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Messiahs, Wannabe Rock Stars, and CEOsThe Charlotte Observer by Patrick Scott, Charles Lunan March 18, 2003
"You see this whole joint? It's me."
Such became the attitude of the CEO who, in the past 20 years, mutated into a self-appointed messiah and wannabe rock star, the ever-dapper Tom Wolfe told a crowd of powerbrokers Sunday.
The best-selling author spent some of his luncheon talk, which wrapped up The Forum for Corporate Conscience at Ballantyne Hotel Resort in South Charlotte, marveling at extremes and excesses of the recent sultans of scandal.
Those CEOs of the '90s were gorging: They had to have a medley of homes -- in Park Avenue, Palm Beach, Paris -- a fantastically big boat, some multimillion-dollar -- but recognizable -- art, like a Picasso; and of course a ranch, say in Montana, so you'd need a personal jet to get there and have a spread for posh parties with high-wattage celebrities.
If only corporate America would get into the mindset of guys like Al Gordon, the famously parsimonious investment banker, Wolfe said, "most of the problems that came up at this forum won't come up again."
Wolfe, who's working on a new novel about college life, pointed out that none of the scandals of late blew up in Silicon Valley, partly because the billionaires there had more modest appetites.
McColl shares a transition moment
Closing out the Tom Wolfe luncheon, Hugh McColl Jr. said he was afraid Wolfe knew of one of his awkward transitions after stepping down as chief of Bank of America, where he rarely had to worry about pumping his own gas.One day, the gas gauge light went on as he was driving and when he pulled into a station, he couldn't figure how to open the gas tank. He had to call his former security guard for help. "So there are a lot of shocks in retirement," McColl said.
Buffett Lays More Heat on BoardsReuters by Brendan Intindola March 17, 2003
NEW YORK -- More sharp elbows and less back-slapping in clubby boardrooms would do more to prevent future business scandals than a heap of new rules and regulation, according to the Oracle of Omaha.
Warren Buffett, in his widely read annual letter to Berkshire Hathaway shareholders, said pliant directors who failed to ask tough questions or fire executives are partly to blame for the recent corporate catastrophes.
"Why have intelligent and decent directors failed so miserably?" Buffett asked in the 23-page composition released a week ago. "The answer lies not in inadequate laws -- it's always been clear that directors are obligated to represent the interests of shareholders -- but rather in what I'd call `boardroom atmosphere.' "
It is "almost impossible," he said, for a "well-mannered" board to debate the firing of a chief executive. This same paralysis of politeness also applies to critical looks at deals, or executive pay, Buffett argues.
The chairman of Berkshire Hathaway, the wide-ranging conglomerate and investment company with a dominance in the insurance business, singled out executive pay for one of his homespun put-downs.
When a compensation committee -- "armed, as always, with support from a high-paid consultant" -- proposes a giant stock option grant for the CEO, "it would be like belching at the dinner table for a director to suggest that the committee reconsider."
Jay Lorsch, professor at Harvard Business School, who has written extensively on boards, said the problem does indeed exist, but has decreased in recent years, and is not the only constraint on director effectiveness.
"There is no question that the problem in many boardrooms is that directors are too polite with each other and with their CEOs," said Lorsch, author of Pawns or Potentates: The Reality of America's Corporate Boards.
However, boardrooms have become less inclined to share group hugs in recent years, as evidenced by a growing number of CEO firings and forced resignations, he said.
Blunt-spoken investor Carl Icahn said in a speech Thursday night at the Waldorf-Astoria Hotel in New York that boards have failed to enforce accountability.
"They have very little idea of what is going on," he said to a group of private-equity and buyout executives. "It's like having a class of tone-deaf kids and trying to teach them the violin."
Buffett Targets CEO PayThe Charlotte Observer by Charles Lunan March 16, 2003
(3/15/03) - Warren Buffett, the nation's second-richest person, said American corporations need to reduce executive pay to win back investor confidence.
"I would say the acid test will be CEO compensation," Buffett said to a roomful of 120 executives from public companies Friday. "What happened with CEO compensation in the last 10 years is clearly what the American investor is upset about. The CEO gets very rich, stays very rich and (investors) get poor, and there has been a lot of that going around."
Buffett delivered the keynote address before The Forum for Corporate Conscience, which has drawn 150 CEOs, authors, activists, lawyers, accountants and academics to the Ballantyne Resort Hotel in south Charlotte for a weekend of introspection.
Chaired by former Bank of America Chief Executive Hugh McColl Jr., the event aims to force CEOs to rethink what their companies should be doing for investors, social justice and the environment.
"As the risk takers, we are the ones in the arena," McColl said in opening remarks. "We are the ones who have everything at stake. We are the ones who need to lead reform."
As chairman of insurance, retail and manufacturing conglomerate Berkshire Hathaway Inc., Buffett lived up to his nickname as the Oracle of Omaha. Dressed in light slacks, a blue blazer and tie, he spoke for an hour before taking questions. Buffett, whose base salary is $100,000, was among the few men in the room not wearing a suit.
When McColl invited him to be keynote speaker, Buffett said, he did not hesitate.
"It's the right topic at the right time and the right audience," he said from a stage slightly elevated above the dining tables in the room. "It's vital we earn back the trust of the public. We don't want to be the generation that makes America turn (against) this wonderful system."
Buffett said directors sitting on companies' compensation committees must go back to the drawing board and rein in executive compensation. American executives earn 180 times as much as their employees, a gap that has more than quadrupled since 1980, according to East West Consulting.
"Someone has to bring it down," said Buffett. "If ratios get back to where they were 10 years ago, there will be a sea change."
Harris DeLoach, president and CEO of Sonoco, said he expects to see "boards of directors reviewing the total compensation and the fairness of it."
He noted there have been extremes in compensation, but not all of have been out of whack. DeLoach's salary last year was $1.35 million.
"I think (Buffett's) right," DeLoach said. "All CEOs have to make fundamental changes to repair the confidence of the public."
"The major damage was not done by the crooks," Buffett said of the runaway executive pay of the late 1990s. "It was done by good people, honest people, decent people who I'd be happy to have as trustee to my will. The CEOs in America basically drifted. They drifted into situational ethics. It got out of hand."
Buffett said it was not realistic to expect CEOs to cut their own pay, but that lower executive compensation had better show up in company reports a year from now.
He acknowledged that while a director on more than 19 companies over nearly 40 years, he found it awkward to speak up against excessive CEO pay packages.
He applauded new rules that will require directors to meet regularly without CEOs or other executives present.
"It is not rocket science to work out a reasonable compensation agreement," said Buffett, who helps set agreements for dozens of CEOs at Berkshire Hathaway companies. "It can be written down in a few minutes."
When Buffett ended his speech to field questions, the first to approach the microphones were activists and academics, who had been invited to the forum to spur discussions about how corporations can advance social justice, a better balance between work and family, and preservation of the environment. One of the few CEOs to ask a question was from the United Kingdom.
Buffett said he opposes the Bush administration's proposal to eliminate the dividend tax, not so much because it was unsound economically, but because it was unfair.
"I don't get it," he said. "There are way better things to do with that money."
Buffett Says to Cut CEO PayBloomberg News by Chris Burritt March 16, 2003
Charlotte, March 15 (Bloomberg) -- Billionaire investor Warren Buffett said U.S. companies won't regain investors' trust as long as chief executives get compensation, including stock options, that keeps rising while shares of their companies fall.
``What really gets the public is when CEOs get very rich and stay very rich and they get very poor,'' Buffett told fellow chief executives including Duke Energy Corp.'s Richard Priory and Bank of America Corp.'s Kenneth Lewis at a conference on corporate governance in Charlotte.
Buffett's views on responsibilities of executives and directors have gained prominence since last year after accounting scandals at WorldCom Inc. and Enron Corp., the two biggest bankruptcies, shook investors' confidence and costs stockholders billons of dollars as shares became virtually worthless. Regulators and executives, including former Bank of America Chief Executive Officer Hugh McColl, who helped arrange the Charlotte meeting, sought advice from Buffett on topics such as executive pay and corporate governance.
Buffett, 72, the largest shareholder in Coca-Cola Co. and American Express Co., was paid $356,400 in 2001 as chief executive of Berkshire Hathaway Inc., his investment company based in Omaha, Nebraska.
Trust to Earn
``It is vital that we earn back the trust of the American public,'' Buffett said. ``We will get it back when we deserve it. When I start reading the proxy statements a year from now, I'll know whether American businessmen and businesswomen are serious about wanting to really give back to the system what the system has given to them.''
Buffett said he read recently about a chief executive who received no bonus because his company's shares fell in 2002, though he got options to buy shares ``worth $15, $20, $25 million.'' He didn't name the chief executive.
``They want the headlines to say they cut the pay,'' Buffett said. ``They are hoping that people don't get to the sixth paragraph of the story. Frankly they should.''
Last month, Citigroup Inc. Chairman and Chief Executive Officer Sanford Weill told directors he'd forgo a bonus because of a 25 percent decline in the company's share price last year. He got options to buy 1.5 million shares, worth about $14.5 million, the bank said. With 450,000 options received in 2002, worth $5.8 million, and his $1 million salary, his total compensation last year fell 78 percent from 2001's $30.3 million.
Directors at Fault
Directors are at fault, Buffett said, for paying chief executives too much and ceding authority to compensation advisers and CEOs themselves as a ``never-ending game'' of soaring stock prices in the late 1990s drove pay higher.
``CEOs in America basically drifted,'' Buffett said, echoing his annual letter to Berkshire shareholders last week. As a director, he said, ``You really felt like kind of a jerk if you held out while comp committees and the advisers they hired told you what the CEO wanted them to tell you.''
Buffett recalled how he as a director of 19 companies over the past 40 years went along with chief executives who recommended acquisitions Buffett thought were ``dumb'' and compensation he thought was ``unfair.''
Challenging a chief executive ``is tough to do in a social situation,'' Buffett said. ``It would be like belching at the dinner table, repeatedly.''
For more than an hour and a half, he answered questions and told jokes to the audience of about 100 executives, educators and heads of organizations such as the Children's Defense Fund and the Aspen Institute.
Consciences Hard to See Amid LayoffsThe Charlotte Observer by Tommy Tomlinson March 15, 2003
(3/14/03) - I've been sitting here awhile, trying to picture 100-some CEOs in town today for something called the Forum for Corporate Conscience.
Mainly I've been picturing them saying things like: "Corporate conscience! Sounds great! Let's pool our money and buy one!"
But they seem serious about it. At least serious enough to rent out Ballantyne Resort and fly in a bunch of consultants and come up with a "white paper" that contains extremely official sentences such as:
This framework is especially useful for thinking about sustainability because leaders must balance myriad complex and often competing factors from within the organization and from external stakeholders.
Other parts are written in English.
Hugh McColl Jr., the retired chief of Bank of America, helped bring everybody here. He wants CEOs to think about things such as social issues and the environment, and not just about how many bathrooms you have to have before your house is officially a mansion.
Investing genius Warren Buffett and author Tom Wolfe will speak, and presidential adviser David Gergen will run the sessions, and everybody gets a big packet with details on all the things a caring CEO should think about.
I read through the whole stack of paper and found only a passing mention to the one thing that makes people wonder if corporations actually have a conscience:
Their habit of throwing their workers out on the street.
The one common thread in big business during the past 15 years is the compulsion to shed people.
It's corporate bulimia -- gorging on mergers, spitting up employees.
Not to get into Mr. McColl's area, but Charlotte's big banks -- Bank of America and Wachovia -- laid off more than 11,000 people between them last year. BofA announced 1,000 more layoffs in February.
Bankers aren't the only ones losing their jobs. Truck drivers and textile workers have been sent packing, too.
In December, unemployment payments came to $10 million in Mecklenburg County alone.
Anybody at a company of any size has to worry about today being the day they ask for your badge.
In fact, it seems as if the people suffering the least are the CEOs, such as the ones visiting our fair city for the weekend.
They'll spend the next few days chatting about things like the benefits of a smoke-free building, while their former employees would gladly suck down two packs a day to have their jobs back.
My vote for Executive of the Year goes to the first CEO who ties his bonus to how many people he can keep.
It's great that big business is finally figuring out it has a responsibility to society and the environment.
But its first responsibility ought to be to human beings, and providing them the greatest economic stimulator in history, otherwise known as a job.
Or as some of their former employees might say:
I got your conscience right here.
El Paso Cuts CEO LooseTheStreet.com by Melissa Davis March 13, 2003
(3/12/03) - El Paso no longer has an embattled CEO.
The struggling energy giant announced late Wednesday that it has booted CEO William Wise months ahead of schedule. The news came one day after dissident shareholders launched a formal proxy fight that has been bubbling up for months.
El Paso had originally planned to keep Wise through a replacement search that could have lasted through the year. But feeling shareholder impatience mount, the company hit the fast-forward button on Wednesday.
While applauding Wise's leadership, the company admitted that it needs to sever its ties with the lame duck CEO in order to move on.
"The board recognizes that the CEO search has been complicated by the announced proxy contest and believes that the pursuit of the company's business strategy will be better served without leadership uncertainty," El Paso said in a prepared statement Wednesday.
Proxy Battle to Dump BoardAssociated Press March 13, 2003
HOUSTON (AP) -- An El Paso Corp. shareholder who launched a proxy fight last month to oust the struggling energy company's board of directors said if his proposal passes, the new board's first job would be to send the chief executive packing.
Selim K. Zilkha, one of the company's largest stockholders, filed his proxy resolution with the Securities and Exchange Commission on Tuesday. In a letter to shareholders, he blamed El Paso's problems squarely on its management and urged them to throw out the 12-member board and replace it with his proposed slate of nine -- including himself.
``I have watched with great dismay the disastrous decline in the value of El Paso's securities, including the precipitous drop in its stock price and a recent series of debt downgrades,'' Zilkha said in the letter.
His proposal is being supported by Oscar Wyatt Jr., another large shareholder and the lead plaintiff in a pending securities fraud lawsuit against El Paso. Zilkha said in his letter that Wyatt, the former chairman of Coastal Corp., a firm acquired by El Paso in 2001, is not a board candidate and is not seeking a company office.
El Paso urged shareholders to reject Zilkha's quest as ``counterproductive,'' adding that it is working hard to shore up its finances, in part by selling off nonproductive assets.
Zilkha owns 8.9 million El Paso shares -- about 1.5 percent of the company's stock. Since January 2001, he's watched the value of his investment plummet from $626 million to $40 million. El Paso's market value plunged from more than $37 billion to about $3 billion during the same period.
The biggest drops came last year, when investors fled El Paso and other energy companies amid a weakening market, heightened regulatory scrutiny and a series of federal investigations and lawsuits in the fallout of Enron's massive bankruptcy in December 2001.
El Paso shares closed Tuesday up 12 cents at $4.62 on the New York Stock Exchange, down from a 52-week high of $46.89.
If shareholders approve the resolution, Zilkha said the new board likely would immediately fire William Wise, El Paso's chairman and chief executive, and appoint a board committee to oversee day-to-day operations until a new leader is found.
Wise announced last month that he would resign as soon as a replacement is found, and would stay on as chairman until the end of the year. Several members of the company's board are working with executive search firm Spencer Stuart to find a successor.
El Paso criticized Zilkha's resolution Tuesday, adding that Wyatt's interests in the matter conflict with shareholders. Wyatt, who holds about 4.6 million shares following El Paso's $22.6 billion acquisition of Coastal, has openly accused El Paso executives of mismanaging the company with dubious accounting methods. El Paso has denied any wrongdoing.
El Paso announced plans Tuesday to sell interests in several wells in New Mexico for $135 million, pushing expected sales of such assets this year to $1.5 billion -- still short of its $3.4 billion goal.
The company also said it has agreed to sell a Gulfstream V jet used by Wise for more than $30 million. Zilkha said he had suggested the sale of the jet last year as the company's finances grew more wobbly, apparently to no avail.
Secret CEO ConventionSouth Florida Business Journal by J. Fakler, D. Lunsford March 5, 2003
(2/28/03) - One might expect a lot of news when the nation's top CEOs, the Senate majority leader and the head of the New York Stock Exchange get together.
Not this time.
Except for a three-hour press conference, the recent meeting of the Business Council at the Boca Raton Resort & Club was kept secret. Even reporters who participated in sessions are mum.
The Feb. 19-21 event hosted the likes of conservative columnist George Will, NYSE Chairman Dick Grasso, Senate Majority Leader Bill Frist and attorney generals from Iowa and Pennsylvania.
Panel discussions focused on business leadership, corporate litigation brought on by states, health care costs and the future of retirement benefits.
But don't click on CNBC or pick up the Wall Street Journal to find out what happened.
Their journalists were there, but they agreed not to report on the event.
CNBC's Maria Bartiromo and the Wall Street Journal's editor for management news, Joann Lublin, were invited to participate in panel discussion before a ballroom full of CEOs.
But the journalists, along with their fellow panelists and attending CEOs, agreed to a code of silence that the powerful and private Business Council requires.
The organization counts the heads of Wal-Mart, General Electric, General Motors, Dell Computer, Sprint, Bank One, Hewlett-Packard and Merck & Co. among its 125 members.
"Everyone understands the ground rules under which we operate," said council Executive Director Philip Cassidy. Those rules call for confidentiality by all who participate in the council's meetings to ensure the continuation of open and frank discussions outside of the public spotlight, he said.
It's a verbal covenant that has held for seven decades, since the council took on its first task in the 1930s of assisting in the national recovery from the Great Depression.
"It has a historical precedent," Cassidy said. The council's "deliberations have always been off the record and a free exchange of ideas."
But some question if the council's heritage still floats in a modern world with corporate scandals and demands for accountability.
'A very bad idea'
The council's conduct "constitutes a secret meeting and that is a very bad idea, especially at the present time when public confidence is at the lowest level ever," said Gunther Karger, research director of Miami-based Discovery Group, a shareholder advocacy organization. "Secret meetings such as the Business Council do nothing to restore confidence. On the contrary, they make it worse."
The Boca Raton gathering is one of three held annually by the nonprofit Business Council, founded in 1933 to help government understand business issues.
The council's early creators helped to guide everything from the Securities and Exchange Act to the Social Security Act, according to council literature. The Washington-based, CEO-only group counts many of the nation's Fortune 100 executives among its roster.
The group is funded through dues paid by individual CEOs, Cassidy said, but he declined to say how much those were. It takes being nominated by another member and a council vote to get in, Cassidy said.
The group's former members include VP Dick Cheney, former CEO of Halliburton Co.; WorldCom's Bernard Ebbers; and Enron's Kenneth Lay, who voluntarily stepped down when the energy company's scandal erupted.
The council views confidentiality as its bedrock for open interaction.
That includes journalists, as well.
Bartiromo, a two-time participant, led the Feb. 20 panel discussion on "The CEO and Business Leadership." Then the high-profile business anchor nabbed CEOs for one-on-one interviews outside.
Scope of the rules
The CEOs answered questions about their industries and the economy. But questions about a possible war with Iraq were off limits. So were questions about council discussions taking place yards away from the CNBC interview set, which showed palms rustling behind the CEOs.
CNBC spokeswoman Alison Rudnick said the cable news station cleared Bartiromo to interact with CEOs and panelists in the off-the-record capacity. "That's the Business Council's rules," she said.
The Wall Street Journal's Lublin also agreed to participate on Bartiromo's leadership panel without reporting what transpired.
"The ground rules were that I couldn't report on what was said," said Lublin, who covers management issues. "It was just kind of neat to talk to all those CEOs."
She said she accepted the terms because it was a networking and relationship-building opportunity. Lublin said her editors also cleared it so long as she paid her own way.
Journalists often have to weigh the need to develop sources with the need to disclose what they find to the public.
The fact that respected media outlets and business leaders would agree to participate and conceal high-level interactions concerns Aly Colon, director of the Diversity Program at the Poynter Institute, a media studies school in St. Petersburg.
While private organizations have every right to be private, Colon said that there is an expectation that a group involving public entities would be more open.
He called the CNBC and Wall Street Journal interaction and access unusual.
Closed meetings, Colon said "make it more difficult for a more complete and thorough understanding of how [the council] works and carries out its business."
"[The meeting] may be ethical, but it may also be just stupid," said Kathy Kristof, VP of the Society of American Business Editors and Writers, and a finance columnist for the Los Angeles Times. "At this time, the public has never been more suspicious of its leaders. You find people act more responsibly when their actions are exposed to the light of day."
"It's amusing to me that the meeting is taking place," said Martin Weiss, chairman and CEO of consumer advocacy group Weiss Ratings in Palm Beach Gardens.
Weiss' new book, "Crash Profits," has a fictional chapter that describes a situation where a CEO exaggerates earnings and is on the brink of failure before he is "transformed," sets up a private organization, resigns and spends the rest of his career in nonprofit work.
"People like Lay who have been a part of this world, if they can stand up in front of a podium and say they lied and explained why they did it, there is a great benefit there to see what they have to say," he said. "We can see what goes on behind the scenes so it doesn't happen again."
One problem, he said, "It has not been the pattern [of executives] to really try and recognize [corporate fraud] in a concrete way. A lot of the players are liable and face legal action and lawsuits from investors so they can't say what they believe."
He doesn't understand why the press was shut out, Weiss said. "All the media should come or none should come."
'No lobbying, no haranguing'
The group doesn't directly advocate any particular course of action, the council's Cassidy said.
But it does profess to be "dedicated to service in the national interest," according to its literature.
"Everyone is entitled to get together and shoot the bull. There was no lobbying, no haranguing kind of speeches," said Capital Hill public policy and liability lawyer Victor Schwartz.
He led Pennsylvania Attorney General Mike Fisher, Iowa Attorney General Tom Miller and Maine's former Attorney General James Tierney in a panel discussion on the role attorneys general could play in spurring litigation against corporations as was the case in suits against tobacco companies.
Like the other participants, Schwartz said the discussions were confidential, but said that everyone acted with the utmost integrity.
"The debate was about what the overall attorney general's role is in enforcing the law and being involved in lawsuits," he said. "It was quite an experience. These are among the most powerful men and women in America and what great attendance."
Chief Execs Holding on to Dual RoleThe Charlotte Observer by Charles Lunan - February 28, 2003
(2/27/03) - In the wake of last year's rash of corporate meltdowns, shareholders are pushing harder than ever to loosen the grip of CEOs on their corporate boards.
But in the Carolinas and across much of the rest of the country, CEOs remain reluctant to relinquish their dual role as chairman, which usually gives them control over when their boards meet and what they discuss.
In the Carolinas, CEOs serve as chairmen at Bank of America, Blue Rhino Corp., Bowater Inc., Duke Energy Corp., Family Dollar Stores Inc., Jefferson-Pilot Corp., Krispy Kreme Doughnuts Inc., Lance Inc., Sonic Automotive Inc., SPX Corp. and VF Corp., among others.
For years, reformers have urged U.S. companies to split the two positions, appoint outsiders as chairmen or at least appoint a "lead director" to improve the flow of information to independent directors. The objective, advocates say, is a better balance of power between corporate managers and the outside directors appointed to oversee them.
In January, a blue-ribbon panel commissioned by The Conference Board -- an influential economic think tank -- recommended that U.S. companies that don't appoint an outside chairman or lead director explain why to shareholders.
Activist shareholders, led by union pension funds, are growing more critical of the arrangement. As of this week, shareholders were trying to get boards at 23 companies, including Colgate-Palmolive Co. and General Electric Co., to consider independent chairmen resolutions at their annual meetings, according to Investor Responsibility Research Center of Washington, D.C. That's up from four last year. No Carolinas companies have been targeted so far.
The investor research center estimates that only 7 percent of public U.S. companies have independent chairmen.
Locally, the vast majority of public companies reject the notion as overkill. Appointing a supermajority of independent directors does enough to balance the CEO's power, said spokesmen, executives and directors for the companies.
Where Charlotte companies have appointed independent chairmen, typically it has been to break in new CEOs rather than bolster the independence of their board. In two instances -- at Enpro Industries Inc. and Nucor Corp. -- largely independent boards may opt to fold the chairmanship back under the CEO position, directors said.
Not a new idea
The idea of appointing an independent chairman is nothing new. Since the early 1990s, companies listed on the London Stock Exchange that choose not to appoint independent chairmen or lead directors have been required to explain why in public filings. In the United States in 1997, the National Association of Corporate Directors recommended independent chairmen as the best way to ensure board independence.
The gigantic California Public Employees' Retirement System (CALPERS) pushed for an independent chairman at First Union Corp. in 2000 after naming it one of 10 badly performing stocks it held.
The pension fund withdrew the proposal after First Union agreed to place an independent director to its nominating committee to replace then-Chairman and CEO Ed Crutchfield. First Union has since taken on the name of Wachovia Corp., with which it merged in 2001.
The New York Stock Exchange has not backed the idea, recommending instead that companies appoint a majority of independent directors and require them to meet regularly without management.
Many U.S. experts say those and other reforms will go further to bolster director independence than appointing an independent chairman.
"There are a lot of ways to skin the cat," said Peter Clapman, chief counsel and director of corporate governance for Teachers Insurance and Annuity Association College Retirement Equities Fund, which manages $259 billion in pension funds and other assets.
This month, Wachovia Corp. CEO Ken Thompson took back the title of chairman, but he is now the lone Wachovia executive on the company's board. And unlike most CEOs, Thompson will continue working closely with a lead director, a position established informally at First Union in the late 1990s to improve communication between executives at the rapidly growing bank and its board. First Union formalized the role in 2000 after discussions with CALPERS.
"We were a little bit like the founders of our country," said Lanty Smith, a Greensboro banker, lawyer and industrialist who serves as Wachovia's lead director. "We put checks and balances in place. We have a strong executive branch, but we also have a very strong judiciary."
Wachovia's independent directors meet by themselves at least three times a year. As lead director, Smith played a key role in keeping Wachovia's independent directors apprised of how management was integrating the operations of First Union and Wachovia last year.
Enpro, an industrial conglomerate that makes everything from compressors to sealants, has been chaired by an outside director since being spun off by Goodrich Corp. last summer. Steelmaker Nucor has been chaired by a local business school dean since 2000. Yet chairmen at both companies say their boards' independence derives more from the regular meetings they have without management.
The advantage of these so-called "in camera" meetings is that they allow directors to raise delicate topics they might avoid while managers are in the room.
"You can bring up whatever you want to bring up," said William Holland, the retired CEO and chairman of United Dominion Industries, who now serves as non-executive chairman at Enpro. "It provides a forum to discuss the CEO's performance."
Finding a CEO and independent chairman who work well together is extremely difficult.
"What's really important in all this is that only one person can run a company and that is the CEO," said Peter Browning, the dean of the McColl School of Business at Queens University, who serves as non-executive chairman of Nucor. "So you need the right balance if you split that up. It's very confusing otherwise."
At Duke Energy and Bank of America, which both have a majority of independent directors, there are no plans to appoint independent chairmen.
"The company has found, as is the practice of the majority of large publicly owned companies, that we are best served by a structure in which the CEO serves as chairman of the board," said Peter Sheffield, a spokesman at Duke, where Rick Priory serves as chairman and CEO.
Dividing duties has downside
Companies that do use independent chairmen say it's no panacea.
Directors fret that dividing the posts can create accountability problems when things go wrong.
Analysts are still debating whom to blame for problems with the AOL-Time Warner merger, which began unraveling last year. After the merger it was unclear whether Chairman Steve Case, who had headed AOL, or CEO Gerald Levin, who had headed Time Warner, was calling the shots. Both have since resigned in the wake of what may go down as one of the most disastrous mergers in corporate history. The company's current CEO, Richard Parsons, is scheduled to take back the title of chairman in May.
"Sometimes a company can go off in the wrong direction and it's unclear who is responsible," said TIAA-CREF's Clapman, who does not favor resolutions forcing companies to split up the CEO and chairman positions. "Is it a CEO problem or a chairman problem?"
While Thompson said Wachovia is "unequivocally" committed to the lead director concept, Enpro and Nucor could move back to the unitary chairman and CEO concept, directors said.
"Clearly it's a transitional thing for us today," said Enpro CEO Ernest Schaub, noting that he has not discussed the topic with his board. Schaub turned down the title of chairman last year so he could focus on operating Enpro, but he doubts U.S. companies will embrace the concept long term.
"With the wrong people, it could be dysfunctional," he said.
What is certain is that the relationship between the CEO and director is shifting.
"Only a few years ago, the idea of these in-camera meetings was uncomfortable to management," said Enpro's Holland. "We have moved beyond that to where management is not suspicious of that anymore. With all this push toward independence, you are probably going to see this grow."
SOURCES: New York Stock Exchange, Investor Responsibility Research Center and The Conference Board
Revolt of the ShareholdersNew York Times by Claudia H. Deutsch February 25, 2003
The annual-meeting season is here, and one thing seems certain: companies are going to have to meet with some very disgruntled investors.
(2/24/03) - The annual-meeting season is here, and one thing seems certain from a glance at the resolutions shareholders have filed: the persistent bear market and recent corporate scandals have taken as great a toll on trust in management as they have on investors' wallets.
State pension funds, unions and other investors, big and small, are clamoring for their say on executive compensation packages, board elections, even choosing where companies are incorporated. They want General Electric to trim severance packages, Citigroup to eliminate golden parachutes, Sprint to stop repricing the stock options granted to management and Delta Air Lines to charge stock options against earnings. They want Qwest Communications to link options to performance, Wal-Mart to split the job of chairman and chief executive into two posts and General Motors to protect the environment.
In New York, William C. Thompson Jr., the city comptroller, acting on behalf of the New York City Police and Fire Department Pension Funds, has submitted resolutions to G.E., Halliburton and ConocoPhillips asking for a board review of their offshore operations in terms of "potential financial and reputational risks" arising from conducting business with terrorist-linked countries like Iran.
It's going to be a raucous few months. Companies as disparate as Cendant and Eastman Kodak, Exxon Mobil and AOL Time Warner, Coca-Cola and Bank of America, Bristol-Myers Squibb and SBC Communications are going to have to meet with very disgruntled shareholders. Angry investors have already filed a record number of resolutions for inclusion in the proxy statements sent each year to all investors.
The deadline for filing proxy resolutions at most companies comes in the fall, months before the annual meeting, and few shareholders recognized in the autumn of 2001 exactly how bad corporate behavior had become; Enron, scene of the first big scandal, did not begin its spiral into bankruptcy until that November. But investors have now had more than a year to stew over their helplessness as news of other accounting and insider-trading scandals has piled up.
The Investor Responsibility Research Center, a nonprofit group in Washington that advises institutions on proxy issues, has already counted 893 resolutions this year through Friday, compared with 802 for all of 2002's proxies. Most are related to corporate governance issues 653 so far, versus 529 in 2002.
Apparently, shareholders do not believe that the new laws, rules and policies spewing from Washington and Wall Street will safeguard their investments. "It surprises a lot of our clients, but the Sarbanes-Oxley bill is simply not warding off a record number of shareholder resolutions," said David Drake, a managing director of Georgeson Shareholder Communications, a proxy solicitation firm.
Immunity has not been granted to companies whose names have not been linked to corporate evil-doing. Kodak, for one, faces six resolutions, up from two last year and three the year before. They touch on stock options, environmental reporting, board elections none of them areas in which the company has been castigated of late. G.E., whose annual meetings were once seen as virtual love-ins, has been bombarded with 25 shareholder proposals, the most in corporate America, questioning everything from compensation plans to nuclear power plant safety.
"Investors are seeking a new gold standard for corporate governance, and they are putting a lot of companies onto their post-Enron punch list," said Patrick S. McGurn, senior vice president of Institutional Shareholder Services, which advises institutions on proxy matters.
Shareholders, it seems, have come to recognize the potentially sinister implications of seemingly benign corporate policies. Years ago, they endorsed the spread of stock options in the belief that options aligned executive interests with their own; then they saw executives manipulate earnings reports to pump up their options. Shareholders enjoyed the tax savings that companies like Tyco International and Ingersoll-Rand received for incorporating in Bermuda until they discovered that it does not allow aggrieved shareholders to sue.
On their own, shareholder resolutions are unlikely to bring fundamental management change. Few ever garner a majority vote. More important, the vast majority of them are "precatory," or nonbinding, so management can ignore them even if they are voted in. The New York City Pension Fund System has actually filed resolutions at several companies, including Pacific Healthcare, Gillette, Goodyear and Hasbro, to require them to take action on any resolutions that win a majority but that, too, is nonbinding.
Still, the resolutions are not futile exercises. They are a highly public way for shareholders to register anger with management and potentially a public relations nightmare.
Last year, "we saw record-breaking votes for resolutions on auditor conflicts, golden parachutes, all sorts of issues that used to attract just modest support," said Carol Bowie, director for governance research at the Investor Responsibility Research Center.
This year, labor in particular is flexing its muscles. According to the A.F.L.-C.I.O., union funds have filed 380 resolutions this year, up from just about 200 last year and about 170 in 2001. "The conduct of companies has simply called for a greater response from us," said Michael Zucker, director for corporate affairs at the American Federation of State, County and Municipal Employees, which has filed 22 resolutions, triple its usual number.
Companies that are not yet listing stock options as an expense, or tying them to performance, are in for a particularly bumpy ride. According to the research center, pay issues, especially those related to options, have wrested the spotlight from the way auditing firms are paid, last year's hot subject. In 2002, just 19 percent of the governance resolutions dealt with pay packages. This year, 44 percent do.
"Compensation hasn't traditionally been a top theme in shareholder resolutions, but the controversies surrounding option plans may be changing that," said Jannice L. Koors, a managing director of Pearl Meyer & Partners, the compensation consulting firm.
The timing is not coincidental. The Financial Accounting Standards Board, the Securities and Exchange Commission and the stock exchanges are all considering new rules or policies that could force companies to list options as expenses and that would eliminate tax disincentives for linking options to performance. But shareholders are not confident that the rules will be carried out. Besides, the proposed rules do not cover how long executives must hold onto options, how compensation will be set in a takeover situation or other pay issues that have raised shareholder ire.
"We've always pushed companies on executive compensation, but we are really putting a bigger effort into it now," said Ted White, director for corporate governance at the California Public Employees' Retirement System, known as Calpers.
Not all the resolutions will make it to a vote. For example, the S.E.C. has consistently allowed companies to omit resolutions that would let shareholders list their candidates for directors in the proxy. The state and municipal employees union nonetheless proposed six resolutions asking for exactly that at AOL Time Warner, Bank of New York, Citigroup, Kodak, Exxon Mobil and Sears, Roebuck. But Mr. Zucker acknowledged that it is facing "huge corporate resistance" to that.
To avoid bad publicity, companies sometimes capitulate to a shareholder's demands in discussions before the shareholder files a resolution. Late last year, both Bank of America and Norfolk Southern, for example, agreed to allow shareholders to vote on golden parachutes, fending off proposed resolutions. The A.F.L.-C.I.O. scuttled planned resolutions dealing with supplemental retirement plans at both G.E. and Coca-Cola a few months ago, after they agreed to phase out parts of the plans that the union found objectionable.
When Dow Chemical recently said it would split the job of chairman and chief executive, the A.F.L.-C.I.O. quietly scrapped a resolution demanding that Dow do so. For three years running, Airborne Express did nothing when its shareholders voted yes to a resolution asking that it eliminate staggered elections for its board; Airborne changed its policy a few months ago after shareholders proposed a resolution that would bind management to comply.
"Even the threat of a shareholder proposal is a ticking time bomb that serves as a real bargaining chip," said Nell Minow, a founder of the Corporate Library, a research group that follows boards.
Indeed, some shareholders TIAA-CREF, the huge pension and mutual fund manager, is a notable example have become experts at using the specter of negative publicity as leverage. Peter C. Clapman, TIAA-CREF's chief counsel, said he wrote 30 "pleasant letters" to companies "saying we have issues with their compensation plans," and hinting that he would file resolutions if they did not "open a dialogue." He was satisfied with responses from 20 of them. He filed resolutions against 10, but withdrew four after they modified their plans. He said he was still talking to an additional five and would not identify them until he was certain that they would refuse to budge.
Mr. Clapman offered details on just one resolution a request for a significant revamping of the stock option plan at SBC Communications. SBC tried unsuccessfully to obtain the S.E.C.'s permission to ignore the resolution, thus making secrecy a moot point.
All told, enough shareholder resolutions will undoubtedly survive to turn some annual meetings into brawls. No one realistically expects Halliburton, G.E. and Conoco to ward off resolutions by backpedaling on Middle East operations. (However, Wendy Hall, a spokeswoman for Halliburton, said that the company is "opening a discussion" with the shareholders who submitted the proposal.)
Tyco, which is registered in Bermuda, has made it clear that it will battle efforts to force it to incorporate in the United States, and few experts expect Ingersoll-Rand, McDermott International, Nabors Industries or other companies incorporated in Bermuda or Panama to cave in on that issue either. And the 18 shareholder resolutions filed to Exxon Mobil second in number only to G.E. include several longstanding environment-related ones that the company fights routinely.
G.E. certainly will not dispense with all 25 resolutions it faces. The company has been hit with resolutions from disparate sources the A.F.L.-C.I.O., the Sisters of Saint Dominic of Caldwell, N.J., perennial individual shareholder activists like Evelyn Y. Davis and John Chevedden, and one of its own pensioners, Helen Quirini, 82, who heads a group called the G.E. Retirees Justice Fund.
G.E. is heading some off at the pass. Andrew Sigler, a former chief executive of Champion International who is G.E.'s newly named presiding director, just agreed to a March 13 meeting with several union and pension fund leaders to discuss executive compensation issues that are the subject of resolutions.
Last week, after G.E. agreed to determine the pay of senior executives without counting income from its pension fund, the Communications Workers of America and the Connecticut Retirement Plans and Trust Funds withdrew their proposed pay-related resolutions. And "there is a good chance a lot more of these issues will be resolved," said Meredith Miller, assistant treasurer for policy for Connecticut.
Still, Gary Sheffer, a spokesman for G.E., estimates that anywhere from 12 to 15 resolutions will make it to the proxy, a hefty increase from 8 last year, 7 in 2001 and 11 in 2000.
"Shareholders are no longer just interested in the numbers," he said. "They want to participate in the nuts and bolts of how companies run."
For that reason alone, meetings could be long and loud. Governance experts say shareholders are unlikely to be content to simply badger management by proxy this year.
"They are going to ask a lot of questions at annual meetings this year," predicted Ms. Minow of the Corporate Library. "If they don't like the answers, they won't wait until next fall to propose the next year's resolutions."