March 7, 2008

WaMu’s Compensation Whammy: Performance Targets That Ignore Mortgage Fallout

This WSJ article from earlier this week noted how the board of Washington Mutual Inc. had set performance targets for top executives that “will exclude some costs tied to mortgage losses and foreclosures when cash bonuses are calculated this year.” As noted in a Form 8-K filed by Washington Mutual on Monday, the 2008 targets selected by the compensation committee included “net operating profit” which is to be calculated by excluding loan loss provisions other than related to the credit card business and expenses related to foreclosed real estate assets, as well as 2008 “noninterest expense,” which is to be calculated to exclude expenses related to business resizing or restructuring and foreclosed real estate assets. The Form 8-K notes that “in light of the challenging business environment,” when awarding 2008 bonuses the company’s compensation committee will consider the targets, then review other appropriate factors – such as subjectively evaluating credit risk management and other strategic actions – and individual performance.

The WSJ article notes:

“In a statement late yesterday, WaMu said, ‘The success with which credit costs are managed will unequivocally continue to be a major part of the Board’s final deliberations.’ The company added that it will include further information on the company’s compensation philosophy in its proxy statement later this month.

The new formula angered some WaMu investors, who have seen the value of their holdings shrivel as the thrift’s mortgage troubles worsened. In the past year, WaMu’s share price has tumbled about 70% – to where it was about 12 years ago. The shares fell 26 cents, or 1.9%, to $13.39 in New York Stock Exchange composite trading. ‘They’ve cost their shareholders a lot of money,’ said David Dreman, chairman of Dreman Value Management LLC, which holds 27.9 million WaMu shares. ‘Bonuses should be given to the executives who enhance shareholder value, not destroy it.’

In a research report, Frederick Cannon, an analyst with Keefe, Bruyette & Woods, expressed concern that the cash-bonus formula “could result in executive focus away from issues, particularly credit management, that we feel are critical to the success” of WaMu. Mr. Cannon, who is forecasting a steep loss by WaMu this year largely because of housing woes, called on the company’s directors to ‘revisit the 2008 compensation plan and make managing credit a top priority of senior management with objective rather than subjective measurements.'”

WaMu’s CD&A will no doubt be an interesting read in the coming weeks, and we will likely soon see whether any other companies stricken by the mortgage turmoil and the overall credit crunch will come up with new ways to “creatively” address 2008 compensation levels for their highest paid executives.

Plenty of issues on CEO pay and the mortgage crisis will be aired today at the rescheduled House Committee on Oversight and Government Reform hearing that Broc blogged about last week.

Senate Acts on an Attorney-Client Privilege Bill

Last week, the Senate passed a bill that would change the federal rules of evidence to provide some limited attorney-client privilege protection when, in the course of waiving the privilege for specific information in a federal proceeding or communications with a federal agency, there is an undisclosed communication or information or an inadvertent disclosure.

In the case of an undisclosed communication or information, the new rule would provide that when disclosure is made in a federal proceeding or to a federal agency that waives the attorney-client privilege or work-product protection, the waiver would only extend (in a federal or state proceeding) to an undisclosed communication or information if (1) the waiver is intentional; (2) the disclosed and undisclosed communication or information concern the same subject matter; and (3) the disclosed and undisclosed communication should – in fairness – be considered together. With respect to an inadvertent disclosure in a federal proceeding or to a federal agency, the rule would provide that the disclosure doesn’t operate as a waiver in a federal or state proceeding if the disclosure is inadvertent, the holder of the information took reasonable steps to prevent disclosure and the holder took steps to rectify the error.

The bill is now being considered by the House Judiciary Committee.

MAC Clauses: All the Rage

We have posted the transcript from our recent webcast: “MAC Clauses: All the Rage.”

– Dave Lynn