Risk & Compliance

Shareholder Reforms Fall Short, Say Treasurers

''Inimical to good governance,'' says one. Also: Green light for lawsuit on Enron 401(k)s; payrolls expand -- and benefits don't look too bad, eith...
Stephen TaubOctober 6, 2003

The Securities and Exchange Commission’s plan to make it easier for shareholders to elect company directors does not go far enough, according to a group of treasurers and other officials who run some of the nation’s largest pension funds.

The managers insist that the rules, which the SEC is expected to trot out on Wednesday, still heavily favor management since they don’t give shareholders a new voice on the boards, according to The New York Times.

The proposed regulations would enable large shareholders to nominate as many as three directors for the largest boards. But this provision would be triggered only after a two-year process.

“The very notion that there has to be a meltdown first before shareholders can swing into action is inimical to good governance,” said Phil Angelides, the state treasurer of California, at a news conference, according to published account. “Under these rules, you can only run a new slate at WorldCom after the meltdown occurred. It’s like telling a homeowner that they can’t install a home alarm until after their home has been burgled.”

Angelides led a similar group of state treasurers who pressed Richard Grasso to resign from his post at the New York Stock Exchange.

Last week New York state comptroller Alan G. Hevesi said the proposal regarding the boards of directors had created “a false impression of reform,” according to the Times. And according to the Associated Press, Hevesi criticized a “shareholder eligibility standard” where the sponsor, to nominate a board candidate, would need a 3-to-5 percent stake in a company.

And Sean Harrigan, the president of the California Public Employees Retirement System (Calpers), reportedly characterized the proposed rules as “not meaningful reform.” He added, “If the set of rules are weighted down with restrictions, it will turn our voice down to what I believe is an occasional whimper.”

Green Light for Lawsuit on Enron 401(k)s

A federal judge has ruled that employees of Enron can sue former chairman Kenneth Lay and Northern Trust, the administrator for Enron’s 401(k) plan, for failing to protect their investments, according to published reports.

A class-action lawsuit charges that company executives encouraged employees to buy Enron stock for 401(k) plans even as the stock price was falling, USA Today points out.. The stock, which at one time traded above $90, became nearly worthless.

However, in a 329-page order released Wednesday, U.S. District Judge Melinda Harmon did dismiss claims that cited the federal Racketeer Influenced and Corrupt Organizations Act, known as RICO, against a number of other Enron officials. They include former chief executive officer Jeffrey Skilling and former chief financial officer Andrew Fastow, according to the AP. She also dismissed the employees’ claims against a number of banks which backed Enron, including Citigroup Inc., J.P. Morgan Chase, Credit Suisse First Boston Corp., and Merrill Lynch & Co.

In response to Harmon’s decision, Northern Trust said in a statement that “we have fulfilled all of our obligations to the participants in the Enron benefit plan and have acted in accordance with all applicable laws. The decision to deny our motion to dismiss does not imply any wrongdoing.”

Shortly after Enron filed for bankruptcy, the Employee Benefit Research Institute (EBRI) said nearly 58 percent of the assets of Enron’s 401(k) plan was invested in company stock. The judge’s ruling means that current and former Enron employees still have a shot at recovering some of the money they lost in their 401(k) plans.

The ruling could also have wide implications at other companies where the 401(k) assets of employees are heavily invested in company stock. Some benefits professionals speculate that companies may further loosen restrictions on when workers would be able to move retirement-plan funds out of company stock and into other investments.

Payrolls Expand — and Benefits Don’t Look Too Bad, Either

For the first time in eight months, U.S. company payrolls expanded. Businesses in the United States added 57,000 workers in September, the first such increase since January.

In August, according to newly revised figures, payrolls shrunk by 41,000, less than initially reported. The unemployment rate in September held at 6.1 percent.

“This could be the turning point for employment,” said Kevin Logan, a senior market economist at Dresdner Kleinwort Wasserstein, according to Bloomberg. “Firms finally believe that demand is strong enough to lead them to hire more workers.”

The news comes on the heels of a Watson Wyatt survey which reported that most companies seem to be moving away from the kinds of cost-cutting measures that negatively impacted their rank and file — presumably making it easier to attract and retain workers.

Only 18 percent of 358 companies that participated in the survey expect to require employees to pay a greater share of benefit costs next year, compared with 56 percent that did so for the past year. Just 12 percent said they will reduce salary-increase budgets next year (compared with 45 percent); 5 percent said they plan to eliminate or severely cut bonuses (compared with 16 percent); and 6 percent expect to reduce employee benefits (compared with 12 percent).

On the other hand, mindful of the pending changes in accounting for stock options, 41 percent of the companies surveyed have decreased eligibility for participation in long-term incentives, and 39 percent are making changes to their short-term and annual incentives.

SEC Investigating Hawaiian Holdings Tender Offer

Hawaiian Holdings Inc., the holding company for bankrupt Hawaiian Airlines, announced that the Securities and Exchange Commission has opened a formal investigation of the company and several of its officers related to a May 31, 2002, tender offer. The company said it was notified of the probe on September 22 and intends to cooperate fully.

The company had offered to buy up to 5.8 million shares, or as much as 17.5 percent of its outstanding stock, for nearly $25 million. According to Dow Jones, the company said it made a payment of $25 million on July 8, 2002, for the accepted shares.

Boeing Capital Corp., a major Hawaiian Airlines creditor, had criticized the buyback plan, contending that it was designed to enrich management and other shareholders and was inappropriate after the company had received more than $30 million in federal aviation stabilization funds in the aftermath of the September 11 terrorist attacks.

“Members of Hawaiian’s management and their affiliates received more than 69 percent of the payout, which occurred during a period of losses and a declining financial condition at the airline,” Boeing Capital said in a March 31, 2003, press release.

Hawaiian Airlines filed for Chapter 11 on March 21.

Scientific-Atlanta Shuffles Finance Department

Scientific-Atlanta Inc., a maker of communications equipment including television set-top boxes, has shuffled its finance department, promoting at least four key members.

Wally Haislip has been promoted to senior vice president of finance and operations. He will report to Jim McDonald, the company’s chairman, president, and CEO.

Haislip, who joined Scientific-Atlanta in 1989 after 17 years at General Electric, had held the positions of senior vice president-finance, CFO, and treasurer since 1998. Before joining Scientific-Atlanta, he spent 17 years in various financial management positions with General Electric.

As a result of this move, Julian Eidson has been appointed senior vice president, CFO, and treasurer, and will report jointly to McDonald and Haislip. Eidson, who joined Scientific-Atlanta in 1973, has served as the corporate controller since 1978 and most recently held the position of vice president, controller, and principal accounting officer.

Steve Boyd has been promoted to fill Eidson’s previous position and will report to him. And finally, Ward Dickson has been promoted to vice president, worldwide financial operations, reporting to Eidson.

Short Takes

  • Citigroup Inc. said it purchased about 5.6 million shares of stock from chairman Sanford Weill, one day after he stepped down as chief executive. Weill received $47.14 per share, or $264 million.

The company said Weill decided to sell the stock in order to facilitate his financial planning in light of his new stage in life. The company added that it received from the board an exception to the company’s policy on purchasing shares from its employees.

  • The global default rate for speculative-grade debt fell to 5.2 percent at the end of September, according to Standard & Poor’s. The current rate is about equal to the average of 5.17 percent since 1981.

S&P said the decline is mostly due to an easing of lending conditions.

The U.S. speculative-grade default rate came in at 5.92 percent, well below the 7.44 percent recorded in December 2002.

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