October 20, 2006

Trying to Curb My Enthusiam: Judge Finds Grasso Breached Duties

I know I can’t hide my grin today. Yesterday’s partial summary judgment from New York State Justice Ramos validates a lot of what our mission has been about on over the past three years – at many companies, the process of setting pay levels has been broken for years. The fixes are relatively simple; the hard part is convincing CEOs and boards that the gravy train is over.

True, the NYSE is a New York non-profit and the circumstances are fairly unique – but the real message for me here is that the courts are “loaded for bear” when evaluating pay packages. Interestingly, Justice Ramos is presiding over the In re Viacom Inc. Shareholder Litigation case slated for trial in a few months.

Here is an excerpt from an article in today’s WSJ:

“Among Justice Ramos’s findings: that the NYSE board wasn’t made aware of a huge chunk of the retirement pay Mr. Grasso was due and that Mr. Grasso had a duty to disclose that pay to the board. The justice also had harsh words for the board.

“That a fiduciary of any institution, profit or not for profit, could honestly admit that he was unaware of a liability of over $100 million, or even over $36 million, is a clear violation of the duty of care,” Justice Ramos wrote in a partial summary judgment, a pretrial ruling on certain aspects of a case. The case is particularly striking because the Big Board boasted an all-star roster of directors, including the chiefs of some of Wall Street’s largest financial companies, each of whom made tens of millions of dollars in annual pay.

Jim Barrall, head of the global executive-compensation and benefits practice at Latham & Watkins LLP in Los Angeles, described the findings as “stunning.” “I have never heard of a court decision finding a breach of fiduciary duty based on the failure to disclose all the numbers” about the size of a supplemental pension. At a minimum, Mr. Barrall suggested, corporate CEOs will have to make sure “the board understands the numbers and all the elements of the [leader’s] pay package and how they work together.” At many companies, the size of an executive’s supplemental pension swells along with the magnitude of bonuses and equity awards.”

Act Now: We continue to receive numerous requests for access to the video archive of last week’s “3rd Annual Executive Compensation Conference.” Apparently word is spreading – particularly about the need to take specific actions now – including implementing the three key analytic tools that need to be discussed in your upcoming CD&A.

You should watch the three separate panels on how to implement tally sheets, wealth accumulation, and internal pay equity – so that you will know how to disclose what your company is doing in these areas.

Market-Valued Employee Stock Options

In this podcast, Ben Stradley of Towers Perrin provides some insight into what the new financial instrument that mimics an employee stock option, the employee stock option appreciation right (also known as an “ESOAR”), including:

– What are ESOARs?
– Why would a company want to issue ESOARs?
– What are potential problems?
– What were the results of the Zions’ auction?
– What issues should companies consider regarding ESOARs?
– Are there other market-based approaches companies could consider?

At Last, There Goes My Innocence…

…guess I’m finally a grown-up now. The latest report from The Corporate Library on backdated options claims that director interlocks played a big role in the backdating scandal. Here is an excerpt from their press release:

“A new study by The Corporate Library of the 120 companies now implicated in the options backdating scandal finds new evidence that the practice of backdating stock options may have been spread by word of mouth through the network of directors sitting on the boards of more than one company. Director interlocking relationships now appear to be the most important governance characteristic and indicator of backdating problems.

The number of companies implicated in the options backdating scandal has more than doubled since The Corporate Library’s first report on this subject, rising from 51 at the end of June 2006 to 120 companies at the end of September 2006. At the same time, the number of companies with directors sitting on other companies implicated in the scandal has risen almost fivefold, from 11 to 51. The most important relationships involve several directors who served on boards prior to 2002, when most backdating activity occurred, and continue to serve now, including Scott Kriens and Stratton Sclavos. Kriens and Sclavos, for example, are responsible for the central position of Juniper Networks within the network of linked companies, and between them sit on four other implicated boards.

In analyzing the director network, the authors of the report also found a wealth of intertwined relationships involving the Silicon Valley law firm of Wilson Sonsini Goodrich & Rosati. A number of the firm’s senior partners, including Larry Sonsini, played multiple roles at many companies implicated in the backdating stock option scandal.”