The Economy

I, Kozlowski

8-K documents reveal the classy world of Dennis Kozlowski. Meanwhile: musicians say they're shocked, shocked by the shabby accounting in the music ...
John GoffSeptember 27, 2002

Disclaimer: While the entries in GW/BW are based on actual news items, some of the people, persons, events, and quotes in this article are fictional. Other stuff I just made up.

Although there’s considerable debate among readers as to whether this column qualifies as a humor piece, it is intended as such.

Please, no lawsuits.

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1. Disney Shareholders

This week, the Walt Disney Co. held a board of directors meeting. Before the convening, many observers believed the get-together would result in substantial changes in the company’s corporate governance.

Indeed, some institutional investors have been clamoring for some serious changes at Disney. While Disney’s board ultimately decided to merely add two more members to the director’s roster, it appears that the company is taking governance issues very seriously these days.

Bear in mind that in early September, hedge fund manager Herb Denton of Providence Capital hosted a meeting among a large number of institutional investors. At the gathering, the portfolio managers discussed corporate-governance issues they believe Disney should consider.

Among their recommendations: separating Eisner’s Chairman and CEO titles. Another investor group, however, suggested running the two titles together, noting in a press release that chairmanceo “has that certain something.”

In August, Disney admitted that three of its independent board members had adult children employed by the company, receiving salaries ranging from $81,863 to $152,608. Another independent board member’s wife is employed at Lifetime Entertainment Television, a cable network half-owned by Disney. In addition, the company reportedly maintains a luxury tree house in the South Pacific for members of a company-employed family. All are thought to be Swiss nationals.

2. Carpenters

In an interview with Bloomberg this week, SEC Chairman Harvey Pitt said shareholders should be given the opportunity to vote on whether companies treat stock options as an expense.

Expensing options “is a topic of major concern to people, and I think shareholders should have the chance to express their views on it,” Pitt told the wire service.

Pitt’s statement appears to mark a reversal in policy at the SEC. Until now, the Commission has allowed companies to reject proxy proposals to expense options, saying the issue falls under “ordinary” business exempt from shareholder votes.

In fact, during the past year alone the SEC has permitted seven companies to exclude shareholder proposals on this issue, according to Bloomberg.

In July, for example, the SEC permitted National Semiconductor Corp. to toss out a proxy on the options topic. It even issued the company a “no-action letter,” which means the SEC won’t take enforcement action if a company does what the agency is permitting.

Pitt’s comments might bring the issue to a head, spurring investors to action. Labor unions, which are big investors in U.S. businesses, have been actively seeking to get publicly traded companies to expense options.

The United Brotherhood of Carpenters, for example, is currently appealing the National Semiconductor decision. Ed Durkin, director of that union’s corporate affairs, told the wire service he believes the change in the SEC’s position will lead to “hundreds” of proxy requests to switch option accounting.

Given the growing importance of such votes, Durken says the carpenter’s union is requesting that shareholder proxies be encased in something more tamper-proof than paper envelopes — “something more sturdy and secure, with, say, a little craftsmanship to it, maybe even a nice grain and all. But I’m just spitballing here.”

3. Computer Associates

Computer Associates (CA) Chief Executive Officer Sanjay Kumar (SK) said an independent review commissioned by the company’s outside directors found the software giant did not violate accounting rules (DNVAR).

Speaking Tuesday to a group of fund managers and shareholder activists at the Council of Institutional Investors’ Fall Conference, Kumar reportedly said the review by PricewaterhouseCoopers — under the direction of Computer Associates board member Walter Schuetze — unearthed no irregularities. The review apparently covered CA’s accounting of the third and fourth quarters of fiscal 1998. Kumar added that accounting used for the period ended March 1998 followed Generally Accepted Accounting Principals.

Later, in a speech at the Pond’s Institute, another CA executive reiterated what Kumar had said, noting that “An outside announting firm has concluded a study and found no accounting irregularities or violation of GAAP by us.” The executive went on to add: “This means the SEC doesn’t have to spend any time looking into any of this stuff because… well, we’ve already done it for them. What a time-saver, I tell you.”

In a related note: CA management announced that the company’s policy of treating worker salaries as operating income has been vetted by the Knights of Pythias.


1. Good Taste

Lawyers and investors are still pouring over Tyco’s 8-K filing last week. One gem that was uncovered in the large document: a note allegedly written by the girlfriend of former Tyco CEO L. Dennis Kozlowski describing a planned party hosted by Kozlowski in Sardinia. The party was for the girlfriend’s fortieth birthday.

According to the memo, guests at the party would be greeted at the door by two gladiators. The note goes on to describe the bacchanalia: “The guests proceed through the two rooms. We have gladiators standing guard every couple feet and they are lining the way. The guests come into the pool area, the band is playing, they are dressed in elegant chic. [There’s a] Big ice sculpture of David, [with] lots of shellfish and caviar at his feet. A waiter is pouring vodka into his back so it comes out his [reproductive organ] into a crystal glass.”

Ah, nothing says “elegant chic” like a vodka-urinating ice sculpture.

2. Older Executives

According to a survey released this week by online career-services center, age discrimination is on the rise in today’s soft executive employment market.

The survey of 340 executives nationwide found that 61 percent of executives believe age discrimination is a greater problem today than it was just one year ago. More than one-third of respondents report encountering age discrimination in their most recent job search.

Within that group, 98 percent said that prospective employers had actually tried to ascertain their ages — illegal in most states, as well as Arkansas. When asked what were tip-offs that a potential employer might be trying to determine their age, respondents cited repeated interview questions about bi-metalism, the Harding Administration, and Pinky Lee. Of that group, twelve percent said interviewers had “half-jokingly” or “semi-seriously” asked if they could blow out all the candles on their birthday cake.

3. Record Industry Executives

On Tuesday, California State Senators Kevin Murray and Martha Escutia opened hearings on accounting in the music industry.

During testimony, a group calling itself the Recording Artists Coalition, led by the Eagles’ Don Henley, recounted how industry accounting practices robbed them of royalty payments.

The musicians told lawmakers they had sold millions of records, but received precious little royalties. In some cases, the musicians said they were told they still owed their record companies money to recoup advances.

When questioned why this is, most of the musicians asserted that accounting in the music industry is based on arcane methods and deliberately vague language.

In fact, Kevin Richardson, one of the Backstreet Boys, testified that, even though his group has sold 70 million records since 1994, its record company “has said we’re still unrecouped. Nothing has changed in the music industry.”

After testifying, Richardson drove off in an ivory-encrusted, Moet-powered limousine, knocking over several fans and passersby.

When confronted by a legislator as to why the Backstreet Boys had not received any money from their CD sales, one record company executive stated: “To be honest, we’re all kind of amazed anybody actually bought these records. I mean, listen to them. This enterprise-wide incredulity has slowed down the payment process.”

Upon wrapping up their week-long investigation into questionable accounting practices in the music industry, the two California senators plan to hold hearings on a purported lack of civility in the real estate business.

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