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CEO Pay Practices & Delisting Standards and Procedures
Sunday, April 03 2005 @ 06:41 PM EDT

The Salt Lake Tribune is running an article from USA Today on CEO payment packages, called "Company profits may be average but CEO pay packages are still big". I found it useful, both as background, and because it lists a number of organizations that track such things that I was not aware of before:

USA Today reviewed several hundred fiscal 2004 proxy statements filed with the Securities and Exchange Commission and found that some of the biggest compensation winners oversee small companies . . . Across a broad cross-section of companies, there was extensive use of income-boosting retention bonuses, supplemental retirement pay and perks ranging from tax reimbursements to personal use of corporate jets.

   ''Forget restraint,'' says Paul Hodgson, analyst for shareholder watchdog group The Corporate Library. ''After years of moderate gains, it's business as usual.'' . . .

Despite new Nasdaq and New York Stock Exchange rules mandating board autonomy, directors remain largely beholden to management when it comes to compensation. . . .

Many boards try to keep their CEO's pay above median levels, a practice known among pay critics as the Lake Wobegon effect: where most every CEO is considered above average.

It seems, from the article, that SCO is not the only company where pay and stock performance diverged last year. Anyway, I thought you'd like to read this for perspective. If you're like me, you've been wondering why executives at SCO make so much money while the company is being run into the ground.

The article quotes Harvard's Lucian Bebchuk, author of a new book, "Pay Without Performance: The Unfulfilled Promise of Executive Compensation." He says the problem is Boards of Directors are unaccountable to shareholders. You can read the introduction and preface of his book in this PDF. He also wrote an Op Ed piece for the New York Times in January about the Enron settlement, "What's $13 Million Among Friends?" And here's a paper he wrote on pension plans and how executive compensation is not properly analyzed without including pension plans.

It's all quite depressing, because from what Professor Bebchuk writes, it seems you can run a company so badly it goes bankrupt, and there is little or no accountability.

The Corporate Library, also referenced in the article, calls itself "an independent research firm providing corporate governance data, analysis and risk assessment tools." Here's their scandals page. And they have a page on Stock Exchange Standards, too. A link on that page brings you to the independence of board members regulations, mentioned in the article:

1. Independence of Majority of Board Members

NYSE Section 303A(1) of the NYSE Manual would require the board of directors of each listed company to consist of a majority of independent directors. Pursuant to NYSE Section 303A(2) of the NYSE Manual, no director would qualify as "independent" unless the board affirmatively determines that the director has no material relationship with the company (either directly or as a partner, shareholder or officer of an organization that has a relationship with the company). The company would be required to disclose the basis for such determination in its annual proxy statement or, if the company does not file an annual proxy statement, in the company's annual report on Form 10-K40 filed with the Commission. In complying with this requirement, a board would be permitted to adopt and disclose standards to assist it in making determinations of independence, disclose those standards, and then make the general statement that the independent directors meet those standards.

2. Definition of Independent Director

In addition, the NYSE proposes to tighten its current definition of independent director as follows. First, a director who is an employee, or whose immediate family member is an executive officer, of the company would not be independent until three years after the end of such employment relationship ("NYSE Employee Provision"). Employment as an interim Chairman or CEO would not disqualify a director from being considered independent following that employment.

Second, a director who receives, or whose immediate family member receives, more than $100,000 per year in direct compensation from the listed company, except for certain permitted payments, would not be independent until three years after he or she ceases to receive more than $100,000 per year in such compensation ("NYSE Direct Compensation Provision").

Third, a director who is affiliated with or employed by, or whose immediate family member is affiliated with or employed in a professional capacity by, a present or former internal or external auditor of the company would not be independent until three years after the end of the affiliation or the employment or auditing relationship.

Fourth, a director who is employed, or whose immediate family member is employed, as an executive officer of another company where any of the listed company's present executives serve on that company's compensation committee would not be independent until three years after the end of such service or the employment relationship ("NYSE Interlocking Directorate Provision").

Fifth, a director who is an executive officer or an employee, or whose immediate family member is an executive officer, of a company that makes payments to, or receives payments from, the listed company for property or services in an amount which, in any single fiscal year, exceeds the greater of $1 million, or 2% of such other company's consolidated gross revenues, would not be independent until three years after falling below such threshold ("NYSE Business Relationship Provision"). The NYSE proposes to clarify this proposal with respect to charitable organizations by adding a commentary noting that charitable organizations shall not be considered "companies" for purposes of the NYSE Business Relationship Provision, provided that the listed company discloses in its annual proxy statement, or if the listed company does not file an annual proxy statement, in its annual report on Form 10-K filed with the Commission, any charitable contributions made by the listed company to any charitable organization in which a director serves as an executive officer if, within the preceding three years, such contributions in any single year exceeded the greater of $1 million or 2% of the organization's consolidated gross revenues.

The NYSE also proposes to clarify this proposal by adding commentary explaining that both the payments and the consolidated gross revenues to be measured shall be those reported in the last completed fiscal year, and that the look-back provision applies solely to the financial relationship between the listed company and the director or immediate family member's current employer. A listed company would not need to consider former employment of the director or immediate family member.

The NYSE proposes to define "immediate family member" to include a person's spouse, parents, children, siblings, mothers- and fathers-in-law, sons- and daughters-in-law, brothers- and sisters-in-law, and anyone (other than domestic employees) who shares such person's home. The NYSE also proposes that references to "company" include any parent or subsidiary in a consolidated group with the company.

The NYSE further proposes to revise the phase-in of the look-back requirement that the NYSE had previously proposed by applying a one-year look-back for the first year after adoption of these new standards.54 The NYSE also proposes to change all of the look-back periods from five years to three years.55 The three-year look-back would begin to apply from the date that is the first anniversary of Commission approval of the proposed rule change.

Now I understand the import of the following section from SCO's most recently file 10K:

Affirmative Determinations Regarding Director Independence

  The Board of Directors has determined each of the following directors to be an “independent director” as such term is defined in Marketplace Rule 4200(a)(15) of the National Association of Securities Dealers (the “NASD”):  Edward E. Iacobucci, R. Duff Thompson, K. Fred Skousen and Daniel W. Campbell.

They also state that their Board of Directors "currently consists of seven directors and has one vacancy.  Directors are elected at each annual meeting of stockholders to serve until the next annual meeting of stockholders or until their successors are duly elected and qualified.  There are no family relationships among any of our directors, officers or key employees.  The names of our directors, their ages and their respective business backgrounds are set forth below." The four independents are joined on the board by Ralph Yarro, Darcy Mott, and Darl McBride. By process of deduction, I gather they are not "independent directors" as defined in Marketplace Rule 4200(a)(15).

Finally, here and here and here are the procedures for denying a company listing on NASDAQ. It wasn't until I read the first one, Marketplace Rule 4300, that I understood why no one can predict whether SCO will or will not be delisted:

4300. Qualification Requirements for NASDAQ Stock Market Securities

The Nasdaq Stock Market[,] is entrusted with the authority to preserve and strengthen the quality of and public confidence in its market. The Nasdaq Stock Market stands for integrity and ethical business practices in order to enhance investor confidence, thereby contributing to the financial health of the economy and supporting the capital formation process. Nasdaq issuers, from new public companies to companies of international stature[, by being included in Nasdaq,] are publicly recognized as sharing these important objectives [of The Nasdaq Stock Market].

Nasdaq, therefore, in addition to applying the enumerated criteria set forth in the Rule 4300 and 4400 Series, [will exercise] has broad discretionary authority over the initial and continued inclusion of securities in Nasdaq in order to maintain the quality of and public confidence in its market, to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and to protect investors and the public interest. [Under such broad discretion and in addition to its authority under Rule 4330(a),] Nasdaq may use such discretion to deny initial inclusion, [or] apply additional or more stringent criteria for the initial or continued inclusion of particular securities, or suspend or terminate the inclusion of particular securities based on any event, condition, or circumstance [which] that exists or occurs that makes initial or continued inclusion of the securities in Nasdaq inadvisable or unwarranted in the opinion of Nasdaq, even though the securities meet all enumerated criteria for initial or continued inclusion in Nasdaq.

Blake Stowell said Friday, when SCO finally filed the tardy 10K and 10Q that their problems were more bookkeeping issues than scandal:

"We will have done all we can," spokesman Blake Stowell said. "This is not an Enron-like situation. ...It's more in the area of bookkeeping [or] clerical-type error."

We'll see if the NASDAQ agrees.


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