As Congress, the Securities and Exchange Commission, and investors look more closely at corporate conduct—and misconduct—companies are making substantial changes to their board of director programs, plans, and policies
According to consulting firm Hewitt Associates, 29 percent of 70 large companies surveyed plan to increase the percentage of outside directors in 2003. By comparison, just 12 percent of companies added to the percentage of outside directors in 2002.
“There is a struggle taking place between the growing need for qualified directors and the reluctance by some candidates to join boards due to increased time requirements and potential reputational and financial risk issues,” said Michael Powers, leader of the executive-compensation group at Hewitt Associates.
The upshot? Powers said it’s getting tougher to land qualified board members, particularly candidates who are standing CEOs or have deep financial experience. “This, in turn, will impact outside-director compensation,” he noted.
So, what are the most common ways companies compensate outside board members? Number one on the list is an annual retainer (91 percent), followed by equity compensation (87 percent), committee-chair fees (78 percent), and board-meeting fees (76 percent).
Of the companies planning to make changes to outside-directors pay, 78 percent said it was in recognition of the greater demands on directors and 33 percent attributed it to the competitive market for highly qualified board members.
The survey also indicated that companies have made huge changes when it comes to their compensation.
Virtually all of the companies that participated (91 percent) have only outside directors sitting on their compensation committees. In addition, 89 percent of the companies’ compensation committees now have written charters, which include the committee’s purpose (98 percent), duties and responsibilities (98 percent), and reporting relationship to the board (81 percent).
Even so, a number of these charters are still coming up short in a few key spots. For example, 61 percent of the committees are not subject to an annual performance evaluation through their written charter, 31 percent don’t have a documented executive-compensation philosophy, and 31 percent don’t have a policy requiring the compensation committee to be made up of outside directors only.
“There’s no question that boards are headed in the right direction with formal compensation-committee charters,” added Powers. “However, recent proposals by the New York Stock Exchange require that the compensation committees of NYSE-traded companies have an annual performance review, a documented compensation philosophy for executives, and an outside-director requirement. So, there’s clearly a lot of room for improvement in these areas for many organizations.”
Swartz Hit with Another Charge
Mark Swartz has more legal troubles.
The former Tyco International Ltd. chief financial officer was indicted in New Hampshire on federal tax-evasion charges, according to published reports.
Swartz is accused of failing to report a bonus of about $12.5 million from Tyco and evading federal taxes of almost $5 million for the tax year 1999, according to Bloomberg.
If convicted, Swartz faces up to five years in prison and a fine of up to $250,000, according to the Associated Press.
In September, Swartz and former Tyco chairman L. Dennis Kozlowski were indicted for allegedly stealing $170 million from the conglomerate and pocketing $430 million from fraudulent sales of Tyco stock.
Swartz left Tyco in August.
BellSouth Changes Accounting Method
On Wednesday BellSouth Corp. said it will take a onetime charge of about $500 million during the first quarter of 2003 due to a change in its method for recognizing revenues and expenses in its directory-publishing business.
“The change in method relates solely to the timing of the recognition of revenues and expenses and does not affect the amounts recognized,” the company noted in a press release.
BellSouth’s management said the company will change from the issue basis method to the deferral method.
The issue basis method recognizes 100 percent of the revenues and direct expenses at the time the directories are published and delivered to end users.
Under the deferral method, revenues and direct expenses will be recognized ratably over the life of the related directory, generally 12 months, the company added.
CEOs: Recession Over
Most chief executive officers expect the economy to grow at the same rate this year as it did last year, according to a survey of the 180-member Business Council.
Most of the surveyed CEOs also believe that President Bush’s proposed tax cuts will boost economic growth.
More specifically, 72 percent of the CEOs expect the economy to grow at about 2.4 percent this year, the same as 2002. And 75 percent said corporate profits will grow about the same as or less than last year.
More than half (56 percent) believe the economy has emerged from the recession.
What is the biggest factor threatening to impede growth this year? “Geopolitical events” were cited at the top, followed by weak economic growth overseas and higher energy prices.
Interestingly, most of the executives insisted that the prospect of war in Iraq did not affect their plans for this year.
Moreover, CEOs said they aren’t concerned about inflation. About 71 percent said they expect the consumer price index to rise by 1.1 percent to 2 percent this year. But this also means they will have trouble raising prices.
However, 60 percent expect wage growth to match last year’s 3.2 percent hike, putting a further strain on profits if they are unable to pass on rising costs to their customers.
- About 63 percent predict the unemployment rate would end the year between 5.6 percent and 6.2 percent. The percentage of unemployed U.S. workers fell to 5.7 percent in January.
- 64 percent believe the increase in health-care and other employee costs is likely to accelerate this year.
- Worse, 86 percent said they expected the increase in those costs to be higher within their own companies.
U.S. Pension Plans Bundle to Cut Costs
A large number of pension plan sponsors in the $25 million to $250 million asset market that have already bundled the investment management and administration of their defined contribution (DC) plans are now also bundling these functions for their defined benefit (DB) plans, according to a study by Greenwich Associates.
“This is an entirely logical extension of the experience that corporations have noted, and, largely, enjoyed, in the evolution of their DC plans over the last 20 years,” said Greenwich consultant Chris McNickle.
The primary motivation for hiring a bundled DB services provider is “efficiencies and cost savings,” according to funds Greenwich Associates interviewed.
The next-highest-rated factor is “improved quality of vendor management and overall service.”
The lowest-placed motivation is “easier management for pension fund staff.”
Meanwhile, education and advice are increasingly becoming important to plan sponsors.
According to the survey, 55 percent of pension funds with between $25 million and $250 million in assets now offer an Internet tool for participant education, and 22 percent of those who do this also provide advice over the phone or through advisers (either in person or at seminars).
The survey also shows that a majority prefers to rely on the proprietary tools of their 401(k) providers rather than reaching out to third parties. Whereas three-quarters of funds in this market segment that do offer Internet advice use their 401(k) providers to deliver it, between 20 percent and 35 percent either additionally or exclusively make use of such outside entities as Morningstar, Financial Engines, and Standard & Poor’s.
Other findings from the survey:
- Although just 4 percent of companies in the $25 million to $250 million pension asset group are using cash balance plans, the percentage is far higher at the top end of this segment: Among plans with assets of $201 million to $250 million, as many as 15 percent do so.
- Most small to medium-sized plans already offer most core asset classes. For example, more than 85 percent offer large-cap value, large-cap growth, and international equity funds, and more than 70 percent currently offer balanced, small-cap growth, and small-cap value funds, as well as actively managed core equity.
- A number of companies are expanding their investment menus. About 15 percent of sponsors are seriously contemplating the addition of a “lifestyle” fund (offered by as many as 40 percent of very large funds), 12 percent a small-cap value fund, 8 percent a small-cap growth fund, and 8 percent a self-directed brokerage window.
- Just 40 percent of funds in the $25 million to $250 million range currently offer a passive domestic stock option.
Wal-Mart Stores Inc. said Charles M. Holley was named a senior vice president and controller on January 21, according to an SEC filing. The world’s largest retailer said Holley would be its principal accounting officer. The filing didn’t identify Holley’s current position, but in prior press releases he has been referred to as the chief financial officer of Wal-Mart International.
Morgan Stanley issued $2 billion of 10-year notes, part of a three-part deal that will also include euros and sterling, according to reports. The notes were priced to yield 5.349 percent, or 147 basis points more than comparable Treasuries. The paper was rated Aa3 by Moody’s and A-plus by Standard & Poor’s.