Massey Energy Director Elections: A Landslide or a Mudslide
I once asked a fellow law school graduate how he did in school. He replied with great enthusiasm, “I graduated in the top 90% of my class!”
A Massey Energy spokesman who announced that its three directors standing for election had won by a landslide reminds me of that retort when I read the announcement. Directors Gabrys, Moore and Phillips won their respective reelections by votes of 55.36%, 55.09% and 57.83& respectively.
A landslide? Surely Massey officials jest. Continue reading »
The Independent (NOT!) Chairman At Morgan Stanley
Among the many proposals up for consideration at this year’s annual meeting at Morgan Stanley is one that deserves your attention and your vote. Proposal #7 calls for the separation of the positions or chairman and CEO and also requires that the chairman be “independent.” For those of you that pay attention to these sorts of things, an independent chair proposal is not new. What makes this proposal unusual is the corporate chutzpah that suggests that this proposal is not in the interest of shareholders. Remember that “financial crisis” from a few weeks back? The boys at Morgan Stanley were some of the dealers at that crack house fiasco.
Morgan Stanley, along with a number of other financial services companies on Wall Street were engaged in a range of financial transactions that contributed to the global financial meltdown. The company, along with its compadres on the Street, traded on a range of securities that bet on the failure of the mortgage market. This gamble based on a failed bet that the unsustainable mortgage market would last (i.e. millions of bad mortgages would not somehow fail all at once) blew up, leaving ordinary people in financial disarray, economies around the world in crisis and the financial companies at risk of collapse. So far so good?
In 2008 and 2009 the company was in crisis. The Company’s then CEO John Mack (now the Chairman) was under pressure from the Fed and the Treasury to merge the company with JP Morgan Chase. Eventually, the Company was forced to take TARP funds, which it has since paid back. While all of this was going on, shareholders were taking quite the hit. MS share price went from a high of $67 and change in 2007 to less than half of that amount in 2010. Of course then CEO and now Chairman Mack saw a $41 million payday in 2007, which has since diminished to a paltry $1.5 million and change in 2009.
Yeah, pay for performance is working here.
Anyway, late in 2009 the Company announced the change in duties of Mr. Mack and the co-President James Gorman but from a shareholder perspective has anything changed on the board?
Well, no.
While a number of new faces have appeared on the MS board over the last couple of years, much remains the same. Several directors are seriously overboarded, holding 4 or more board positions (James Hance (5), Donald Nicolaisen (4), Charles Noski (4), Laura Tyson (4)), several directors have held their posts for excessive terms (Robert Kidder (17 yrs), Laura Tyson (13 yrs)) and of course, the chairmanship is held by an insider, Mr. Mack. Perhaps these problems could be ignored if the company hadn’t, well, screwed the pooch. Unfortunately for the rest of the world, that was not the case.
For MS shareholders interested in sorting out the pros and cons of this shareholder proposal, the Company proxy statement is of little help. Regrettably, the proponent talks in platitudes about the merits of independent chairmen. (Yawn). But somehow, corporate hubris seemed to get the best of executives at the Company who offer that “[t]he Board should not be constrained by an inflexible, formal requirement that the Chairman be an independent director who has not previously served as an executive officer.” The proxy statement goes on for several more interminable paragraphs suggesting that its independent board and committees all somehow validated its decision to let Mr. Mack continue on as CEO-Emeritus/Chairman.
Okay, so let’s recap: Stock price in the toilet, entrenched Chairman, entrenched board, executive pay rewarding short term performance, shareholders left holding the bag. This is a no brainer folks.
Vote for requiring that the chairman be I N D E P E N D E N T!
Waddell and Reed: Hyperbole as a Measure of Performance
In the never-ending grab for higher levels of excessive pay at shareholder expense, CEOs have shown a remarkable set of qualities: hubris, greed and brazenness. This list runs on but today, I am reminded by CorpGov.net that another talent has been overlooked, at least at the financial services company Waddell and Reed. That quality is hyperbole. It seems that the company’s CEO, Henry J. Herrmann has quite a talent in that department.
In a March 5, 2010 letter to shareholders, Mr. Herrmann suggests that a shareholder proposal coming to a vote on April 7th “could put Waddell & Reed Financial, Inc. at a serious competitive disadvantage and could erode the value of your investment.”
Really?
This apocalyptic event Mr. Hermann refers to is a shareholder proposal calling for an advisory vote on executive compensation. As Mr. Herrmann notes in a quieter moment in his letter, the proposal “recommends that the Board of Directors adopt a policy requiring an advisory vote of our stockholders to approve the Compensation Committee Report and the executive compensation policies and practices set forth in the company’s Compensation Discussion & Analysis in our proxy statement.” Somehow, this doesn’t strike me as a doomsday event so it prompted me to see what’s going here at WDR. (See ProxyAnalyst’s recommendation on this vote here)
A quick glance at the company’s proxy statement clarified things. Indeed, somebody would be at a disadvantage should shareholders be allowed some say on executive pay. However, it wouldn’t be the company’s investors.
Mr. Herrmann received approximately $4.9 million in total compensation in 2009, up roughly 20% from 2008. The market was up, company performance as measured by stock price for 2009 was up. One could argue that pay linked to performance was as it should be. Unfortunately for shareholders, the process could use a bit of tweaking considering how pay was set at the company.
As noted in the company’s proxy statement, four factors were used in determining Mr. Herrmann’s pay:
• The Company’s financial and operational performance for the year;
• Market survey information for comparable public and private asset managers prepared by the Committee’s independent compensation consultant;
• Recommendations of the Company’s Chief Executive Officer, based on individual responsibilities and performance;
• The previous year’s compensation levels for each named executive officer; and
• Overall effectiveness of the executive compensation program.
Yes, it seems that at Waddell and Reed, the CEO calls the shots when it comes to setting his own pay package. This arrangement is threatened should investors have some sort of input into this process. Undoubtedly, Mr. Herrmann is disturbed at the prospect that shareholders might take exception to his pay package, which includes the free personal use of the corporate jet, tickets to sporting and cultural events as well as this nifty pay package. Mr. Herrmann has undoubtedly worked hard to cultivate a solid relationship with his board of directors and doesn’t need that apple cart upended by the company’s owners.
However, it seems unlikely that this hullabaloo will come to much should shareholders approve this proposal. After all, the same proposal submitted by the same shareholder received majority support from shareholders last year. What did the company do in response?
Nothing.
Ernst & Young: Enron Redux?
What have we learned from the collapse of Lehman Brothers Holdings?
The report issued by a bankruptcy court examiner into the collapse of Lehman Brothers was released last week, sending shock waves through the business world. Aide from many details about high-risk business deals undertaken by the company, what has been most revealing to me is the blame laid on Ernst & Young, Lehman’s outside auditors. One would think that post-Enron, where the once venerable Arthur Anderson was extinguished in the blink of an eye, the remaining Big Four would be a bit more rigorous about their audit engagements. Apparently not.
What came out of the Enron disaster was the Sarbanes Oxley Act (SOX), which among other things imposed increased responsibilities on companies and their auditors to conduct and verify their internal controls. In addition, Congress and the SEC severely limited outside accountants from engaging in non-audit work with the firms they were auditing.
Say hello to the “rule of unintended consequences.”
An interesting thing happened in 2001. That was the year that auditors were prohibited from doing other consulting work for their corporate audit clients. In the case of Lehman Brothers and Ernst & Young, that event seemed to have just the opposite effect in that the auditor’s fees skyrocketed. From 1999 to 2007, the last year auditor fee data was reported to Lehman’s shareholders, Ernst & Young’s fees increased 7 fold from $5.3 million to more than $31 million. While some of the increased revenues can be attributed to the additional work created by Sarbanes Oxley compliance, it remains interesting from a shareholder perspective that the numbers accelerated in such rapid fashion.
The following chart reveals the dramatic climb in E&Y’s fees for the 9-year period. It suggests that, in terms of fees collected from it’s client, the risk of “not biting the hand that feeds you” increased dramatically.
What we see is that, in the case of Lehman Brothers and Ernst & Young, the auditor was able to recoup their non-audit fees in spades. While the apparent conflict of interest that was eliminated by SOX was eliminated, the motivation to rigorously assess the financial dealings of Lehman Brothers may have taken a back seat to the revenues generated from the long-term engagement with Lehman Brothers.
I have no doubt that Ernst & Young officials would rigorously argue that no such conflicts existed. However, when “credible evidence” suggests that “accounting gimmicks” were not uncovered by Ernst & Young to shareholders, investors can only wonder.
So what have we learned here?
Despite SOX reforms, there are still risks to investors from shoddy audit oversight. Auditors are still subject to enormous pressure from unscrupulous clients who try to hide risk from their investors. Long-term engagements by companies of their outside auditors pose real risk to investors.