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June 23, 2003
In Short
In Washington
Congress
1. Senate Committee approves legislation to reverse FCC-led media deregulation.
2. House approves measure to speed SEC hiring
Securities and Exchange Commission
3. SEC says stockholders will be first in line in $1.4 billion settlement
4. Battle continues over proxy access rule
In Business
Executive Compensation
5. CEO pay rises 17% for 2002
6. AICPA chief gets 22% pay raise
Scandal
7. Rite Aid CEO pleads guilty to fraud
8. Ex-Gemstar officials under SEC scrutiny for inflating revenue
9. Sprint pays $5.6 million to settle claims it bilked the government
In the States
Ohio
10. Governor signs law to strengthen state securities regulations
California
11. Assembly Judiciary Committee passes whistleblower protection bill
12. State pension fund establishes standards for CEO pay
Fighting Back
13. International tax justice organization gets underway
14. El Paso shareholder revolt falls short
15. Corporate scandals hit the deck
This Week's Action Item: Tell corporate America a 17% rise in executive pay is unacceptable
In Washington
Congress
1. Senate Committee approves legislation to reverse FCC-led media deregulation
Members of the Senate Commerce Committee last week sent a strong rebuke to the Federal Communications Commission (FCC), approving a bill that would undo much of the dangerous media deregulation that the FCC approved on June 2.
The bill (S. 1046) would reverse the FCC decision to allow a single company to own broadcast outlets that can reach 45% of American households (up from 35%). It would also reverse rules allowing a company to own a newspaper and TV station in the same market.
"Today's vote is a strong, bipartisan repudiation of the FCC's disastrous ruling," said Sen. Fritz Hollings (D-S.C.), a co-sponsor of the bill along with Sen. Ted Stevens (R-Alaska).
The bill's future on the Senate floor is unclear. Likewise, a similar proposal in the House has so far been a non-starter. But public outrage against the media deregulation is clear. The FCC got an unprecedented 500,000 e-mails, postcards, and other communications asking them to preserve what is left of a diversity of voices on media and not loosen ownership rules.
For more, see: "Senate Panel Approves Tougher Media Rules," by Frank Ahrens of the Washington Post: http://www.washingtonpost.com/wp-dyn/articles/A14327-2003Jun19.html
For a group following the issue, see: http://www.democraticmedia.org
2. House approves measure to speed SEC hiring
The House of Representatives unanimously (423-0) approved a bill that would allow the Securities and Exchange Commission to speed up hiring by exempting accountants, economists, and examiners from civil service examinations.
With a major budget increase to $841.5 million for the fiscal year beginning October 1, the SEC will be hiring 800 new professionals in the coming year. So far, it has hired less than 40 percent of the new accountants it needs.
"Reforms and new penalties to deter wrongdoing don't mean anything unless you have the ability to implement and enforce them," said Rep. Richard Baker (R-La.), a sponsor of the bill. "We're hoping to get more cops on the street, to protect and serve America's average investor."
See: "Bill Approved to Speed Up Hiring at SEC" by the Associated Press: http://www.newsday.com/news/politics/wire/sns-ap-sec-hiring,0,3497865.story
Securities and Exchange Commission
3. SEC says stockholders will be first in line in $1.4 billion settlement
The Securities and Exchange Commission last week revealed in a court filing that stockholders who lost money because of fraudulent stock research will be the first to receive money from the $1.4 billion settlement with 10 banks over conflicted analyst research.
However, the SEC also said that it would take at least 17 months before investors see any of the money. The court filing was issued to encourage U.S. District judge William H. Pauley to approve the settlement.
According to the filing, mutual fund shareholders would not get any money back directly, but might get some through their mutual funds. Last in line for a refund will be purchasers of options and other derivatives.
For more, see "SEC Details Analyst Settlement Payout" by Kevin Drawbaugh of Reuters: http://reuters.com/financeNewsArticle.jhtml?type=businessNews&storyID=2937765
4. Battle continues over proxy access rule
Though the Securities and Exchange Commission finished accepting comments on a proposal to make it easier for minority shareholders to nominate candidates for corporate boards on June 13, the issue continues to heat up.
Last week, the Business Roundtable spoke out against the SEC's proposals to bring greater democracy to the proxy election process. CEOs are arguing that they've seen enough reforms, which are costing them time and money to comply with. They think that it's time to see how Sarbanes-Oxley works before moving too fast.
Under current rules, it is very difficult and expensive for minority shareholders to nominate directors. As a result, shareholders almost always only have one slate of directors to choose from -- directors selected by the current management and friendly to their interests. Changing the rules would be a tremendous improvement to shareholder democracy.
Unions and socially responsible mutual funds have been the most vocal supporters of changing the rules, which could give them much more say about how the corporations they own shares in are run.
See: "CEOs dig in against reforms" by Reuters: http://www.chicagobusiness.com/cgi-bin/news.pl?id=9221
In Business
Executive Compensation
5. CEO pay rises 17% for 2002
It was a bad year for the economy and a bad year for the stock market. But 2002 was yet another good year for CEO pay, which rose 17%, according to a study conducted by the Corporate Library.
Based on a study of 1,019 companies, the average total cash compensation for 2002, including salary, bonus, and other direct payments reached a median of $1.2 million in 2002. The median bonus increased 9% to $451,000.
A key rise came in long-term incentive plans, which reward an executive if the company meets a performance goal over several years. The biggest long-term incentives went to ConocoPhillips CEO J.J. Mulva ($15 million) and Mattel CEO Robert Eckert ($8 million).
The biggest cash bonus went to Viacom CEO Summer M. Redstone ($16.5 million). Redstone also received the biggest base salary at $3.6 million.
Examples of executives who did well despite big stock drops include Cendant CEO Henry Silverman ($11.4 million compensation despite a 47% stock price drop) and Home Depot CEO Robert Nardelli ($11.2 million compensation despite a 53% stock drop).
See: "Excellent Year for Executives" by Ben White of the Washington Post: http://www.washingtonpost.com/wp-dyn/articles/A11103-2003Jun18.html?nav=hptop_tb
Also see Corporate Library report, ""What Really Happened to CEO pay": http://www.thecorporatelibrary.com/company_research/reports/CEOpay2002_061903.pdf
Also, see "Take Action on Overpaid Executives," by Los Angeles Times Columnist Kathy Kristof: http://www.delawareonline.com/newsjournal/business/kristof/06222003.html
6. AICPA chief gets 22% pay raise
In light of all the recent scandals and outrages in the accounting industry, you might think that the chief executive of the American Institute of Certified Public Accountants would be sensitive to executive pay issues.
But Barry Melancon, who heads the industry's lobbying and self-regulatory organization, received a 22% pay hike last year, bringing his annual salary to almost $1 million. By contrast, the chairman of the Securities and Exchange Commission earns $142,500. Even the vastly overpaid chairman of the Public Company Accounting Oversight Board earns a mere $556,000 a year.
The AICPA, once well-respected, is struggling for an identity these days. Its industry-policing role has largely been subsumed by the Private Company Accounting Oversight Board (PCAOB), in large part because the AICPA proven flawed in getting some of its members to stick to fundamental and ethical accounting principles.
For more on that conflict, see: "Sarbanes-Oxley offspring squares off against AICPA" by Allen Wan of CBS Marketwatch: http://cbs.marketwatch.com/news/story.asp?guid=%7B0B8D1C63%2D218A%2D4F62%2D8AAF%2DB9966AFAC256%7D&siteid=mktw
For details on Melancon's outrageous pay, see: Accounting group head paid nearly $1 mln last year " by Reuters: http://reuters.com/financeNewsArticle.jhtml?type=governmentFilingsNews&storyID=2964332
Scandal
7. Rite Aid CEO pleads guilty to fraud
Martin L. Grass, the former Rite Aid CEO who presided over a $1.6 billion earnings restatement, last week pleaded guilty to fraud and other charges in connection to a plan to artificially inflate the drug store chain's earnings between 1996 and 1999. He could face eight years in prison and more than $3.5 million.
Rite Aid inflated its earnings through a complex scheme where the company improperly classified the costs of closing old drugstores and manipulating credits from suppliers. Prosecutors claim that Grass helped engineer this fraud and then hid information about business dealings from auditors and board members alike.
Grass's guilty plea comes a week after Rite Aid's former CFO, Franklyn M. Bergonzi, pled guilty to fraud.
One of the reasons that prosecutors were able to build a successful case against Grass was that they were able to get Grass making incriminating statements on tape. Without that evidence, it is unlikely he would have pleaded guilty. Prosecutors likely won't be so lucky in other complex fraud cases.
For more, see "Ex-Rite Aid CEO Grass Pleads Guilty to Fraud," By David Morgan of Reuters: http://story.news.yahoo.com/news?tmpl=story&u=/nm/20030617/ts_nm/crime_riteaid_dc_23
Meanwhile, former Rite Aid shareholders will start receiving checks totaling $140 million in the next few weeks, part of an earlier $334 million settlement fund from a class action suit brought against Rite Aid and its former auditor, KPMG. For more on that story, see "Rite Aid Faces Huge Costs After Scandal" by Mark Scolforo of the Associated Press: http://story.news.yahoo.com/news?tmpl=story&u=/ap/20030620/ap_on_bi_ge/rite_aid_2
8. Ex-Gemstar officials under SEC scrutiny for inflating revenue
The Securities and Exchange Commission is investigating whether two former executives of Gemstar-TV Guide fraudulently inflated revenue and made false predictions in an effort to drive up the stock price.
Last week, the SEC accused company founder Henry C. Yuen and former CFO Elsie M. Leung with engaging in "round trip" transactions where it paid money for phony trades and then got the money back, inflating revenue without transacting any meaningful business. The SEC also accused Yuen and Leung of falsely talking up the prospects of the company's on-screen program guide business
See "S.E.C. Says Ex-Gemstar Officials Used Deception to Inflate Revenue," by Saul Hansell of the New York Times: http://www.nytimes.com/2003/06/20/technology/20GEMS.html
9. Sprint pays $5.6 million to settle claims it bilked the government
Though WorldCom has been in the news lately as a particularly undeserving government contractor for receiving a deal to build wireless networks in Iraq after engaging in massive accounting fraud, last week another telecom company - Sprint - also revealed some rather dubious credentials for government work.
The long-distance telephone provider last week agreed to pay $5.6 million to settle charges it overcharged the federal government for services. The charges were related to fees that the telephone companies pays to local carriers for linking customers to the telephone network.
The allegations came from a lawsuit filed by telecom specialist John Russo, who used the whistleblower claim in the False Claims Act to sue as a private individual on behalf of the United States.
For details, see http://www.usdoj.gov/opa/pr/2003/June/03_civ_369.htm
In the States
Ohio
10. Governor signs law to strengthen state securities regulations
Ohio Governor Bob Taft last week signed a new securities law that will increase penalties for white-collar crimes and lengthen the statute of limitations for both civil and enforcement actions. The bill will also prevent corporations from improperly influencing accountants who audit their books.
"The law provides new protections to Ohio investors and will help build consumer confidence in small public companies, the backbone of our economy," said Governor Taft.
California
11. Assembly Judiciary Committee passes whistleblower protection bill
A bill that would provide new protections for corporate fraud whistleblowers passed through the state Assembly Judiciary committee last week, clearing the way for an Appropriations Committee vote.
The bill, SB 777, sponsored by State Sen. Martha Escutia, would also create the nation's first 1-800 whistleblower hotline, which would give employees confidential access to the attorney general's office. Additionally, the bill will fine corporations who withhold information about financial fraud $1 million.
"SB 777 will ensure that employees can alert the public to corporate dangers without fear of retribution," said Doug Heller, of the Foundation for Taxpayer and Consumer Rights, a California group supporting the bill. "Stopping corporate fraud before it does its damage will do more than just save investors' money and workers' jobs, it is a defense shield for the economy."
The bill is similar to legislation passed by the legislature last year and vetoed by Governor Gray Davis (S.783). However, it has some modifications that Governor Davis said would make him support the bill.
For more, see the Foundation for Taxpayer and Consumer Rights: http://www.consumerwatchdog.org/corporate/pr/pr003415.php3
12. State pension fund establishes standards for CEO pay
The California Employees' Retirement System, Calpers, last week announced it would establish standards for executive pay in companies where it invests and use its shares to vote against any pay plans that award more than 5 percent of total equity compensation to the top five executives.
Calpers, with assets of $137 billion, is the largest and one of the most active state pension funds in the nation. The fund managers hope that they can help to curb excesses of executive pay, which they say harm both investor confidence and stock returns.
"Poorly designed compensation packages are having a disastrous impact on companies and shareowners by emphasizing short-term or self interested behavior," said Sean Harrigan, President of CalPERS Board of Administration. "This plan will help curb the abusive practices by aligning corporate management with its owners and enhancing long-term superior performance."
The state teacher's pension fund is scheduled to consider the proposal next month.
For details, see: http://www.calpers.ca.gov/whatsnew/press/2003/0617a.htm
Fighting Back
13. International tax justice organization gets underway
Building on discussions at the World Social Forums of Florence and Porto Alegre, 20 organizations from 15 countries have joined forces to launch a "Global Tax Justice Network" with a "declaration for tax justice."
The Network is focused on curbing the problem of international corporate tax evasion and the rise of tax havens. Fierce international competition has driven corporate tax rates down around the world. The result is that corporations are keeping more and more money from governments.
In the United States, for example, more and more companies are using offshore tax havens, as Citizen Works has documented. Some are outright reincorporating in places like Bermuda and the Cayman Islands, saving tens of millions in their annual tax retuns.
The Network plans to fight "ruinous tax competition" through intensified co-operation, greater transparency, and taxing capital income in the home country of capital owners. The group is also organizing a road show of national presentations.
For more information, see http://www.taxjustice.net
14. El Paso shareholder revolt falls short
2003 has been the year of the shareholder, with more than 1,000 shareholder resolutions filed at major companies. At El Paso Corporation, it almost became the year of the shareholder takeover.
One particularly motivated and wealthy shareholder, Selim K. Zikha, attempted to get shareholders to elect a whole new board of directors in response to the company's disastrous performance (share price fell from $70 to a low of $3).
But despite spending an estimated $5.9 million on the proxy election, Zikha's slate was defeated by the incumbent slate of directors, proving how difficult it is to effect any change in the board of directors at a large corporation. The company spent an estimated $10 million soliciting shareholder votes for the current board of directors.
The SEC, however, is considering changing the rules to make it easier for minority shareholders to nominate directors.
See "El Paso shareholders reject dissident slate of directors" by the Associated Press: http://www.usatoday.com/money/industries/energy/2003-06-17-el-paso-vote_x.htm
15. Corporate scandals hit the deck
We've all seen the playing cards with Iraq's "most wanted." But now there's another set of cards with a different set of images -- the perpetrators of corporate crime, fraud, and abuse.
A group of Atlanta entrepreneurs have created "The Stacked Deck," which features on its cards some of corporate America's most-wanted executives, like Kenneth Lay, Dennis Kozlowksi, and Bernie Ebbers.
"We wanted to do something about it other than sit around a dinner table, drink wine and complain," said Douglas Quinby, who by day is a marketing director for J.R. Mayhew, a midsize technology company.
For details, see http://www.thestackeddeck.com
This Week's Action Item
Tell corporate America a 17% rise in executive pay is unacceptable
The Corporate Library has found that despite a bad economy and a bad stock market, 2002 was another banner year for CEO pay, which rose a whopping 17%. Based on a study of 1,019 companies, the average total cash compensation for 2002, including salary, bonus, and other direct payments reached a media of $1.2 million in 2002. The median bonus increased 9% to $451,000.
For anyone who owns stock, now is a good chance to let the companies you own know that these salaries are outrageous. As Los Angeles Times columnist Kathy Kristof suggests in a recent article: "Write to the members of the company's compensation committee, in care of the company's board of directors. The members of the compensation committee are listed in the proxy statement. If the response is inadequate, and the pay remains out of line, vote against those directors when they come up for re-election. Also support shareholder resolutions that seek to reign in executive pay, experts suggest…Stockholders have contributed to bad pay behavior simply by being neglectful in the past, said Nell Minow, editor of the Corporate Library, a corporate governance Web site."
So as this week's action item, contact the members of the compensation committees in companies you own stock (or if you don't own stock, at companies that have been particularly outrageous in the area of CEO pay), and tell them these executive salaries are outrageous, unfair, and bad for the economy.
To see Corporate Library report, ""What Really Happened to CEO pay": http://www.thecorporatelibrary.com/company_research/reports/CEOpay2002_061903.pdf
For more hints, see "Take Action of Overpaid Executives," by Los Angeles Times Columnist Kathy Kristof: http://www.delawareonline.com/newsjournal/business/kristof/06222003.html
Also, see Citizen Works' campaign against excessive executive pay: http://www.citizenworks.org/corp/options/greedoptions.php
United for a Fair Economy also has a lot of great resources on CEO pay: http://www.faireconomy.org, as does the AFL-CIO's pay-watch section: http://www.aflcio.org/corporateamerica/paywatch/
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News summaries based on original reports in other publications are prepared by Citizen Works staff and are not created, sponsored, approved or endorsed by the publications to which the original reports are attributed.
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