Can the Buck Stop at the Directors' Table?



Published: October 24, 2004



NOTHING so concentrates the minds of corporate directors as the prospect of a shareholder lawsuit.


So last week, as Michael D. Eisner and the board of the Walt Disney Company went on trial in Delaware, corporate directors and their

advisers gathered at a conference in San Francisco to learn how to avoid ending up in the dock. From lawyer after lawyer, they heard a

consistent theme: the sun has set on the era of the imperial chief executive and his royal court of cronies.


Independent directors now know that if they are foolish enough to cede crucial compensation decisions to the chief executive, as

Disney's directors are accused of having done, they risk not only their shareholders' investments but also their own reputations – and wealth. If the shareholders prevail in the Disney suit, they could win damages that would come out of the directors' own pockets.  That case centers on Mr. Eisner's hiring of Michael Ovitz as president of Disney in 1995. When Mr. Eisner decided to dismiss him 14 months later, the contract the two had worked out yielded Mr. Ovitz $140 million. Lawyers for shareholders have argued since 1997 that the directors shirked their duties by granting Mr. Eisner carte blanche to deal with Mr. Ovitz, who was then his good friend.


The huge pay and lavish perks collected by some senior executives have long stirred shareholders' ire, but as Patrick McGurn, special

counsel to Institutional Shareholder Services, said Wednesday at the conference, some are resetting their targets. "The anger is not being focused on the overpaid executives anymore," he said. "It's being focused on members of compensation committees."


Institutional Shareholder Services, which advises big investors on proxy votes, has started advocating the withholding of votes for director candidates whom it blamed for "a disconnect between pay and performance," Mr. McGurn said. Four out of five of its clients said in a recent survey that they expected to withhold votes for members of compensation committees in the next round of corporate annual meetings.


Shareholders are "going to try to go after more boards," Mr. McGurn said, adding that investors might give those responsible for setting and monitoring executive pay a chance to "get out of the penalty box" by adopting reforms.


The first step they advocate may seem obvious: Directors should find out exactly how and how much senior executives are paid and explain it all to shareholders.


At most big companies, that is no longer easy. C.E.O.'s are compensated in a multiplicity of ways, some of which can be tricky to measure.


Honeywell International took a step forward in its latest proxy statement by tallying a variety of benefits its executives received on top of their salaries, bonuses and stock awards. At a glance, shareholders could glean that they had allowed David M. Cote, the chairman and chief executive, $174,000 of personal use of company planes and cars last year, $319,000 in above-market interest on deferred income and $137,000 in reimbursements to cover taxes on various benefits.


Critics of the planeload of perks granted to C.E.O.'s hope that securities regulators will demand more detailed disclosure of these benefits and that companies will be shamed into excising them. Alan Beller, director of the division of corporate finance at the Securities and Exchange Commission, showed up at that conference to reinforce that notion. Companies have been "overly creative," Mr. Beller said, in efforts to slip through perceived loopholes in rules on disclosing executive pay and perks. "A perk by any other name is still a perk," he said.


MR. BELLER hinted that the commission might bring more accusations like the ones it leveled at General Electric a month ago, contending that the company failed to describe fully the rich package of retirement benefits it gave to John H. Welch Jr., its former chairman and chief executive. The commission found that the benefits Mr. Welch received in his first year of retirement, including jet travel and use of an $11 million apartment in Manhattan, were worth $2.5 million. (Without admitting any wrongdoing, G.E. settled by agreeing not to violate the disclosure rules.)


Mr. Beller said executives often resist calls for details by asking: "Where does it say we have to disclose that? Show me the words."He had a terse rejoinder: "Let me help. Disclosure is required of all compensation earned or paid from all sources for all services."

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