Wednesday, March 14, 2007

Washing Machines, Cruises, and Tax Gross-ups -- Handouts Live On in Corporate Boardrooms.



Despite recently enacted SEC regulations that made reporting of executive compensation more transparent—and allegedly easier to read and digest, a key issue still unaddressed was the continued excessive pay packages being granted for poor performance (both financial and shareholder return).

Christian E. Weller and Kate Sabatini of the Center for American Progress detailed what is largely a non-relationship between share prices and executive compensation in a study released in July last year. The report, “The Great CEO Guarantee: Getting Really Well-Paid Regardless of Your Performance,” shows that many companies increased the pay of their CEOs from 2001 to 2005 even when these companies’ stocks fell short of basic benchmarks such as the S&P 500 stock price index, and even when these companies' stocks failed to outperform staid U.S. Treasury bonds.

Under pressure from activist investors, Representative Barney Frank (D-Mass.), the new chair of the House Financial Services Committee, has pledged to hold Congressional hearings on runaway CEO pay packages; ancillary legislation to be discussed, too, is how to bring shareholders into the decision-making process on executive pay.

In our view, the oversight hearings need to transcend disclosure reforms and open up floor debate on the egregious perquisites showered on board members, too. Unfortunately, the 10Q Detective feels like we are yodeling in the Swiss Alps—and the only ones hearing our echoes of distress are ourselves.

No matter how cogent their populist arguments—activist hedge funds, labor unions, and reformers alike--are remiss in failing to open up their eyes to lavish board compensation. No matter how small the additional perks granted to directors, it is the other stakeholders, including workers and shareholders, who will foot the bills.

To the methods of persuasion,
turn a blind eye
To the masters of evasion,
turn a blind eye
To the science of control,
turn a blind eye
To the sellers of illusion,
turn a blind eye
To masters of confusion,
turn a blind eye
-- Call, album Turn a Blind Eye

Granted, there is an absence of conclusive empirical data in the executive compensation debate that boards' abdication of their fiduciary duties, such as ceding responsibility to CEO pay demands, is related to their own posh pay packages. Nevertheless, is it not human nature that those non-employee directors who serve on the Compensation Committee would be more inclined to co-opt the contract process to the CEO if they were treated to similar largesse?

One hand washes the other. – Roman philosopher & politician Seneca (5 BC - 65 AD)

This being Proxy season, the 10Q Detective wanted to share some board perquisites discovered—to date—in our diurnal readings--not unavailable to Common stockholders:

  • Whirlpool Corporation (WHR-$84.79): “For evaluative purposes, we permit non-employee directors to test Whirlpool products for home use, and [we] reimburse the directors for any income tax payment resulting from any additional tax obligation of this policy.”

10Q Detective: A federal lawsuit is filed against Whirlpool in Arkansas, claiming the company has done nothing to fix or warn customers of leaky icemakers in some of its side-by-side refrigerators. We wonder if any directors found problems in their ‘testing’ of these or other appliances, like dishwashers or room air-conditioning equipment?

  • Life Time Fitness, Inc. (LTM-$49.43): The upscale urban fitness centers operator “will reimburse all non-employee directors for the cost of purchasing a “family” Athletic membership to our health and fitness centers.”

10Q Detective: Do the memberships include FREE amenities, such as the full-service spas and dining services?


  • Anheuser-Busch Companies (BUD-$50.05): “As part of their continuing education, directors are encouraged to visit the beer king’s facilities—and the Company pays their expenses related to such visits.
  • Directors using the corporate aircraft and corporate residences for board purposes may be permitted to invite family members or other guests to accompany them on the aircraft or to join them in the use of the corporate residences for the limited period the director is on board business.”

10Q Detective: BUD adds to life's enjoyment not only through the responsible consumption of beer by adults, but through theme park entertainment, too. One of the largest U.S. theme park operators, Anheuser-Busch’s adventure parks include SeaWorld, Busch Gardens, Water Country, and the water park Adventure Island. Now what is the probability that much of the ‘continuing education’ is conducted during the spring/summer months, when the theme parks—oops! — learning facilities are open for business?

  • The Goodyear Tire & Rubber Co. (GT-$28.25): Each director is entitled to receive “up to two sets of automobile tires per year—as well as the reimbursement of taxes in respect of income (value of tires).”

10Q Detective: Goodyear, the largest U.S. tire maker, said last month that it would freeze pensions and require salaried retirees in the United States to contribute more for health coverage to cut costs. How about easing the pain of its restructuring angst by throwing in some free tires for employees, too?

  • Hewlett Packard Company (HPQ-$39.55): “non-employee directors may use the company aircraft for travel to and from HP events. Each non-employee director also may receive up to $2,500 worth of HP equipment each year.”

10Q Detective: Compensation for non-employee directors who served during fiscal 2006 exceeded $200,000 (cash/stock).

Last year, before the Hewlett Packard scandal broke, board chair, Patricia Dunn, hired an investigative firm to ferret out the board-level source of media leaks. The gumshoes used pretexting to obtain information on the residential call records of the directors. HP's investigation found that Dr. George Keyworth II was the source of several leaks. [We trust he was prudent enough not to use HP e-mail to transmit those media leaks?]

  • The Steak n’ Shake Company ($16.70): “All non-employee directors are also eligible to participate in the Company’s medical reimbursement plan, which provides reimbursement up to $3,500 per year for otherwise unreimbursed medical costs. Finally, all non-employee directors are entitled to reimbursement of 75% of the cost of their personal tax preparation, up to a maximum reimbursable amount of $1,250.”

10Q Detective: During fiscal 2006, the board met five times.

  • Starwood Hotels & Resorts Worldwide (HOT-$63.17): “Each non-employee director receives “the annual grant of 250,000 Starwood Preferred Guest Points and eighteen free nights per year in the Company’s hotels.”

10Q Detective: Last month, the hospitality concern announced joint venture plans with Morgan Stanley to buy the Sheraton Grand Tokyo Bay Hotel, which is located in the Tokyo Disney Resort area. Guess whose going to Disney World?

  • And speaking of The Walt Disney Company (DIS-$33.62): “To encourage Directors to experience the Company’s products, services and entertainment offerings personally, the Board has adopted a policy, that, subject to availability, entitles each non-employee Director (and his or her spouse, children and grandchildren) to use Company products, attend Company entertainment offerings and visit Company properties (including staying at resorts, visiting theme parks and participating in cruises) at the Company’s expense, up to a maximum of $15,000 in fair market value per calendar year plus reimbursement of associated tax liabilities.”

10Q Detective: Does the tax gross-up include the sales tax for purchase(s) of (i) Mickey Mouse ears and (ii) a picture with Pluto?

  • Carnival plc (CUK-$46.75): “All non-executive directors are encouraged to take a cruise for up to 14 days per year for product familiarization and pay a fare of $35 per day for such cruises. Guests traveling with the non-executive director in the same stateroom will each be charged a fare of $35 per day.”

10Q Detective: “All other charges associated with the cruise are the responsibility of the non-executive director.” God forbid! The directors might actually have to open up their own wallets and pay for gratuities and airfare out of their annual $40,000 retainers (does not include stock grants) received in remuneration.

Editor David J Phillips does not hold financial interests in any of the companies mentioned in this posting. The 10Q Detective has a Full Disclosure policy.

1 comment:

Wesley said...

I enjoy your blog. I am currently an MBA student at San Francisco State University. I find your analysis informative and refreshing.