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The
Corporate Reform Weekly
Vol
V, #26 July 10, 2006
In
This Issue…
Executive
Pay
1.
Business Roundtable claims CEO pay is not out of control
Corporate
Scandal
2.
Senators urge Justice to not let Boeing take a tax deduction for $615 million
settlement
3.
Lay’s death leaves his conviction in the air
4.
Deputy AG warns that hedge fund industry poses an “emerging threat.”
Securities
and Exchange Commission
5.
SEC tells PCAOB to delay guidance on options backdating as scandal grows
Lobbying
and ethics
6.
Lobbying firm fails to disclose income from at least 35 clients, raising
questions
7.
Report documents Democrats’ extensive corporate consulting network
This
Week’s Action Item
Support
public funding of elections
Executive
Pay
1.
Business Roundtable claims CEO pay is not out of control
Responding to
criticism of excessive CEO pay, the Business Roundtable (an association of 160
chief executive officers of leading U.S. companies) last week released a study
attempting to show that CEO pay growth is actually “consistent with the growth
of the market value and shareholder returns of those companies.”
The study
tracks 350 large companies between 1995 and 2005. According to a Business
Roundtable press release: “median total compensation for CEOs in Mercer Human
Resource Consulting's Mercer 350 database increased 9.6 percent per year. This
tracks closely with the 9.9 percent median annual shareholder returns over the
same ten-year period, and the 8.8 percent annual growth in median total market
capitalization.”
"As
leaders of multi-million and billion dollar organizations, we fully appreciate
that the media and the general public would be interested in executive
compensation," said John J. Castellani, President of Business Roundtable,
"But misleading reports that large numbers of CEOs make hundreds of
millions of dollars every year are simply untrue. Executive compensation has
closely followed the growth that companies have experienced in the last ten
years."
"Sensational
accounts about executive compensation unfairly damage companies and send a
false alarm to shareholders that could jeopardize our future economic
competitiveness," Castellani continued. "This research by a
widely-respected corporate compensation expert and database should set the
record straight and lay the groundwork for an honest debate on an important
issue."
However, the
report was dishonest in a number of crucial ways – it omitted pension and
retirement plans, severance packages, deferred compensation, dividends paid to
executives on restricted stockholding, and the money executives have made by
cashing in stock options and restricted stock. It also omitted a variety of
perks, including personal use of the company plane.
The Corporate
Library’s Paul Hodgson told reporters that these types of compensation
“potentially are far more valuable than anything the executives received during
their career.”
Harvard Law
Professor Lucian Bebchuk told reporters that while the report “might give
readers the impression that the relationship of pay to firms' economic
fundamentals [has] not changed significantly…this impression would be
completely incorrect."
The report
comes one week after a well-publicized speech by Berkshire Hathaway Vice
Chairman Charles Munger at the Stanford Law School Directors’ College on what
Munger called the “wretched excesses of executive compensation.”
Munger said
that CEOs, "have a duty to the larger civilization to dampen some of this
envy and resentment by behaving way more noble than other people and more
generous…People should take way less than they are worth when they are favored
by life."
Excessive CEO
pay is also the subject a recent Fortune article entitled the “Real CEO pay
problem,” which asserts that: “Voters are outraged. Big investors are demanding
change. Even some CEOs admit there's a crisis. But rewards that defy all
economic logic don't simply spring from greed. Corporate America's
executive-compensation system is broken.”
See: “The real
CEO pay problem” By Rik Kirkland,
Fortune magazine:
http://money.cnn.com/magazines/fortune/fortune_archive/2006/07/10/8380799/
For more, see:
“Fred Cook Analysis of Mercer 350 Data Confirms Growth of Markets, Shareholder
Returns Aligned With Trends in Executive Pay”
http://biz.yahoo.com/prnews/060705/dcw007.html?.v=61
See also:
“It's Good to Be the CEO, “ By Troy
Wolverton, TheStreet.com: http://www.thestreet.com/markets/marketfeatures/10295346.html
Corporate
Scandal
2.
Senators urge Justice to not let Boeing take a tax deduction for $615 million
settlement
A week after
Boeing agreed to pay federal regulators $615 million to end two criminal
probes, three Senators want to make sure that Boeing doesn’t turn around and
use that settlement as a tax write-off, effectively charging it to the American
people.
The Senators
-- Charles E.
Grassley (R-Iowa), chairman of the Senate Finance Committee; John McCain
(R-Ariz.), a longtime critic of Boeing; and John W.
Warner (R-Virginia), chairman of the Armed Services Committee —
wrote a letter to Attorney General Alberto Gonzales saying that allowing
Boeing to deduct payments to settle government ethics charges "would be
unacceptable."
"We are not
interested in settlements that are designed to look good in newspapers, but
fail to bring real accountability," the letter stated.
In a
statement, Grassley said: “If Boeing is able to deduct the settlement, the real
penalty to Boeing could be millions and millions less than advertised. If the
Justice Department failed to take into account the tax implications of the $615
settlement, that's inexcusable."
Corporations
frequently try to deduct settlements to end criminal probes.
The $615
million settlement, largest ever for a defense contractor, ended a three-year
inquiry into two alleged crimes. One involved hiring a former Air Force
official, Darleen Druyun, while she was in charge of overseeing contracts at
the Pentagon. Druyun served nine months in prison last year for violating
federal conflict-of-interest laws, and Michael Sears, formerly Boeing’s CFO,
spent four months in prison for illegally recruiting Druyun.
The other
alleged crime involved stealing data from rival Lockheed. Boeing was stripped
of $1 billion in government rocket-launching business as a result.
For more, see:
“3 Senators
Protest Possible Tax Deduction for Boeing in Settling U.S. Case,”
By LESLIE WAYNE:
http://www.nytimes.com/2006/07/07/business/07boeing.html
“Boeing
settlement is a record,” The Associated Press:
http://159.54.227.3/apps/pbcs.dll/article?AID=/20060701/BUSINESS/607010348/1003
3.
Lay’s death leaves his conviction in the air
In the wake of
Enron founder Ken Lay’s death last week, legal experts speculated that it may
ultimately lead to an overturning of his conviction. Typically, when a
defendant who pleads not guilty dies before being sentenced, the conviction is
overturned on the grounds that the defendant did not have a chance to appeal
it.
If the
conviction is overturned, it would prevent the government from seizing the
$43.5 million prosecutors are seeking. However, a number of civil class
lawsuits targeting Lay’s assets will be allowed to continue.
Lay and former
Enron CEO Jeffrey Skilling were convicted in May of fraud and conspiracy for
lying to investors and employees about Enron's financial health as the company
spiraled into bankruptcy in Fall 2001. Lay was convicted on six counts and
Skilling was convicted on 19 of 28 counts.
The trial took
51 witnesses, 56 days of testimony over 16 weeks, 27 boxes of evidence, and
five days of deliberations. Both Skilling and Lay testified in their own
defense, arguing essentially that Enron’s collapse was more of a classic run on
the bank caused by a panicky investment climate than a deliberate fraud. They
blamed CFO Andrew Fastow for any fraud that might have occurred, but insisted
that they were focused on the big picture and certainly didn’t direct or know
about any fraud until much later.
Skilling
testified that he never signed paperwork approving Fastow’s deals and he was
more focused on building new businesses. Lay said that he was “very much of a
decentralized person” and a “delegator,” who didn’t even have time to read his
e-mails and relied on others to do so.
Opinion in
response to Lay’s death was generally unforgiving. Even in death, Lay continues
to be widely reviled for his role in a fraud that cost thousands of workers
their jobs and destroyed $60 billion in shareholder wealth while top executives
made off with hundreds of millions of dollars from well-timed stock sales.
One person
with nice things to say about Lay, however, was President Bush, who in an
interview on Larry King said: “He’s a good guy… One of the things I respected
him for was he was such a contributor to Houston’s civil society. He was a
generous person. I’m disappointed that there was this — he betrayed the trust
of shareholders, but…”
For more, see:
“Experts See
Lay's Death Erasing Conviction,”
By KRISTEN
HAYS, AP
http://www.chron.com/disp/story.mpl/ap/fn/4030136.html
“Death Puts
Lay Conviction in Doubt: Since the Enron founder can't appeal, criminal charges
may be voided. Civil cases against those tied to the scandal are expected to
continue,” By Thomas S. Mulligan and Miguel Bustillo, Los Angeles Times:
http://www.latimes.com/business/la-fi-lay6jul06,1,1847580.story
“Disposition
of Ken Lay's wealth in legal limbo,”
By Greg
Farrell, USA TODAY
http://www.usatoday.com/money/industries/energy/2006-07-06-lay-legal-usat_x.htm
4.
Deputy AG warns that hedge fund industry poses an “emerging threat.”
Deputy
Attorney General Paul McNulty last week told reporters that he was concerned
that the $1.2 trillion hedge-fund industry poses an “emerging threat” to
investors because the industry is so lightly regulated. McNulty, who heads the
corporate-fraud task force, said his task force is studying the issue.
“There's been
some interest in the media recently on hedge funds, and that would be a good
example of an emerging threat that we would want to talk about and ensure that
we are handling,” he said.
McNulty also
reaffirmed that the “The corporate-fraud task force is alive and well,” McNulty
said. “The need for it in our view is still very clear and strong.”
McNulty’s
remarks came a week after a federal appeals court said that the SEC did not
currently have the authority to regulate hedge funds, leaving it up to Congress
to grant that authority. The Court said that the SEC overstepped its bounds by
treating investors as “clients” of the fund manager.
McNulty’s
remarks also echo concerns raised recently by Berkshire Hathaway Vice
Chairman Charles Munger at a keynote speech at the Stanford Law School
Directors’ College. Munger accused hedge fund managers of doing anything and
everything to keep fees high and profits flowing. Calling it a “ghastly
culture,” Munger predicted that, “there will be a terrible scandal in due
course.”
For more, see:
“Hedge Fund Fraud Poses `Emerging Threat,' U.S. Regulator Says,”
http://www.bloomberg.com/apps/news?pid=20601070&sid=aDZc_kPYhhm4&refer=
Securities
and Exchange Commission
5.
SEC tells PCAOB to delay guidance on options backdating as scandal grows
The Securities
and Exchange Commission last week told the Public Company Accounting Oversight
Board to delay offering guidance to accounting firms on how to handle stock
options backdating, insisting instead that it would deal with the issue when
the SEC issues its own rules on executive pay disclosure.
Over the last
several weeks, more than 60 companies have disclosed investigations into
whether or not they improperly backdated stock options. At least 17 people have
been fired or have quit, and 40 grand jury investigations are underway. At a
corporate-fraud task force meeting this month, Deputy Attorney General Paul
McNulty said that he would be looking into the growing scandal and that “That
one has the potential of being categorized as an emerging threat.”
Backdating
options benefits executives because when executives cash out on stock options,
they get the difference between the current value of the stock and the value of
the stock on the day the option was granted. If the stock option grant is
backdated to an earlier date when the stock was worth less, the executive will
get more money when he or she cashes out.
The current
debate among accounting professionals is whether accounting firms could have
and should have detected and prevented stock options backdating. Already,
accounting firm Deloitte & Touche has been accused of improperly approving
backdating by a former client, Micrel Semiconductor Inc.
Also last
week, SEC Commissioner Paul Atkins suggested that backdating may actually be
good for shareholders because it might allow directors to pay executives lower
salaries "It is cheaper to pay a person with well-timed options than with
cash," Atkins said at a speech, noting that timing the grants gave
companies "the biggest bang for the buck."
For more, see:
“More Details and More Actions in Inquiries on Stock Options,” By BLOOMBERG
NEWS: http://www.nytimes.com/2006/07/06/business/06options.html
“SEC Asks
Regulator to Shelve Alert For Auditors on Timing of Options,”
By DAVID
REILLY of the Wall Street Journal
Lobbying
and ethics
6.
Lobbying firm fails to disclose income from at least 35 clients, raising
questions
Copeland
Lowery Jacquez Denton & White, a lobbying firm under federal investigation
for its unusually close connections to Rep Jerry Lewis (R-Calif.) and former
Rep. Randy “Duke” Cunningham (R-Calif.), failed to disclose “at least $755,000
in income from 17 nonprofit organizations and governmental entities, and
$635,000 from 18 other clients between 1998 and 2005,” according to a
Washington Post report.
The Post
reports that while the firm claims the errors were inadvertent, some experts
have called them “unusual” and that the firm may have been trying to avoid
drawing attention to its lobbying. Many of the clients received generous
“earmarks” after hiring Copeland Lowery.
Among the
reporting errors was an understating of the money received from military
contractor ADCS Inc., Brent R. Wilkes’ company. Wilkes has been identified as
“co-conspirator No. 1” in court documents related to Cunningham, who last year
pleaded guilty to taking $2.4 million in bribes from defense contractors.
Copeland
Lowery was founded in 1992 by former Rep. Bill Lowery (R-Calif.), who has
maintained close ties to both Cunningham and Lewis. Between 1997 and 2006,
Lowery and his clients gave Cunningham's political campaign committees $459,000
and Lewis's committees $917,000, according to the nonprofit Center for
Responsive Politics.
Prosecutors
say that as chairman of the House Appropriations Committee, Lewis has earmarked
hundreds of millions of dollars into federal contracts for companies
represented by Copeland Lowery.
According to
Taxpayers for Common Sense, Lewis earmarked more than $70 million in funds for
Environmental Systems Research Institute Inc., a San Diego area-based mapping
software company, which paid Lowery’s firm $320,000 in lobbying fees. As the
head of the Appropriations Committee, Lewis is in charge of $850 billion in
government funds.
Prosecutors
are also interested in Jeff Shockey, who left Lewis’s office in 1999 to work as
a lobbyist for Lowery, and then went back to work for Lewis last year, receiving
$600,000 in severance payments from Lowery.
Lobbying Firm
Underreported Income
Some Clients
Paid With Public or Tax-Exempt Funds in Bids for 'Earmarks'
By R. Jeffrey
Smith, Washington Post Staff Writer
http://www.washingtonpost.com/wp-dyn/content/article/2006/07/05/AR2006070501656.html
7.
Report documents Democrats’ extensive corporate consulting network
Though much
has been made of late about the connections between Republican consultants and
large corporations, a new study by the Real New Project, a nonprofit
noncommercial investigative reporting organization, has found that Democratic
consultants are also heavily involved with large corporations.
The study,
which examined 25 key Democratic consultants, advertising and public relations
execs and lobbyists, found “a veritable witches’ brew of odious agendas,”
according to its author, Russ Baker.
Baker writes
that these agendas “include helping Wal-Mart improve its image rather than
addressing the practices that created the image problems in the first place,
staving off accountability for companies involved with global warming and
asbestos, squeezing the consumer even further on credit policy, promoting
wasteful military/homeland security boondoggles, fighting off universal health
insurance and affordable prescription drugs and much more. Democrats on K
Street are increasingly partnered in their influence-peddling and spin machine
firms with Republicans.”
Baker also
notes that: “Many of the Democratic consultants cited in the Real News Project
report worked in the Clinton-Gore administration and continue to have close
ties to leading Democrats, from Hillary Clinton to Harry Reid. They are likely
to help whoever gets the Democratic nomination set her or his platform and
rhetoric.”
For the full
story, see: http://realnews.org/rn/content/25demconsultants.html
This
Week’s Action Item
Support
public funding of elections
Now that the
Supreme Court has reaffirmed that spending limits are an unconstitutional
infringement on the First Amendment, the importance of public funding of
elections has become even more important as the best way to limit the polluting
influence of corporate money in politics.
As This Week’s
Action Item, we encourage you to check out the new “Voters First” pledge
unveiled by Common Cause, Public Campaign Action Fund, Public Citizen, and the
U.S. Public Interest Research Group (US PIRG)
The “Voters
First” pledge, which the groups will ask all congressional candidates to sign,
includes “specific policies to make elections fair for all, restore
congressional accountability, and protect voters’ right-to-know. Activists will
use the pledge in congressional districts across the country to press
candidates for federal office to support a comprehensive agenda to clean up
Congress.”
Specifically,
The Voters First Pledge calls on candidates to put voters ahead of lobbyists by
supporting legislation to:
1. Make
Elections Fair. Establish and enforce campaign spending limits by providing a
set amount of public funding for all candidates who agree to take no private
contributions.
2. Restore
Accountability. Pass and enforce meaningful new restrictions on gifts and
travel from lobbyists and other powerful interests for members of Congress.
3. Protect
Voters’ Right-To-Know. Require full disclosure on the internet of all
lobbyists’ contributions and any fundraising help members of Congress get from
lobbyists.
To find out
how you can get involved see: http://www.commoncause.org/site/apps/nl/content2.asp?c=dkLNK1MQIwG&b=194883&ct=2673077
Help
spread the word about The People's Business
We encourage
you to tell everyone you know about the Citizen Works book, The People's
Business and to distribute promotional flyers locally. Flyers are available
online, or if you would like to have some flyers mailed to you, please e-mail news@citizenworks.org.
The People's
Business, which is available in stores everywhere, examines the very nature of
corporate power, presenting a range of strategies to curtail it, explaining how
ordinary people can restore citizen control. Bringing together the
recommendations of the Citizen Works Corporate Reform Commission—a coalition of
leading authors, activists, scholars, and professionals—The People's Business
is a vital, clearheaded plan for strengthening individual rights, transforming
corporations into engines of public prosperity, and creating a sustainable,
life-respecting society where the people have the power.
Bolstered with
relevant history and examples, The People's Business is a lively book that will
appeal both to deeply-committed long-time activists looking for a coherent
approach in the struggle for corporate accountability as well as thoughtful
citizens everywhere who may be looking for immediate measures that serve as
effective means of corporate reform.
It is our hope
that The People's Business will serve as an important tool in educating people
about what they can do to challenge corporate power. But it will only be an
important tool if people actually read it. That's why we need your help in
spreading the word!
Why not pick
up your copy at a bookstore today if you haven't already?
MAKE YOUR
VOICE HEARD
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