>
Congressional Report: SEC
failed miserably in preventing Enron crimes
This is a clear bipartisan failure from the last several years. Arthur
Levitt (for SEC chief) may have been more small-investor friendly than
Harvey Pitt was/is but his SEC didn't do much either.
10/4/02 <link>
Mr.
Pitt just doesn't learn
Just when we were beginning to think we should start giving Mr. Pitt
some benefit of the doubt, he indulges in the potential
conflict-of-interest behavior that got him heavily in the hot seat in
the past. Is this guy for real??
10/1/02 <link>
CEO
Salaries debate
Here are some very interesting statistics from this WP article.
1. "...In
1960, the average head of a top company made twice as much money as
President Dwight D. Eisenhower, according to one study. Today's top
chief executives earn more than 60 times as much as President Bush. In 1980, on average, the
CEOs of the biggest U.S. companies were paid 40 times as much as
hourly wage earners at their companies. Now that number is approaching
500 times as much..."
2.
"...The Financial Times recently calculated that the executives
at the 25 largest American companies to go bankrupt in the past few
years walked away with $3.3 billion collectively in "share sales,
payoffs, and other rewards." Never before, critics charge,
have
so many people been paid so much money for achieving so little [our
emphasis]..."
3. "...'We looked at 75 years of company data and never found
the slightest correlation between executive compensation and company
performance [our emphasis],' said Jim Collins, author of the 2001 bestseller
'Good to Great,' which emerged from a five-year study of
1,435 major corporations...."
4. "...More than 90 percent of the successful companies Collins
analyzed were led by executives promoted from within. [our
emphasis] Yet of those he
identified as attempting to make the leap 'from good to
great,' two-thirds had hired outsider chief executives. 'We
found that the best CEOs tend to come from inside a company [our
emphasis],'
Collins said..."
One of the problems: "....But
the pool of CEO candidates has long been kept artificially small,
Khurana said. 'Ninety positions open up each year, and the only people
considered for most of them are heads of other big companies,' he
said. 'There are clearly other great candidates, but this created the
perception of a leadership shortage that does not exist.'..."
Another problem: "...Many
compensation experts also say that corporate boards of directors are
too weak. A recent working paper produced by the National Bureau of
Economic Research argues that chief executives have seized control
over the process of determining compensation. Many CEOs are also
chairman of the company's board. This makes boards see themselves as
servants of management rather than working on behalf of shareholders,
said Lazard's Rohatyn, who has served on about 10 boards in his
career. As a result, he said, boards often rubber-stamp even the most
outrageous salary demands..."
Our view: For good or bad, the
market has to determine CEO pay, but the market must not be rigged in
favor of CEOs. It must be rigged in favor of employees and
shareholders. A motivated employee base brings results and a focus on
shareholders brings profits.
9/30/02 <link>
Music
industry price-fixing lawsuit settlement
Piracy is bad when their customers do
it, but they probably felt laws
don't apply to them. NY Att. Gen. Eliot Spitzer is certainly winning
our hearts!
9/28/02 <link>
SEC
getting it act together?
With his recent actions, Harvey Pitt and his SEC seem to be showing
some signs that they are willing to actually take their jobs
seriously. We are therefore inclined to give them some benefit of the
doubt temporarily, to see how well they follow-through on Mr. Pitt's
most recent statements and proclamations.
9/17/02 <link>
You
thought Enron and Worldcom were bad?
Well, we're sure this is nothing new. The
Conference Board's Blue-Ribbon panel seems to have got it
Strongly recommends accounting of stock options. About time! NYT:
From
Halliburton to Enron
Paul Krugman compares Halliburton's
Dick Cheney (now Vice President) and his pick, Enron's Thomas White (now Army
Secretary). |
