The GMI Blog

Small Print

By Paul Hodgson - CCO and Senior Research Associate

Trouble Designing an Effective CEO Pay Plan? There’s an App for That

Thanks to Research Associate Michelle Lamb for this little dream of an app and for the headline. Meridian Compensation Partners have come up with a new iPad app for compensation committee members. I guess it was only a matter of time, but congratulations to Meridian for being the first there. It gets our award as iConsultant.

The one-of-a-kind application, which can be downloaded for free at the iTunes Store(R) or from Meridian's website ( www.meridiancp.com/app), features: a library of executive compensation primers on plan design, benchmarking, governance, disclosure, taxes and accounting treatment; direct access to proxies and relevant 8K disclosures for public companies; alerts to the latest regulatory and legislative news; and the ability to ask questions of Meridian's consulting experts. Users can follow up to ten of their favorite companies through a personalized app feature that provides them with a quick link to important disclosure data for those companies.

Actually… that does sound quite useful.

CEO Quotation of the Week

Events Team Leader Mark Magee nailed down this one. James Gorman, CEO of Morgan Stanley, is
the clear winner of this week’s CEO Quotation of the Week.

Morgan Stanley Chairman and Chief Executive Officer James Gorman said employees understand why the investment bank had to cut pay, and those who don’t grasp the reasoning need to adjust their attitude.

“You’re naive, read the newspaper, No. 1,” Gorman said he would tell miffed employees, speaking in an interview on Bloomberg Television. “No. 2, if you put your compensation in a one-year context to define your overall level of happiness, you have a problem which is much bigger than the job. And No. 3, if you’re really unhappy, just leave. I mean, life’s too short.”

Pretty blunt. Calling them naïve is one thing. Calling them a sad sack is totally something else. And then he tells them to get lost. Pay is going down by an average of 20 to 30 percent for senior bankers and traders, so his better be going down by more or he’ll have to adjust his own attitude.

Not exactly George C. Scott's opening speech in Patton...

New Yahoo CEO says company needs to "do better"? Mark also found this on January 25^th. And to be honest, this – had it been ruder – would have been in contention for the CEO Quotation of the Week
competition, but Gorman had it already. Close second though. I mean, listen to this:

"When it comes to making decisions, I make them quickly and then push to move fast, fast, fast," he said.

"We will get speed back into the equation and move aggressively. To me that's how we get to playing offense rather than defense."

Talk about mixing your metaphors. And not just fast, but fast fast fast. Is that like fast cubed?

Retail Cyber Bullying

Mark also found this from “Tarjay” on January 23^rd. Like, is everyone else on holiday or something?

Last week, in an urgent letter to vendors, the Minneapolis-based chain suggested that suppliers create special products that would set it apart from competitors and shield it from the price comparisons that have become so easy for shoppers to perform on their computers and smartphones. Where special products aren't possible, Target asked the suppliers to help it match rivals' prices. It also said it might create a subscription service that would give shoppers a discount on regularly purchased merchandise.

An “urgent” letter to vendors, no less. “Exclusive to Tarjay”, a new line. Wait, hold on, you can get those at bizrate, NexTag and Shopzilla for half that price….

Lowering the Bar

Compensation Analyst Manager Scott Patterson – yeah, s’OK, Mark’s not alone in the office found this in Applied Materials 2012 proxy statement. Brace yourself, this is compensationspeak.

The minimum threshold was reduced to the 40th percentile for fiscal 2011 from the 50th percentile for fiscal 2010, and corresponding downward adjustments were made to the other percentile levels for fiscal 2011. These changes were intended to: (i) motivate our NEOs to achieve excellent financial results in a dynamic, challenging economic environment, (ii) increase the retention value of equity awards for our NEOs and (iii) align our targets with the changes in Applied’s product mix related to EES that are intended to enhance the Company’s long-term growth opportunities. The Committee believed these revised requirements for vesting remained challenging and that the likelihood of achievement was generally consistent with the prior requirements.

As Scott comments: “A lowering of standards is the way to motivate your employees? If we could all be so lucky.” Yeah, right, pay for performance. You know, Allied Materials was one of about three companies that actually passed our test – in GMI’s Executive Pay Scorecard – that required that incentives only be paid out for ABOVE median performance. And now… they’re gonna FAIL.

"Oh, alright then, I'll take the job if you insist."

And this is from Events Analyst Dovid Muyderman – OK, OK, so they’re all there. A January 23^rd 8-K from Hillenbrand.

Effective January 30, 2012, Scott P. George, age 57, has agreed with Hillenbrand, Inc. (the “Company”)(NYSE:HI) to become the Senior Vice President, Corporate Development.

Those little turns of phrase that just make no sense. Don’t you love them? Another George Scott reference too. No, wait, this is Scott George.

"Type I subsequent event as defined in the Subsequent Events topic of the FASB Codification" say what?

And Dovid pulled this from a January 19^th 8-K from Stryker Corporation.

Stryker Corporation (NYSE:SYK) announced today that Stryker Biotech has reached a settlement with the U.S. Attorney’s Office for the District of Massachusetts. As part of the settlement, Stryker has agreed to plead to one misdemeanor charge and pay a non-tax deductible fine of $15 million. As a result of this resolution, the Department of Justice has agreed to dismiss all thirteen felony charges against Stryker Biotech contained in a 2009 federal grand jury indictment. Stryker had previously disclosed in March 2009 that its Biotech division was the target of a federal grand jury investigation being conducted by the U.S. Attorney's Office for the District of Massachusetts. With today’s announcement, Stryker believes it has realized its goal of obtaining an appropriate resolution of this matter.

From a financial standpoint, the settlement represents a Type I subsequent event as defined in the Subsequent Events topic of the FASB Codification and accordingly, the incremental charge to earnings of approximately $0.03 per diluted share will be recorded in the Company’s fourth quarter 2011 results. As a result of the settlement which was not factored into previously announced guidance, Stryker now expects to report 2011 adjusted diluted net earnings per share at the low end of its current range of $3.72 to $3.74, an increase of 12% over adjusted diluted net earnings per share of $3.33 in the prior year and at the high end of the adjusted diluted net earnings per share range stated at the start of 2011 of $3.65 to $3.73.

Look what is this about, earnings per share adjustments or the fact that this company appears to be crooked or, at the very least, dodgy. So one misdemeanor and a $15 million charge (that actually punishes sharholders rather than the guilty parties) is equivalent to thirteen, THIRTEEN, felony charges. How is that right?

Chevron, What Does "Notably Higher" Mean?

Adapted from the second post I wrote for the Chief Compliance and Ethics Officer Network:

Today executives on Chevron’s securities analyst call about its fourth quarter 2011 earnings are sure to get some questions on the meaning of the term “notably higher.”  The company’s recent press release noted cryptically that "The company’s general guidance for the quarterly net after-tax charges related to corporate and other activities is between $250 million and $350 million.  Total net charges for the fourth quarter are expected to be notably higher than the general guidance range [emphasis added]."  Analysts will want to know whether this vague reference reflects Chevron’s putting aside reserves to cover the Ecuador environmental litigation-related costs, such as the bond to appeal to the Ecuador Supreme Court or a possible settlement of the $18 billion judgment just upheld by the court, and if not, how that will be accounted for.

 

Aguinda v. ChevronTexaco is one of the most complicated and drawn-out global lawsuits in history, seeking damages for the environmental and health impacts of oil extraction in Ecuador dating back to the 1960s. It's the subject of a superb documentary called Crude from director Joe Berlinger and has been featured on 60 Minutes.  Chevron, the successor defendant following its purchase of Texaco, has filed a series of appeals but lost the latest round this month when an Ecuadorian court upheld the $18 billion judgment against the company. It was Chevron's decision to have the case litigated in Ecuador instead of the United States.  Both sides have accused the other of corruption. 

 

An independent report released last year criticized the financial, operational, and reputational risks of Chevron's response to the suit. It will be dismissed by some because it was commissioned by Amazon Watch and Rainforest Action Network, who are frank about their own point of view. (Their website is called ChevronToxico: The Campaign for Justice in Ecuador.)   But the company has not successfully refuted the findings by Simon Billenness and Sanford Lewis that Chevron’s admissions about its liability risks in court documents were inconsistent with its financial reports and that its legal and public relations strategy poses an unacceptably high risk.  This week’s call is another opportunity to push the company to provide better information about what the impact of the judgment will be. 

 

Three shareholder proposals filed by Chevron investors also reflect these concerns.  One calls for appointment of a director with environmental credentials.  Another calls for separating the chairman and CEO positions to provide independent oversight.  The third asks that shareholders be given the right to call a special meeting.  Sponsors of the proposals include the New York State pension fund, Amnesty International, and Zevin Asset Management.  

 

Investors understand that this is a reputational issue with direct financial consequences.  A Huffington Post piece by Kerry Kennedy about her visit to the Ecuador site prompted comments from readers like these: “And to think I've been buying gas at Chevron lately! I hate reading stuff like this, it makes me sick for the future of our children & grandkids.” “Chevron: typical fossil fuel business culture. Their management is every bit as slimy, toxic, and destructive as their product.”  Companies need to consider that for consumers and investors the way they address environmental liabilities is a critical indicator of credibility and operational sustainability. 

 

 

Olympus Under Focus

By Naveen Reddy, Senior Research Analyst

Olympus Corporation has recently increased its global brand recognition for all of the wrong reasons. Few companies in recent memory have self-immolated in such a public and drawn out fashion. For Japan, which is certainly not a stranger to corporate scandal, the Olympus story was particularly resonant, seemingly because it dredged up all of the worst aspects of Japanese corporate practice, and delivered them in a storyline that would have been otherwise difficult to script. This resonance may be why momentum for governance reform has increased in Japan. Recently, the MOJ (Ministry of Justice) has begun soliciting public comments on Revision of Companies Act, which indicates the possibility to require Japanese companies to have outside directors.

Ministry of Justice Proposals

Guidelines for Public Comment

Any regulatory requirement that would increase the presence of outside directors would be a start. Japanese boards are typically stacked with company executives, with few outside or independent
directors. As recently as June 2011 Toyota Motor Corp fielded a board with 29 directors, all of whom were company executives.

In the case of Olympus, not only was the lack of outside directors problematic, but also the presence of company executives on the audit board. Hideo Yamada, the company’s former internal auditor, and member of the audit board, was responsible for ensuring the integrity of the financial statements while also moonlighting as an Olympus fraud participant.

Unfortunately, the proposed legislation would do little to address this obvious conflict.

Outside director requirements also have inherent limitations, particularly when taken in a cultural context. Ask former Olympus CEO Michael Woodford what it is like to be the lone dissenting voice on a Japanese board. After turning in his computer, mobile phones, and apartment keys, he was told to take the bus to the airport after voicing his concerns over the now infamous cover up transactions.

It would seem that simply having one or two outside directors may not be enough, if that director is cut from a Japanese corporate culture that values harmony over discord. While more foreign investors
will likely push for board representatives from their home markets, it is not a stretch to say that many Japanese companies now see Olympus as a case study for why not to seat foreign outside directors.

Will these potential regulatory changes be a watershed moment for Japanese corporate governance? It is doubtful, given the country's longstanding hostility towards corporate reform. Nonetheless, small changes are to be applauded, as the first step towards recovery is admitting that you have a problem.

Supplier Risk

I was honored to be invited to post a series of five short essays on governance and compliance issues for the blog of the Association of Compliance and Ethics Professionals.  This is adapated from my initial post:

Otto von Bismark famously said that to retain respect for laws and sausages, one must refrain from watching how they are made.  In an increasingly global but increasingly transparent world, we have to add consumer goods to that list.  Mike Daisey's one-man show about his journey to the Chinese manufacturing facility that produced the Apple products he loved has been performed widely across the country.  Daisey was a passionately devoted Apple customer until he read about some haunting test photographs of a factory accidentally left on an iPhone.  His disturbing discoveries about the working conditions at the factory operated by Foxconn included employees who were 12 and 13 years old, occupational safety violations, and a high rate of employee suicides.  This month, Daisey's story ran on the NPR program "This American Life" with a follow-up report corroborating his findings that included fact-checking by NPR investigators and independent assessments from a Hong Kong-based NGO.  The New York Times is also running a series on the issue of outsourcing with a focus on Apple and Foxconn.

Apple responded to Daisey's NPR report quickly by changing its policy to disclose its list of suppliers and submit to audits from the Fair Labor Association. 

Reputational risk management is an increasing problem for corporations and supply chains are an increasing part of that risk.  Last year, I wrote about the problems created by a sub-licensee of Warner Brothers when the an advocacy group self-dubbed the Harry Potter Alliance wrote a letter to the studio behind the Potter films, NBC Universal and Time-Warner asking them to make sure that the chocolate sold in Harry Potter wrappers meets Time-Warners' own ethical sourcing guidelines, with copies to Potter author J.K. Rowling, the corporations behind the theme park, and, of course, the press.  Four members of the movie's cast joined in, calling on the children of America to insist on chocolate manufactured without exploiting children in Africa. 

A new book, Business Ethics and Corporate Sustainability (edited by Antonio Tencati and Francesco Perrini) has a chapter on supply chain that suggests customers may be better suited and motivated to act as monitors of supply chain sustainability issues.  There is no question that concerns about customer defection prompted Apple's response to the Daisey broadcast.  Apple's reputation for coolness could collapse quickly if iPads and iPhones become associated with mistreatment of teenage workers. That makes this an issue for shareholders, too.  Nearly 40 shareholder proposals on sustainability reporting were filed in 2010 because investors believe that portfolio companies are critically underestimating the economic risk of supply chain vulnerability.  Significantly, a majority of those proposals were withdrawn following negotiations with the companies.  Every board should have an annual agenda item to make sure that supply chain issues are evaluated, disclosures meet the top global standards and facilities are audited by independent international organizations to ensure that their operations are not the next stop on Mike Daisey's itinerary.

 

Las Vegas Sands in the hands of Sheldon Adelson

Yesterday, Las Vegas Sands’ CEO’s wife, Dr. Miriam Adelson, has given a further $5 million to Winning Our Future, a so-called “super PAC” set up to support Newt Gingrich’s presidential candidacy, on top of
the $5 million already given by the CEO himself, Sheldon Adelson. These actions give us at GMI pause for thought. Such political action committees (PACs) can take in unlimited donations from corporations, unions and individuals. This much support makes the Adelsons among the largest known individual contributors to the current Republican primaries. But coming from individuals who have a controlling interest in a company – Las Vegas Sands – that is so beset with governance and social issues, the reputation of the super PAC and the campaign it is supporting might be impugned. For example, elections are typically something over which Mr. Adelson exercises considerable control, since his position as controlling shareholder and his membership on the board’s nominating committee
means that he can nominate and elect the entire board.

Here’s the detail: control of the Las Vegas Sands is largely in the hands of Mr. Adelson, who, along with his wife, controls roughly 57 percent of shares. As the controlling shareholder, Mr. Adelson elects the
entire board. Possibly as a consequence, only half of the board can be judged to be independent. And that’s not all, there are many unusual transactions between the company or its subsidiaries and entities controlled by Mr. Adelson. These include aircraft lease agreements, administrative agreements, and the
purchase of restaurants owned by entities affiliated with Mr. Adelson. In addition, the company employs the CEO’s stepdaughter and son-in-law. They were paid $51,000 and $286,000, respectively, in 2010. All this is detailed in the company’s 2011 proxy statement.

But governance is not the only problem. We at GMI also have issues with a whole range of executive compensation problems at the company. For example, at more than $2.5 million, the cost of providing security during 2010 to Las Vegas Sands’ CEO Sheldon Adelson and his family is more expensive than at any other company in the Russell 3000. The next highest costs are only just over $1 million for the CEOs of Dell, Oracle, and Amazon. Someone had to be first, but $2.5 million is a very large amount of money indeed to be spending on security services. In fact, the cost of providing security along with his other perquisites, such as the provision of a car and chauffeur, exceeds the value of Mr. Adelson’s salary and his stock option award together. While his latest stock option grant is not excessive, the fact of Mr. Adelson receiving a stock option award at all sits a little oddly with his control of over 57 percent of the outstanding stock in the company. Likewise, his position as controlling shareholder would seem to
make the need for an employment agreement between him and the company somewhat superfluous; but employment agreement he has.

Other perquisites are also a little unusual, a note to the Summary Compensation Table in the 2011 proxy statement says:

Our executive officers, as well as certain other employees, are entitled to use workout facilities at the Canyon Ranch Spa at The Venetian Resort Hotel Casino and The Palazzo Resort Hotel Casino and to receive dry cleaning services. The Company provides certain of its executive officers with access to corporate memberships at country clubs for business purposes. The Company requires these executives to reimburse it in full for personal use of these facilities. On certain occasions, an executive officer’s spouse or other immediate family member has accompanied the executive officer on flights on aircraft that we own, lease or provide pursuant to interchange or time sharing arrangements. The Company also permits its executive officers to use Company personnel for home repairs during business hours on a limited basis. The Company requires that these executives reimburse it in full for these services. There is no incremental cost to the Company for any of these benefits.

While the company claims that there is no incremental cost to these benefits, the existence of such arrangements calls into question the effectiveness of decisions made by the compensation committee.

But there’s more on top of the governance and compensation issues. After his dismissal as Sands China’s chief executive officer in 2010, Steven Jacobs filed a lawsuit for wrongful termination against Sands China and Las Vegas Sands. Mr. Jacobs alleges that he was fired because of conflicts with Mr. Adelson, who sought to conduct business with Macau authorities and local banks in a variety of ways that were improper and possibly illegal. Mr. Jacobs’ allegations are said to be the basis for investigations by the SEC, DOJ, FBI, and the Hong Kong Securities and Futures Commission over possible violations of the anti-bribery Foreign Corrupt Practices Act. Prior to this case, one of Sands’ overseas units paid a fine of around $1.6 million in 2010 to China's State Administration of Foreign Exchange related to certain payments the company had made to counterparties and other vendors.

All in all, not the most effectively governed company.

Say on Pay Votes Getting Teeth in the U.K.

By Greg Ruel- Research Associate

The word "non" has been removed from "non-binding shareholder vote" in the latest attempt to curb rising executive compensation. Not in America, we aren't there yet, but an article in today's Financial Times lays out some of the terms proposed for a binding shareholder vote on executive compensation in the U.K. Vince Cable, U.K. Business Secretary, proposes that pay plans be supported by 75% of shareholders in order to pass. That threshold certainly would have produced a number of additional high profile failures in the U.S. during 2011. If you remember, we released a report in November outlining 157 companies in the Russell 3000 who failed to garner even 70% of shareholder support including Pfizer (55%), Abercrombie (56%), News Corporation (65%), Exxon Mobil (66%), and Yahoo! Inc. (69%)

In addition, Mr. Cable says the government intends to propose legislation for greater transparency on compensation policy, including employees views on company pay. Executive pay discussion has been boiling over in the U.K. in recent weeks, especially regarding big banks paying out large bonuses while barely removed from taxpayer funded bailouts. Under new rules, shareholders would have a binding vote on severance pay with clawbacks implemented for executives who failed to produce during their term.

Board shake-ups are also planned, from increasing diversity to include more academics and public servants, to preventing executives from serving on compensation committees of other publicly traded companies. This new say on pay legislation won't be without controversy, including the potential to enhance the power of proxy advisory firms with conflicts of interest, but these moves certainly mark a shift in the balance of power between shareholders and management.

RIM Implements Long-Awaited Governance Reforms

By Nathaniel Parish Flannery, Research Analyst

Say hello to the new CEO. Late Sunday night, Blackberry maker Research In Motion (RIM) made the decision to push out the company’s two CEOs and name Thorston Heins, then one of the company’s COO’s a the company’s new top executive. From a governance perspective, it’s important to not only did the company make a shift away from its controversial dual CEO structure but also took the additional step of appointing an independent chairman. The company also said that current board member Barbara Stymiest will become the independent board chairman. Still, concerns remain about the continued inclusion of the former CEOs on the board.

After all, according to data from GMI, less than 1% of the world’s largest companies have implemented a dual-CEO structure. The move by RIM makes the company more like Apple and Google, makers of the iPhone and Droid, companies with separate CEOs and Chairmen, and less like Samsung Electronics, a Korean company with a long list of governance problems, including the presence of a dual-CEO structure. Rival producer Motorola does not have two CEOs, but it does have a combined Chairman / CEO.

Other companies with two CEOs include Whole Foods and Apollo Group, the troubled private education company.

It remains to be seen if the changes at RIM will be sufficient to placate disgruntled investors who are dissatisfied with the company’s track record on governance reform and have been disappointed by its recent financial performance. After all, in recent years the company has been beset by a number of leadership woes, and after announcing delays on some of its products and facing criticism from consumers on others, RIM has seen its share of the U.S. smartphone market fall below 10%.

Although Jim Balsillie and Mike Lazaridis, the company's former co-chief executives have been defenestrated from the executive office, they continue to serve on the company’s board and can be expected to continue to shape the company’s long-term strategy. The management shake-up is an attempt to assuage angry shareholders. But it stops short of a total separation since the two former CEOs will continue to serve as directors and remain significant shareholders.

In other words, the shake-up is not exactly a clean break from past practices. Mr. Balsillie who was suspended from the board for one year following a settlement with the Ontario Securities Commission and re-appointed in May 2010, will now continue to serve as a director on the company’s board. Mr. Lazaridis will stay on as the board's vice chairman.

Unlike Taiwan Mobile, RIM no longer has two CEOs. The Blackberry-maker has set its boardroom in motion, but if investors aren’t happy with the extent of the company’s governance reforms, they may simply Sprint to the NexTel.

Small Print

A hack's admission of "what the hack"

Compensation Analyst Ashley Kotzur found this News Corp story on Reuters.

“News Group has agreed to compensation being assessed on the basis that senior employees and directors of NGN knew about the wrongdoing and sought to conceal it by deliberately deceiving investigators and destroying evidence," the statement said.

Only NGN, then, not News Corp, and definitely no one called Murdoch, or any of his relations. Or friends. Or business associates. Or anyone who stood near him at any official or unofficial function.

Pootonium

Events Team Leader Mark Magee found this other Reuters piece on Bed Bath and Beyond and was all worried about using the brilliant headline he’d come up with: Pootonium. Why would I worry about it being beneath us? When you have an opportunity for good, clean, toilet humor, you should take it every time.

U.S. home merchandise retailer Bed Bath and Beyond Inc. is recalling tissue holders because one of its materials emits low levels of radiation, the company said on Friday.

According to the Nuclear Regulatory Commission (NRD), there is no health threat from the item, the Dual Ridge Metal boutique tissue holder, the company said in a statement.

The holder has been sold since July in about 200 of Bed Bath and Beyond's 1,000 stores in the United States and Canada and through its website, it said.

The holder "contains a material which emits low levels of radiation," the company said.

"The NRC has also informed us that the material is believed to be in the tissue holder itself and cannot be inhaled, nor can it contaminate other objects (such as tissues)."

The item has been pulled from the stores and from the website.

The statement did not identify the radioactive material.

Who knew going to the bathroom could be so dangerous? Such a relief to know that it cannot contaminate your toilet paper though. That’s a big phew. But you shouldn’t have to take a Geiger counter with you when you’re going to the toilet. It’s the one place you can usually get away from everything.

Corporate Big Bang

Events Analyst Dovid Muyderman (sun)spotted this in an 8-K on January 11^th from NJR Clean Energy Ventures.

On January 11, 2012, NJR Clean Energy Ventures (“NJRCEV”), a subsidiary of NJR, announced the completion of a 14.1 megawatt solar system on McGraw-Hill Corporation’s East Windsor, N.J. campus and also announced that several of its other solar projects were placed into service during the first quarter of fiscal year 2012 as well.

Talk about Masters of the Universe. I thought it was only God who could complete solar systems.

Sounds like an admission of guilt to me

As Mark Magee commented when he sent it to me, this is not definite yet, but, whether it’s definite or not, it’s more than BP was thinking of paying, more than it set aside, and quite a lot of money. Enough? Probably not.

Jan. 19 (Bloomberg) -- BP Plc, the operator of the Macondo well that caused the worst U.S. oil spill in the Gulf of Mexico in 2010, may reach a settlement with the U.S. for as much as $25 billion, Morgan Stanley said.

The company and the Department of Justice will probably agree on a sum of $20 billion to $25 billion before the trial scheduled to start on Feb. 27, analyst Martijn Rats said in a note published today. The figure, which includes civil charges, criminal penalties and fines under the Clean Water Act, exceeds the $12 billion that BP set aside for these costs, he said.

And another in the series Small Print is not just about the nasty...

Thanks to Mark again for this.

BlackRock (BLK) Inc., the world’s biggest money manager, is looking to leverage its $3.5 trillion of client assets by embarking on an unprecedented campaign urging corporations to adopt shareholder-friendly practices.

That’s a lot of votes. A really, really large number of votes. So that means that if you have BlackRock in your list of top 10 shareholders you better make up your mind not just to talk the governance talk but also to walk the governance walk. Otherwise those votes are going to be against you.

On the tenth day of Enron my comp committee gave to me: 10-year tenure with $120 million earned in the final full year

By Scott Patterson - Compensation Analyst Manager

Meg Whitman led eBay for 10 years taking it from start up to a Fortune 500 company and along the way she was well rewarded. She became a billionaire thanks to shares owned when the company went public in September 1998, and then went on to see shares surpass $300. Her running of the company was filled with ups and downs with the end of her tenure being a downtime with a share price below $30 on her final day at the helm. Yet she still brought in $120,427,360 as total realized compensation during her final full year as CEO.

Once again it appears that stock options played the key role in the $100 million plus payout. With some of her final actions at eBay consisting of exercising options Ms. Whitman realized nearly $117 million in value during fiscal 2007. An additional $6+ million was realized in fiscal 2008, her final year as an eBay executive. The remaining options outstanding at 2008 fiscal year end of over 2.5 million appear to be underwater at the moment but she has a few more years before they terminate.

Ms. Whitman was the beneficiary of eBay’s quick rise to riches and became an executive icon whose fame led to a run for governor of California. With this run for public office, eBay’s performance during Ms. Whitman’s reign was discussed and debated. Her fortune amassed through eBay was unquestionable, but how it was earned became questionable. Was her taking the position of CEO just prior to the company’s IPO just great timing and the wealth that came with it was not indicative of her work, or was it her decision making that created the internet giant?  Her final years as CEO were not as bright as the first half of her tenure, so her earning over $120 million in total realized compensation for her final full year in the top position must have led shareholders to question why a billionaire was reaping such high reward during a time of uncertainty for the company.

Legg Mason’s Capital Management Value Trust – A tarnished star that may remain tarnished

By James A. Kaplan - Chairman, GMI

As investors know, the Legg Mason Capital Management Value Trust will continue to be managed by Bill Miller until April 2012 when he will step down.

The performance of the fund had been dismal. According to a Bloomberg report, the fund has fallen an average of 9.6% each year for the past five years. Mr. Miller’s style has always emphasized stock-picking with a heavy concentration in industries that he believes to be substantially undervalued. This method introduces significant risks, including overall market risk, as well as selection impact.

I am sure Mr. Miller understood these risks because they are a fundamental element of portfolio construction. However, I think Mr. Miller and the fund took on even greater risk in 2010 and 2011, as measured by GMI’s Accounting & Governance Risk (AGR®) rating. In 2010 the Legg Mason Capital Management Value Trust had a weighted Accounting Risk score of 21.50, compared to the weighted S&P 500 score of 27.90. This lower score represents substantially higher exposure to aggressive accounting and management. Analysis of the portfolio in 2011 proved even worse: Legg Mason’s fund had a weighted score of 19.40 versus the S&P 500 score of 29.35.

While the fund’s poor performance cannot be solely attributed to its accounting and governance risk exposure, this increased exposure has been shown to have negative impact on returns in general. The chart below traces performance of all rated North American corporations over the past five years. Companies with low Accounting Risk gained an average of 24.2%, while those rated at highest risk lost 34.3%.

“Legg Mason’s Bill Miller Will Exit Main Fund After It Falls Behind Peers,” www.bloomberg.com, November 17, 2011.