Video"That number was really supposed to help with transparency, because with greater transparency comes greater accountability," says Julie Gozan, director of corporate governance for New York–based Amalgamated Bank. "But it didn't turn out to be the big change we expected it to be."
There was so much confusion over the total compensation number, in fact, that major news organizations, including the Associated Press, Dow Jones, and Bloomberg, often reported different numbers for the very same executive, making it next to impossible for the casual investor to sort through the differences. In advance of the proxy season, AP even put out a 14-page guide designed to help its reporters interpret proxies. The very first boldfaced warning advised reporters that "our totals may differ from what other news organizations report."
Carthage, Missouri-based diversified manufacturing company Leggett & Platt Inc. experienced the confusion firsthand. In a letter sent to the SEC on April 23, the company's general counsel and secretary complained that just about everyone — from AP to the local paper to the proxy advisory firm Glass Lewis — had gotten the CEO's total compensation number wrong. "By the time we saw the [AP] article, our local newspaper had posted it online and residents in our small community were already posting outraged comments," wrote general counsel Ernest C. Jett. It was particularly frustrating, adds CFO Matthew Flanigan, because Leggett & Platt had warned the SEC in an April 2006 letter that investors would zero in on the total compensation number "in the erroneous belief that they now know exactly what a company pays its top executives."
The confusion wasn't just limited to journalists and investors, either. On the other side of the boardroom door, attorneys and others involved in the process say there was chaos related to the summary compensation table, which was required to detail the total compensation of the five top executives, including the top financial executive. "Up until the print button was pushed, every single number was changing," says Brink Dickerson, a partner at Troutman Sanders in Atlanta who collects proxies the way some people collect baseball cards. "Because it's included by reference into other SEC documents, you want it to be right. Close doesn't get you to where you want to be."
One problem with the table was that companies were not required to provide any information on 2005 compensation, which made it impossible for all but the most sophisticated number cruncher to compare. In addition, the definition of what qualified as a bonus changed depending on how the bonus was calculated, which enabled hundreds of companies, including Motorola and grocery giant Kroger, to report a blank line where a bonus figure would normally appear. Instead, the "bonus" often wound up getting sprinkled across several columns in the summary compensation table, making it necessary to read the footnotes to figure out what was really going on.
"It may not have been classified as a bonus under the category established by the SEC, but these guys got bonuses," says Paul Hodgson, senior research associate at The Corporate Library.
And then there were the footnotes. Some stretched on for pages or were printed in what the creator of the comic strip "Dilbert" calls "Enron Beelzebub" typeface — so small that it was necessary to blow it up 250 percent to actually read it. Wachovia, for example, needed three pages of footnotes to describe its executive-compensation program — including former vice chairman Wallace Malone's compensation of $23.6 million, a particularly noteworthy sum given that he left the bank in January 2006. (In fact, Malone's compensation was close to what Wachovia chairman and CEO Ken Thompson made for running the banking giant all year.) The nondisclosure disclosure, which according to one of the footnotes included $320,000 spent on office space for Malone, might have made Dennis Kozlowski jealous. But it's unlikely that any Wachovia investors, even the most sophisticated ones, took the time necessary to dig in.
Purple Prose
Some of that complexity was supposed to be addressed by the CD&A, which, like the more numbers-oriented Management's Discussion and Analysis in the 10-K, was designed to provide a comprehensive discussion on the various facets of compensation. But what investors often wound up with were pages of information that wasn't anywhere close to the "plain English" that the SEC requested when the rules were announced last summer.
Dickerson, who in mid-May had already read close to 400 CD&As, says the language in many was practically identical. "They all say that their compensation philosophy is to attract and retain top talent while at the same time maximizing shareholder value," he says. "I'm still waiting to read the proxy that says, 'We can't afford a compensation consultant so we looked at three CEOs at similar companies and paid our guy more because we think he's worth it.'"
Length had little relation to clarity. Some of the longer CD&As, including IBM's, where the compensation disclosure accounted for two-thirds of the proxy pages, were actually reasonably easy to understand. Meanwhile, Berkshire Hathaway's CD&A, which at under 500 words was among the shortest, was criticized for being overly simplistic. And when it came to really plain English, the reality, says Dickerson, is that only the Fortune 500 came close to concise disclosure, despite the fact that the top 6,000 to 8,000 public companies should have been able to handle the assignment.
Reader Comments» Post a comment