Newsletter: Executive Compensation
Council of Institutional Investors
TIME FOR CORPORATE CONFETTI
Supreme Court spouse and tax superstar Martin Ginsburg once asked a client a now-legendary question. The client, knowing that Marty's brilliant tax advice had made billions for Ross Perot and others, outlined to him an asset-parking scheme where he would give his money to some "guys" in Switzerland, who would, at some point, decide to give it back. To achieve the desired tax windfalls, it was critical that the money actually be given, and that no agreements be entered into to insure its return. After describing his plan in great detail, the client turned to Marty and asked if there was anything else he needed to know before giving his advice. Marty's response, after a quiet pause:
"How well do you know these guys?"
This question has now become the fashionable one in governance circles. Shareholders say individual directors are critical players and that more attention needs to be paid to them. (The short slate rule may, at Chrysler and elsewhere, be making this more possible.)
A lovely thought. Flawed only by the fact that in large companies shareholders are not permitted to view or learn about what the directors do in their meetings. Not to mention the fact that shareholders virtually never select, meet, or speak to directors, and have no wish to micro manage.
Some shareholders are now tracking director-specific data (like board attendance records) to help remedy this information gap. But this kind of information is limited in quantity and usefulness.
There is other information, however, that shareholders can track to help make judgements about directors. They can taste the directors' cooking.
If you eat at a restaurant and keep getting bad food you might begin to guess, even without being in the kitchen, that the cook cannot (or will not) cook. Some shareholders (like New York City's pension funds and CalPERS) are similarly beginning to hold directors responsible for unacceptable corporate performance and practices. Indeed, Business Week just published a list of ten directors who sit on unusually large numbers of troubled-company boards.
Assuming that few directors should be dismissed on the basis of single events, the goal should be to look for patterns. (A friend of mine says that he believes in patterns more than Virginia believes in Santa Claus.) What kinds of patterns?
How about, just as an example, a "corporate confetti" pattern: a tendency to treat corporate assets like fodder for ticker-tape-confetti parades. Surely there are few more important patterns for shareholders trying to determine if boards are taking their oversight responsibility seriously.
Consider, for example, the following pattern of expenditures and events at one evolving corporation. Some of these may be troubling but no one of them may be heart stopping on its own. Some of these are rather old. But some are rather new--that is what patterns are. All are from published sources, but none has been independently verified by the Council.
From the pending Time Warner/Turner deal: for becoming the manager of a division of Time Warner, it is predicted that Ted Turner will receive $111 million for five years' work, as compared to $7 million for the previous five years' work. Turner has publicly announced that being vice chairman of Time Warner is "not much of a job."
- Michael Milken, convicted of six counts of fraud, fined $1.1 billion and barred for life from the securities industry, will receive an estimated $40 million from Time Warner and an additional $10 million from Ted Turner for advising on the Time Warner/Turner deal.
- 20% of outstanding Time Warner stock--one- fifth of the entire company, in other words--is reserved for employee stock option plans.
- Time Warner has spent hundreds of millions to fire executives in the last few years. The most recent executive to leave, Michael Fuchs, will be paid an estimated $80 million; not $80 million to work but $80 million not to work. Robert Morgado was paid $60 million to leave. Robert Pittman was paid $20 million. Bob Krasnow was given $7 million. Nick Nicholas, Jr. was given $15.8 million and he will continue to receive $250,000 annually through 1999 (allowing him to keep his pension and benefits of $600,000 a year).
- Time Warner routinely pays seven figure severance payments to executives, including those leaving following disasters. Manny Gerard, COO of Warner, supervised Atari when it crashed in 1982. Gerard received a bonus of over $700,000 in 1982 and, when he left Warner of his own accord two years later, was given a severance package of $10 million. Upon retirement, Ralph Davidson, Chairman of Time from 1980-87, was given $4 million plus stock options and profit-sharing plans that would provide him with $1 million a year (not including his Time stock).
- In 1994, Time Warner CEO, Gerald Levin, made $5 million in salary and bonus alone without counting his stock and options.
- In 1990, Steve Ross--Time Warner's co-CEO at the time--made $78.2 million (including a $74.9 one-time payment for his interest in Warner). The same year Time Warner laid off 605 members of the publishing division. Ross' salary was 2.5 times the combined salaries of the people who were laid off.
- Between 1973 and 1989, Steve Ross earned approximately $275 million or about $16 million a year not including his insurance, pension and perks.
- Courtney, Steve Ross' third wife, was paid $250,000 for producing a documentary about a friend. The documentary cost Warner an estimated $6 million to make and market. It produced $200,000.
- Ross' compensation survives him. His contract guarantees that the payment of his salary and bonuses (presumably based upon past performance) would continue for three years after his death. His family was also to receive all of his bonuses, stock, long-term compensation, company life insurance ($7.9 million), pension and other benefits. As well, the 7.2 million stock option grant would be fully exercisable by the family until the year 2002.
- Warner paid $950,000 to director Bill vanden Heuvel for his negligible role in the sale of Warner's Ralph Lauren cosmetics company. Heuvel was the chair of the executive compensation committee and a long-time friend of Steve Ross and, Ross' second wife, Amanda Burden.
- Time Warner maintains chalets in Aspen and a private hotel in Acapulco, Mexico (the five Trump Tower apartments that Warner owned were sold due to protests by directors). At the Acapulco hotel alone, where executives and guests are encouraged to use and keep equipment, there was a $24,000 bill solely for tennis shoes.
- As of 1992, Time Warner's fleet of seven planes included some in the $20-30 million category. These planes cost an additional $2,500 an hour to operate.
- Upon Time's takeover of Warner, 500 Warner executives were paid $680 million--in cash--which was the largest acquisition payment ever made to employees. They also received new options at $38 a share.
- Warner--then Time Warner--CEO, Steve Ross, received $200 million upon the acquisition of Warner by Time. He also received 7.2 million new options which was the largest option grant ever given. This option grant was structured such that it would be fully exercisable by Ross--or, in the event of his death, his family--at any point over the 12 year period.
- Other Warner executives who benefitted from the Time-Warner merger include: Robert Daly and Terry Semel who made $50 million apiece; Robert Morgado who made $16 million; and Bert Wasserman, Martin Payson and Deane Johnson who each made $20 million.
- The 30 law firms involved in the merger made more than $76 million and the four main investment advisory firms made over $60 million. The banks made $350 million in financing fees and expenses. There was also a $29 million "miscellaneous" fee.
- Legendary Time Warner advisor, Oded Aboodi, was fined $930,000 for insider trading of Time Warner stock after pleading no contest in October of 1994.
- In 1982, two top Warner executives (and two of Ross' closest friends), Jay Emmett and Solomon Weiss, and a Warner "marketing consultant", Leonard "The Fox" Horwitz, were found guilty of charges relating to racketeering in conjunction with the Westchester Premier Theater. Listed as a "co-conspirator" but never charged, Ross pleaded the Fifth Amendment and refused to appear before the grand jury. Federal prosecutor, Nathaniel Akerman (a former member of the Watergate prosecutor's team) called Ross "the real culprit" in open court.
"In our view the real culprit has not been brought to criminal justice. The real culprit in this instance is the chairman of the board of Warner Communications and the investigation of him is still continuing."
- One former Warner director stated in a deposition: "You have a person who has exceeded his power with the greatest of arrogance and you have a bunch of myrmidons on that board completely manipulated by Steve Ross." (On at least one occasion, Warner contributed $500,000 to director Beverly Sills' New York City Opera.)
The full quote by former Senator and governor Abraham Ribicoff--Warner director appointed by Herb Siegel--when he departed from the board in 1987: "I have never in my life been with a board so subservient to the chairman or the CEO. I couldn't take it anymore. I think Steve Ross's contract is one of the most outrageous things that has ever happened. Nobody is worth that kind of money. You have a bunch of myrmidons on the board completely manipulated by Steve Ross, stooges to give Steve Ross anything he wanted."
- Time Warner stock currently trades at $38, after a four-for-one stock split in 1992 (all numbers are post-split). It has $18 billion of debt. In 1989, when Time's stock traded at $32 (pre-split $126), Paramount offered $50 a share (pre-split $200 a share). The board turned the offer down.
These items span many years. Many were overseen by directors of Warner or Time, not Time Warner, or by Time Warner directors who do not currently serve on the board.
Those looking to see if directors are on the job might ask themselves Ginsburg's question about sets of facts of this nature. How well do we know these guys?
What more do we need to know?
Sarah A. B. Teslik
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