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Executive Loans Being Eyed

A new study takes a look at executive loan tallies and rationales.
Lisa YoonDecember 30, 2002

In the runaway movie hit, “My Big Fat Greek Wedding,” the family patriarch uses a squirt of Windex as a cure-all for all that ills his brood.

But it’s going to take more that spit and polish to clean up the suspect appearance of executive loans.

According to a new study “My Big Fat Corporate Loan,” by Paul Hodgson of the Corporate Library—an organization that tracks executive-compensation practices—more than one-third of the largest US companies (by market capitalization) have loaned cash to executives. In total, indebtedness at the 508 companies that disclosed loans was $4.5 billion.

While most loans to executives are stock-related, says the report, a “substantial minority” of the loans are used for non-work-related purposes, such as home improvements; helping out with personal cash-flow problems; family partnerships; legal fees; providing lines of credit; and special investments.

The management at Blockbuster Inc., for example, loaned CFO Larry Zine “an amount equal to all federal, state and local income taxes payable in connection with his sign-on bonus,” according to SEC filings. And accessories retailer Claire’s Stores Inc. gave a loan of $250,000 to the chairman’s wife for “personal expenses.”

What’s more, a good portion of corporate loans stretch the meaning of the word “loan.” For instance, some companies issued incentive loans, which are forgiven if certain performance targets are met. “Isn’t that what bonuses are for?” quips Hodgson.

Other relatively common loan classifications include relocation and retention loans—the latter being a loan that is forgiven after the executive remains with the company for a designated period of time.

Not all companies behave badly when handling executive loans, notes Hodgson. Among his examples of upstanding corporations is biotech product maker Cygnus Inc., which has a formal policy against issuing loans to officers unless the hand out meets specific criteria, namely: the loan has to be “approved by the majority of independent, disinterested directors”; must benefit the company in some reasonable degree; is issued on terms that are as favorable to the company as well as the executive; and “could be obtained in an arm’s length transactions with unaffiliated third parties.”

The management of Allegiance Telecom were on the up and up too, when they disclosed the rationale—albeit an unusual rationale—behind a recent executive loan. The loan, which went to group vice president and director Anthony Parella, was issued to repay debt incurred from land purchases. The loan prevented Parella from selling company shares to pay for the real estate, which, according to company documents, seemed in the best interest of shareholders. The Allegiance proxy statement also noted that Parella was selling the land to pay back the loan in full.

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