Thursday, December 28, 2006
December 28, 2006
And What a Year It Was!
With Sarbanes-Oxley in the rear-view mirror for 4 years now, one would think that this would have been a quiet year for corporate governance developments. To the contrary, it was arguably the most dramatic year of change in recent history. Here is a snapshot of some of the more significant developments:
- The majority-vote movement matured at an incredible pace. Within the span of a single year, over half of the Fortune 500 adopted some form of policy or standard to move away from pure plurality voting for director elections. This trend is likely to continue as it’s the governance change that investors seek the most.
- An area not touched by Sarbanes-Oxley - executive compensation - continued to be inspected under a microscope by both investors and regulators. The SEC adopted sweeping changes to its compensation disclosure rules and investors became more willing to challenge companies that continue outlandish compensation policies. And House Democrats intend to consider executive compensation legislation early in 2007. [Today's WSJ and Washington Post contain articles in which Rep. Barney Frank expresses displeasure over the SEC's recent change in its exec comp rules - and we have announced a January 11th webcast just on these new changes. More on all this next week.]
- More and more hedge funds and private equity funds found “value” in using governance as an entree into forcing management to alter strategic course or to put a company into "play." The recent hiring of Ken Bertsch, a former TIAA-CREF governance analyst who had been working for Moody’s, by Morgan Stanley is an indicator that using governance as a “big stick” is likely to continue.
- The recent sale of the two primary proxy advisory services - ISS and Glass Lewis - at handsome premiums is a pretty good indicator that governance as a skill set can be quite profitable.
- The re-opening of the SEC’s “shareholder access” proposal - spurred by a recent 2nd Circuit decision - was unthinkable a year ago. But it’s now reality.
- The proposed elimination of broker votes in 2008 - via a rulemaking from the NYSE - means that the 2008 proxy season promises to be the wildest yet. But 2007 surely will be wild enough.
One thing we know for sure - we can’t predict what the New Year will bring! Happy Holidays!
Some Thoughts from Professor John Coffee
In an interview with the Corporate Crime Reporter, Professor John Coffee waxes on problems with the McNulty Memo and the Paulson Committee Report.
A Conservative Year for Holiday Cheer
Fried Frank took it easy in this year's annual festive message. Each year, the firm issues an alert at the end of the year which focuses on a true - and zany - government prosecutorial act. No food fraud to report on this year...
Go to United Health Filing with the Securities and Exchange Commission »Go to Previous Item on DealBook »
Wednesday, December 27, 2006
In a statement released Dec. 22, the agency said it is altering the requirements for disclosing the value of stock option awards and giving firms more flexibility in how they report those expenses.
The SEC said the new rules should more closely conform with the reporting of stock option awards under standards in the Financial Accounting Standards Board's rule FAS 123. That rule requires recognition of the costs of stock option awards over the period in which an employee is required to provide service in exchange for the award.
Using this same approach when disclosing executive compensation will give investors a better idea of the compensation earned by an executive or director during a particular reporting period, the SEC explained in its announcement.
Tuesday, December 26, 2006
The falsification of documents is a key issue for the feds in trying to determine which of the scores of backdating investigations they will ultimately pursue as criminal matters. Said Keith Krakaur of Skadden Arps to the Recorder, speaking generally about the investigations: “When there are falsified documents, the government views them as an intent to defraud, because people generally don’t falsify documents unless they’re trying to make things different from reality.” He added: “They view that as intent.”
Apple released a statement in October that “the investigation raised serious concerns regarding the actions of two former officers in connection with the accounting, recording and reporting of stock option grants.” Scheck cites “individuals with knowledge of the case” who say the two officers are former GC Nancy Heinen and ex-CFO Fred Anderson. Heinen left the company in the spring.
The investors argued that Alliance should be held liable because Savage signed a registration statement for a $1 billion Enron bond offering that incorporated the company's false financial statements for 1998 to 2000. Alliance, a New York-based money manager, is now known as AllianceBernstein.
U.S. District Judge Melinda Harmon in Houston rejected that argument after concluding that there was "no evidence that Alliance had any authority to influence, supervise, or determine Savage's actions at Enron," The Wall Street Journal reported. She also said there was no evidence that Savage knew or should have known that he had signed a false registration statement.
Jim Hamilton, an analyst at Wolters Kluwer Law & Business, noted the significance of the ruling in a posting on his Web log. Had the judge held Alliance liable based on Savage's service on Enron's board, "the effect would be to chill the willingness of qualified individuals to serve on boards of public companies as independent directors," Hamilton wrote.
Thursday, December 21, 2006
Go to Article from Bloomberg News via The New York Times »
Wednesday, December 20, 2006
“Obviously, the writers have no idea what a hedge fund is,” McDiligence sniffed in his blog post. “What they should say is that love isn’t like a non-diversified traditional long-only fund.”
He explains (sort of):
"In reality, love is exactly like a hedge fund. Love is a limited partnership structure — it takes a large initial investment, and is largely unregulated. Frequently, it uses an aggressive strategy, relying on large directional bets and substantial amounts of leverage. The plan is to generate significant alpha (using the Lipper Love Average as a benchmark) but it is not uncommon to see a hedge fund or a love relationship with an unsuitably low Sortino ratio, indicating that it has strayed from it’s raison d’etre."
McDiligence even includes a graph, whose shape would be familiar to any securities analyst, suggesting that a pre-nuptial agreement can work like a “put” option for the wary husband- or bride-to-be. “It floors your downside, and there is unlimited upside,” the post reads. “If the love falters or a better substitute arrives, you can walk away with no marginal pain.”
Go to Item from Long or Short Capital »Go to Previous Item from DealBook »
The changes would “eliminate unnecessary requirements while preserving the principles of the standard,” the chairman of the oversight board, Mark W. Olson, said.
The new rule, which is expected to be adopted this spring after public comment, is much shorter than the old standard, coming in at 65 pages rather than 180. It encourages auditors to use their judgment in deciding which internal controls should be reviewed, focusing on controls where the risk of significant misstatements is the highest.
Go to Article from The New York Times »
Tuesday, December 19, 2006
Many boards grappled with one or more of these issues last season, but that doesn't mean they've gone away. If anything, shareholders feel empowered by their progress.
Monday, December 18, 2006
And with companies and financial buyers awash in cash anxiously looking for ways to put their money to work while interest rates remain low and financing is plentiful and cheap, bankers do not expect the wave of hostility to crest any time soon.
Many executives are making unsolicited bids for companies, BusinessWeek says, because they believe they must buy their rivals or risk being bought out as their industries consolidate.
The magazine cites AirTran Airways’ recent unsolicited $288 million bid for Midwest Airlines as an example. AirTran decided to go hostile after Midwest refused to engage in private merger talks. “You can debate the merits of consolidation, but if it happens, no one wants to be left out” AirTran President Robert L. Fornaro told BusinessWeek.
Go to Article from BusinessWeek »
Express Scripts is offering $29.25 in cash and 0.426 of its own shares for each Caremark share, or $58.50 in total — a 15 percent premium on Caremark’s closing price on Dec. 15, Express Scripts said in a press release early Monday.
Pharmacy benefit managers act as the middleman between drug companies and employers that offer drug subsidies to their workers as part of health-care coverage. By acquiring Caremark Rx, which is double its size, Express Scripts would become the largest pharmacy benefits manager in the nation by far.
The takeover bid, which seeks to scuttle Caremark Rx’s agreement last month to merge with CVS, will pit Express Scripts, with a market value of $9.3 billion, against the much-larger CVS, worth some $25 billion.
The offer by Express Scripts is a throwback to the 1980’s in two ways: It is a rare hostile bid that could spark a fierce bidding war, and it relies heavily on debt, some $14 billion. Express Scripts’ $26 billion offer is a vivid illustration of the role that cheap credit is playing in fueling the explosion in takeovers, as historically low interest rates and a flood of available cash have enabled private equity firms to buy out bigger and bigger companies.
The offer comes as somewhat of a surprise, as Express Scripts had widely been considered a takeover target, not an acquirer, because of its small size. Indeed, its bid for Caremark could also put it into play.
The proposed merger between CVS and Caremark received a mixed reception by investors. When it was first announced, shares in both companies tumbled, but they have returned to close to where they started after the deal. In that deal, Caremark received no premium for its shares.
Go to Press Release from Express Scripts »Go to Article from The New York Times »Go to Article from Bloomberg News »Go to Previous Item on DealBook »
Friday, December 15, 2006
Second request have become less common in recent years, according to figures published in a document accompanying Friday’s announcement. In the fiscal years 2000 and 2001, before the antitrust division took up its 2001 Merger Review Process Initiative, about 40 percent of preliminary investigations led to second requests. In 2002 and 2003, that percentage fell below 29 percent. In 2004 and 2005, it stood at 24 percent.
Merger reviews have also gotten shorter. Since the 2001 initiative was announced, the average length of time from the opening of a preliminary investigation to the early termination or closing of the investigation has fallen from about 93 days to 57 days, the Justice Department said.
Go to Press Release from the Justice Department »
Financial sector offerings paid off big, tech stocks are back, and 2007 promises more of the same
The once-moribund market for initial public offerings heated up in 2006, giving savvy investors an opportunity to beat the market by a wide margin. IPOs gained 24% through Dec. 8, vs. a 13% gain for the Standard & Poor's 500-stock index, according to Renaissance Capital in Greenwich, Conn., as the amount of money raised jumped 19%, to $38 billion.
The market looks just as solid going into 2007. And as the economy slows, upstarts with strong growth potential will look more appealing, says David Antonelli, chief investment officer at MFS Investment Management in Boston.
Thursday, December 14, 2006
More than $236 billion in commercial real estate transactions were recorded in the first 10 months of 2006, up from $231.9 billion a year earlier, the Washington-based association said in its Commercial Real Estate Outlook report, released today. Blackstone Group LP's agreement in November to acquire Equity Office Properties Trust, the biggest office landlord in the U.S., for $20 billion, isn't included in the data.
The ability to sell these options, which allow the holder to buy Google stock at a specified price, changes the game for Google employees. As The New York Times reported Wednesday, outside investors are likely to pay more for these options than the employee would earn by exercising it. Even “underwater” options — those with an exercise price above Google’s current stock price — could have some value to outside investors, who may expect Google’s shares to rise, putting the options in the money.
Analysts, experts and columnists described Google’s move in generally glowing terms, calling it “elegant” and suggesting it was a win for both employees and shareholders. But the reaction was not entirely positive. Several people raised the possibility that Google was making it too easy for employees to cash out their options early, undermining some of the usefulness as an incentive.
Go to Article from The New York Times »Go to Item from Tech Trader Daily via Barron’s »Go to Item from Internet Outsider »Go to Item from The Precursor Blog »
Wednesday, December 13, 2006
The statement from the International Swaps and Derivatives Association, Securities Industry and Financial Market Association and the other groups follows what some investors and traders have called suspicious trading in credit derivatives before announcements of takeovers and other events that can change the perceptions of a borrower's ability to meet debt payments.
The groups said they have adequate procedures in place to guard against improper trading in the unregulated market for credit derivatives and other markets including loans that are privately negotiated between banks and investors and not traded over an exchange. They will ``educate'' and ``inform'' members about how to handle information that hasn't been publicly disclosed that could influence markets, they said.
According to MarketWatch, SEC Chairman Christopher Cox said the accounting rules have posed "the biggest challenge" under the law and "without question, it has imposed the greatest cost." The proposed SEC rules would offer management much more flexibility in carrying out audits.
The changes were outlined in a memorandum written by Paul J. McNulty, the deputy attorney general. Under the revisions, federal prosecutors will no longer have blanket authority to ask routinely that a company under investigation waive the confidentiality of its legal communications or risk being indicted. Instead, they will need written approval for waivers from the deputy attorney general, and can make such requests only rarely.
Another substantial change introduced yesterday prohibits prosecutors from considering, when weighing whether to seek the indictment of a company, whether it is paying the legal fees of an employee caught up in the inquiry.
The revised guidelines follow criticism from legal and business associations and from federal judges, senators and former top Justice Department officials that the tactics used in recent years against companies like the drug maker Bristol-Myers Squibb and the accounting firm KPMG were coercive and unconstitutional.
WASHINGTON (Reuters) -- The Securities and Exchange Commission said Tuesday it is moving to increase the minimum net worth required for an investor to be eligible to invest in hedge funds to $2.5 million from $1 million.
At an open meeting of the investor protection agency scheduled for Wednesday, the proposal is expected to be voted on and then undergo a public comment period, SEC Chairman Christopher Cox told reporters at a briefing.
Final action by the commission would come later.
"We are going to be lifting the accredited investor standard from where it has been since 1982 at $1 million of net worth to $2.5 million," Cox said.
Tuesday, December 12, 2006
Both memoranda were designed to serve the same basic function: to help federal prosecutors decide whether to charge a corporation, rather than or in addition to individuals within the corporation, with criminal offenses. Under the Thompson memo, in deciding whether a corporation was cooperating with an investigation, prosecutors were allowed to consider two controversial factors: 1) whether a company would agree to waive the attorney-client privilege in regard to conversations had by its employees, and 2) whether a company had declined to pay attorneys’ fees for its employees.
The McNulty Memo requires that when federal prosecutors seek privileged attorney-client communications or legal advice from a company, the U.S. Attorney must obtain written approval from the Deputy Attorney General.
The new memorandum also instructs prosecutors that they cannot consider a corporation’s advancement of attorneys’ fees to employees when making a charging decision. An exception is created for those extraordinary instances where the advancement of fees, combined with other significant facts, shows that it was intended to impede the government’s investigation.
The Thompson memo was pointedly criticized by business groups and civil liberties organizations, who claimed that it eviscerated individuals constitutional rights. In July, federal judge Lewis Kaplan slammed the Thompson Memo in a case involving allegedly illegal tax shelters created by former KPMG employees. For more background on the Thompson Memo, check out this WSJ.com exchange between a former U.S. Attorney and two white-collar defense lawyers.
The WSJ today has a front page story about "How Backdating Helped Executives Cut Their Taxes." A later section carried the story "Another Consequence of Backdated Options: Stiff Tax Bills." Finally. The essence of the options backdating scandal, backdating either exercise dates or option grant dates, is a tax scam. What is disappointing is the degree to which senior executives in major companies thought that cheating on taxes was legit. The second story, by Theo Francis, explains why so many companies are cleaning up their past back dated options -- a 60% tax penalty that can be avoided if unexcersied, back dated options are repriced before year end.
BusinessWeek.com, December 12, 2006, 12:00AM EST
The last year has been notable for a string of massive leveraged buyouts that have extended the limits of what private equity firms can do. Kohlberg Kravis Roberts bought hospital company HCA for $33 billion, beating the record that KKR established in 1988 with the RJR Nabisco deal (see BusinessWeek.com, 11/10/06, "The Dark Side of the M&A Boom"). The record was broken again in November with The Blackstone Group's $36 billion acquisition of Sam Zell's Equity Office Properties Trust (see BusinessWeek.com, 12/08/06, "Private Equity: What's the Limit?").
But in a year of record deal volume (see BusinessWeek.com, 11/07/06, "The Money Behind the Private Equity Boom"), the vast majority of transactions are much smaller. Buyout pioneer Thomas Hicks specializes in those smaller deals, which he says can be at least as profitable as bigger LBOs that dominate the headlines. On Dec. 8, his Hicks Holdings teamed up with The Watermill Group, a private equity firm in Lexington, Mass., to acquire Latrobe Specialty Steel of Latrobe, Pa., for $215 million in cash and $35 million in assumed debt. The company sells steel to civilian and military aircraft makers.
Monday, December 11, 2006
“It’s not even close,” writes Paul Kedrosky in his Infectious Greed blog:
Sure, it’s the highest it’s been in four years, but you might equally write that VC funding is still 36 percent off its dotcom peak, or that it is more or less flat year-over-year. Instead we have this irresponsible stuff.
Go to Article from The Financial Times via MSNBC.com »Go to Item from Infectious Greed »
Woody, for all you non-athletic supporters, is Woody Hayes, the iconic coach for whom millions of Buckeye fans are grateful never became a lawyer. Woody’s son is Steven B. Hayes, a municipal judge in Columbus. Thanks for the tip, Archie!
"We were not in possession of any material, non-public information at the time of the trade," the Perseus-Soros Biopharmaceutical Fund said in a statement.
Deloitte & Touche will pay $210 million and the banks will pay $245 million under a settlement approved Nov. 10 by Judge Lawrence McKenna of Federal District Court in New York. The amount each bank owes is confidential. Adelphia filed for bankruptcy in 2002 after an accounting fraud that led to the criminal convictions of its founder, John J. Rigas, and his son Timothy.
Investors had claimed losses as high as $5.5 billion, saying that Deloitte & Touche and the banks contributed to the fraud. Adelphia sold its cable properties to Comcast and Time Warner for $16.7 billion in July.
Friday, December 08, 2006
"This is something we are giving a lot of thought and attention to," Paulson told CNBC's Maria Bartiromo. "There have been major changes in the capital markets over the past five to ten years, including big increases in private pools of capital."
Paulson said they are examining hedge funds in three areas, including: investor protection; systemic risk, or ensuring that there is enough liquidity in the system; and transparency between the hedge funds and those lending them money.
The Securities and Exchange Commission adopted a rule in 2004 ordering most hedge fund advisers to register with the investor protection agency. But a federal court threw out the rule in June.
Since the SEC's registration rule was struck down, the agency has been developing scaled-back rule proposals, including one to raise the minimum net worth an investor must possess to be allowed to invest in hedge funds. That proposal is expected to come before the SEC for a vote next week.
The average annualized performance of hedge funds 14.03%, according to the HFRI Fund Weighted Composite Index. The typical hedge fund charges investors a 2% management fee, along with a 20% share of profits.
Go to News Release from Towers Perrin »
Go to Report from The 451 Group’s TechDealmaker »
One case has been closely watched on Wall Street. It is a class-action lawsuit against more than a dozen leading investment banks and institutional investors that took part in syndicates to underwrite the initial public offerings of hundreds of technology companies in the 1990s.
The suit, brought by purchasers of the stocks, charges that the sharing of information among the underwriters and the way in which they allocated shares to their customers amounted to an antitrust conspiracy.
While the eventual outcome of the case is uncertain, there is little uncertainty about the second antitrust case the court accepted. The question in that case, Leegin Creative Leather Products v. PSKS, No. 06-480, is how antitrust law should treat the minimum prices that manufacturers require retailers to charge for their products.
In a 1911 case known as the Dr. Miles precedent, this practice of “resale price maintenance” was deemed always illegal under the Sherman Act. The case asks the justices to re-evaluate the precedent in light of modern economic theory, and instead to make these arrangements subject to case-by-case analysis under what is known as the rule of reason.
In other areas of antitrust law, the court has steadily backed away from a categorical view of antitrust liability and is highly likely to use this case as a vehicle for doing the same for resale price maintenance.
Specter was joined by former Attorney General Richard Thornburgh and lobbyists from a number of business and legal groups, who said that forcing a change in the DOJ's policy could lead the Securities and Exchange Commission, the Internal Revenue Service and other government agencies to review their policies on privilege waivers.
Specter's move comes as Deputy Attorney General Paul McNulty is leading an internal review of the government's corporate-fraud prosecution policies in the wake of a concerted lobbying effort by business groups and a court decision in New York that found one of the policies to be unconstitutional.
At issue is the way federal prosecutors have interpreted provisions of the so-called Thompson memo, issued in 2003 by then-Deputy Attorney General Larry Thompson. In the memo, Thompson lists a number of factors prosecutors should consider when deciding whether to indict a company for corporate fraud. Among them: whether the company has waived the attorney-client or work-product privilege and granted prosecutors access to internal investigations prepared by the company's lawyers. (Thompson is now general counsel of PepsiCo.) Given that companies under criminal indictment are often driven to bankruptcy -- most notably exemplified in the case of accounting firm Arthur Andersen -- the DOJ's critics say corporate defendants are left with little choice but to waive their privilege and turn over documents relating to internal investigations. Those documents often become public through court proceedings and provide fodder for shareholder class actions.
Thursday, December 07, 2006
The months-long inquiry in South Korea has already led Lone Star to cancel a deal to sell its stake in Korea Exchange Bank to Kookmin Bank for $7.3 billion, which would have allowed the firm a highly profitable exit. In deciding to scrap the deal last month, Lone Star cited the uncertainty created by the open-ended investigations conducted by what it called “politically motivated'’ prosecutors.
Lone Star defended its acquisition of the Korean bank on Thursday, calling the prosecutors’ latest findings “the same old broad conspiracy theory that never made any sense and still is not supported by any hard evidence.” The notion that Korea Exchange Bank was sold for a bargain price is “absurd,” Lone Star said.
Go to Article from Reuters via The New York Times »Go to The Financial Times’s FT Video »Go to Press Release from Lone Star Funds via PRNewswire »
Go to Press Release from Whirlpool via PRNewswire »
Wednesday, December 06, 2006
There was more good news for the banks in Tuesday’s ruling. The decision raises the prospects that earlier settlements in the case, in particular a $425 million agreement with J.P. Morgan Chase and a $1 billion guaranteed proposed deal with the issuers of the new shares that was still pending approval by the judge in the case, could be nullified.
Described by many as the largest consolidated securities class-action case ever, the I.P.O. lawsuit involved more than 300 individual investors and 309 issuers.
The ruling was a devastating blow to the embattled securities class-action powerhouse Milberg Weiss Bershad & Schulman, which is a co-leader for the plaintiffs. The firm has been operating under a cloud for months after it was indicted by a federal grand jury in Los Angeles in May. The firm and two of its named partners are accused of making $11.3 million in secret payments to entice people to serve as plaintiffs in more than 150 lawsuits.
Download the Appeals Court Ruling (PDF) »Go to Article from The New York Times »
Go to Article from Bloomberg News via The Los Angeles Times »
Tuesday, December 05, 2006
The New York Times reports that a second S.E.C. official, who is also on Tuesday’s witness list, asked to be removed from the Pequot inquiry because of his serious misgivings about decisions made on the case. The Wall Street Journal writes that Ms. Thomsen will tell the committee that Mr. Aguirre “resisted standard supervision, and ignored the S.E.C.’s chain of command.”
Like Mr. Aguirre, S.E.C. investigator Eric Ribelin believed that the inquiry “was not handled right,” Senator Arlen Specter, the chairman of the Judiciary Committee, told The Times. “Something smells rotten here,” Mr. Ribelin wrote in an e-mail message to an S.E.C. supervisor last year.
Mr. Aguirre, who led the hedge fund investigation until he was fired last year, has told members of Congress that senior S.E.C. officials blocked him from taking testimony from Mr. Mack. S.E.C. officials deny that their probe of Mr. Mack was blocked by politics. Ms. Thomsen said in testimony prepared for today’s hearing that the S.E.C. has sued “captains of industry, presidential cabinet members, members of Congress and celebrities. The enforcement division does not pull its punches.”
The S.E.C. is also under review by the Government Accountability Office, the investigative arm of Congress. Charles E. Grassley, the Iowa Republican who is chairman of the Senate Finance Committee, asked for the review in September because he was growing concerned, he said, about whether the S.E.C. was “faithfully adhering to its mission.”
Go to Agenda of Tuesday’s Hearing »Go to Article from The New York Times »Go to Article from The Wall Street Journal (Subscription Required) »Go to Article from Bloomberg News »
The N.Y.S.E. and the NASD, which are merging their regulatory arms, will work with the Securities and Exchange Commission and the Chicago Board Options Exchange as pressure mounts on regulators to better police hedge funds for crimes, including insider trading, which will be the focus of a Senate Judiciary Committee meeting later today.
Go to Article from Bloomberg News »
Monday, December 04, 2006
The Wall Street crowd is giddier than a 10-year-old with a PlayStation 3 over news that the NASD and the New York Stock Exchange will be merging their regulatory units.
It has set off industry-wide celebration. Brokerage officials are handing out happy quotes to reporters about the welcome change. Lawyers who represent crooked stock brokers are making statesmanlike predictions of regulatory synergies.
The last time I saw people in the brokerage industry this happy, the Republicans had just swept the Senate. As with all mergers, though, this one is bound to be bum news for someone. I hate to throw cold water on this party, but what does it all mean for the customers?
A Democratic commissioner Friday, Dec. 1, said he expects that the agency will be divided over a vote later this month on investor rights. If so, this will be the first time the agency has been split on a critical vote since Cox took charge at the SEC almost two years ago.
At issue is a federal appeals court's Sept. 5 ruling that the SEC was wrong to let American International Group Inc. exclude from its proxy an investor proposal intended to make it easier for shareholders to nominate alternative director candidates on corporate ballots.
To resolve the difference between the SEC's interpretation of the rules and the court's, Cox's most viable options would force him to choose between one option sure to be opposed by the SEC's two Democrats and another that faces resistance from at least one of his GOP colleagues.
Thursday, November 30, 2006
Depending on whom you ask, a panel’s sweeping proposal to revamp securities rules goes too far, or not far enough. The panel, formed with the endorsement of Treasury Secretary Henry Paulson, issued a report Thursday that recommended making it harder for companies to be indicted or sued and seeking to limit rules that impose high costs on business, among other changes. The Council of Institutional Investors, a corporate governance group, responded Thursday by saying that the recommendations “would undermine the effectiveness of market watchdogs and weaken critical investor protections.” The National Venture Capital Association had a very different take.
The venture association, which represents firms that invest in start-up companies, suggested the committee’s proposal did not give enough relief to small businesses. It called the report a “step backwards based on work and recommendations that have already been put forth.”
The opposing views reflect the growing debate over whether the Sarbanes-Oxley Act of 2002, passed after the collapses of Enron and WorldCom, has made the U.S. a less-hospitable place for business, a safer place for investors, or some combination of the two.
The panel, called the called the Committee on Capital Markets Regulation, is co-chaired by R. Glenn Hubbard, the dean of the Columbia University Graduate School of Business, and John L. Thornton, the chairman of the Brookings Institution. It has no official standing, but its recommendations are likely to help set the agenda at the Bush administration.
The report spends a lot of time describing what it considers to be the flight of initial public offerings to markets outside the U.S., a trend it suggests is driven by the additional red tape and costs of a U.S. listing. The Council of Institutional Investors, a nonprofit group of pension funds, called this analysis “off-base.” In a statement released Thursday, the council argued that the nation’s declining I.P.O. share reflects increased globalization, higher investment banking fees in the U.S. and the privatizations of many state-owned companies overseas.
The National Venture Capital Association issued its own statement, in which it criticized the report for failing to recommend more measures to shield small businesses from Sarbanes-Oxley. It argued that the scope of small businesses that would be granted relief is “much narrower” than a proposal recently put forth by a committee of the Securities and Exchange Commission.
Go to Press Release from the Council of Institutional Investors »
Go to Press Release from the National Venture Capital Association »
• Go to Article from The New York Times
• Go to Article from Bloomberg News
• Go to Report from the Committee on Capital Markets Regulation
• Go to Webcast of Committee Briefing
Tuesday, November 28, 2006
In 2001, the Boston Red Sox hiked ticket prices just 24 hours after the New England Patriots had won their first Super Bowl. It was an egregious increase, but no one noticed.
People also don’t notice much on the day after Thanksgiving, because they either are suffering tryptophan hangovers or are in pre-stampede mode at the local Best Buy. Even the public markets take half the day off.
So it isn’t terribly surprising that hospital chain HCA picked Friday to disclose additional terms of its $21 billion sale to Bain Capital, KKR and Merrill Lynch. After all, $175 million in transaction fees and $15 million annual management fees aren't something to promote (or list in the small print on an ER visit bill). In addition, the management fee can increase annually beginning in 2008, while new owners will be entitled to: “a fee equal to 1% of the gross transaction value in connection with certain subsequent financing, acquisition, disposition, and change of control transactions as well as a termination fee based on the net present value of future payment obligations under the management agreement in the event of an initial public offering or under certain other circumstances.”
Once again, we are watching new private equity owners raid the corporate coffers for their own benefit (as opposed to for the company’s benefit). Let me repeat that word: “Owners.” Shouldn’t it be implicit that owners will participate in company management? Do they deserve extra financial credit for paying active attention to their own control investment? And, even worse, why do they get paid to terminate said agreement? It’s a pre-baked golden parachute that presumes KKR is just as valuable to HCA while “not managing” as it is “managing.” I wonder if Daddy Thomson would agree that I'm as valuable when "not writing" as when "writing?" Methinks not.
The counterargument here is: “Hey, the private equity firms now own HCA, so they’re the only ones who get hurt if the company’s valuation is reduced.” Yes and no. First, value also is being reduced for any HCA employee holding company options (for the inevitable flip). More importantly, not all private equity firms share either the transaction or management fees with limited partners. You remember limited partners, don’t you? They’re the ones who actually funded the buyout’s equity tranche.
Bain, for example, almost never shares any of those fees with LPs. Well, it officially does, but then takes out all of the unaccounted for consulting fees generated by affiliate Bain & Co. Even firms with more generous sharing – which usually means 50/50 or 60/40 in the LP’s favor – still apply carried interest, which means that even firms that give 100% to LPs may only end up giving 80 percent. It’s worth pointing out that buyout firms all used to take 100% of such fees for themselves, but progress in this area has still moved like stubborn molasses.
The solution: End management fee agreements, and probably transaction fees as well. Private equity is supposed to be about building portfolio company value over time – not about getting rich on Day 1.
He mocks the deferred-prosecution agreement the feds struck with Bristol-Myers Squibb, which was accused of inflating its revenues. New Jersey U.S. Attorney Chris Christie went too far, says Epstein. “The most striking evidence of the abuse of power is paragraph 20 of the agreement, which requires BMS to ‘endow a chair at Seton Hall University School of Law,’ Mr. Christie’s alma mater, for teaching business ethics, a course that he himself could stand to take.”
The new regulator will retain all of NASD’s 2,400-person regulatory team, as well as 470 of the NYSE Group’s operation. NYSE’s regulation chairman, Richard G. Ketchum, will serve as interim chairman of the combined operation for three years, while NASD’s chairman and chief executive, Mary L. Schapiro, will serve as C.E.O.
Earlier this year, the Securities and Industry Association, Wall Street’s trade and lobbying group, said it favored eliminating duplication by creating one regulator with one set of rules and interpretations to govern the industry. The association also sought a seat for itself on the board of whatever regulator emerged.
Go to NYSE Group Press Release »
One proposal to be considered would deal with the minimum net worth that an investor must possess to be allowed to invest in hedge funds. Earlier this month, S.E.C. chairman Christopher Cox said that it was necessary to further isolate hedge funds from small investors.
Another measure to be batted about next Monday would tighten up the anti-fraud statute dealing with hedge funds.
Wednesday, November 22, 2006
On Wednesday, both BusinessWeek and Fortune magazine took a look at why there is such a deal-making frenzy.
They covered some familiar territory (bulging private equity funds in search of takeover targets, easy access to the debt markets), but BusinessWeek hinted at a tantalizing, if a bit far-fetched, political angle. It cited the incoming Democratic congress as one big reason for the year-end spate of deals. In the new year, “deals may see a greater degree of scrutiny in Washington,” it concludes.
Meanwhile, the tone of the media’s merger-related coverage seems to grow more portentous every day. “If the good times keep rolling,” Fortune writes, the buyers will “do fine.” But “if the normal cycle reasserts itself, if the world hasn’t really changed, the buyers will end up with a wicked hangover.”
Because private equity buyers tend to offer cash, as opposed to the stock that strategic buyers tend to offer, sellers are more willing to deal. But that shows that the sellers “apparently would rather cash out than bank their future on the success of an expensive merger,” the article continued.
On Tuesday, The New York Times noted how the deal-financing scene has gone topsy-turvy, thanks to free and easy debt markets. It is so cheap to borrow that buyers essentially cannot help themselves, and debt financing is often seen as safer than using stock. While “normally cautious bond investors are living like Las Vegas high rollers,” the article noted, “stock speculators are behaving like worry-warts.”
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Tuesday, November 21, 2006
Rather than focus on buyout funds’ record-setting size or quick exits, Fortune looks at how private equity investment changes business.
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Andrew Ross Sorkin of NY Times Dealbook has developed some middle ground between Ben Stein’s call for banning management buyouts and the private equity market’s calls for continued regulatory indifference. Specifically, he has a four-part plan for fixing certain problems inherent in management buyouts. It goes something like this:
Require that a majority of minority shareholders approve the transaction. If senior management holds a control position, don’t let its vote be the only one that matters.
Use independent advisors. Real ones without either existing company relationships or a financial stake in the deal (i.e., stapled financing agreements).
Set aside up to 10% of the newly-private company for public shareholders. In other words, pre-empt the whining.
Provide some detail of the business plan for the company, once it becomes private. Let shareholders decide if management can best add value as a public or private entity.
Points one and two seem like no-brainers. Both help prevent self-dealing without much downside. If it’s really a good deal, then the minority shareholders will vote for it. Sure certain Wall Street firms will lose some fees, but not in the aggregate. It might even promote the creation of new boutique I-banks.
Points three and four are a bit trickier (as Sorkin admits).
My concern on point three isn’t so much the mechanics of it, difficult though they may be to design. Instead, it’s an issue of consistency. Assuming the point one becomes a generally-accepted principle, would a majority of this new 10% class have the right to veto a subsequent sale? If not, why not? Maybe the answer is that public and private shareholders are granted different levels of privilege, but then the same could be argued of controlling and non-controlling shareholders. It seems that you must either accept point one and deny three, or accept them both with a giant addendum to number three.
I have been arguing for a while that there is an inherent unfairness that public shareholders vote on acquisitions without knowing what the future possibilities are. I also think that the only viable solution is to demand more of the banks charged with writing fairness opinions (I’d also ask more of corporate boards, but it’s futile to request objectivity of cronies). If a company gives away its future gameplan – particularly when adoption of said plan is not yet approved – it almost certainly puts the company at a competitive disadvantage. Again, put some bite in the currently-toothless fairness opinions.
Finally, let’s add a fifth point (as first suggested by DealBook reader Andy Johnston): Make public all auctions of public companies. Once a corporate board is actively willing to consider buyout bids, retain a banker and issue what would amount to a buyout RFP (request for proposal). Give everyone one month to submit bids – which is a tight enough timeframe to still reward those private equity firms that helped initiate the deal.To be clear, I mean something even more transparent than afterthought “go shop” provisions.
Some M&A bankers may object to this proposal, saying that their selective bluebook mailing lists are designed to discourage frivolous bids. I say that I’d rather suffer through a handful of frivolous bids, rather than arbitrarily restrict the process in a may that may depress/prevent legitimate bids.
It also is worth noting, of course, that all of the above likely would require federal regulatory action. So be it. Even free markets require some ground rules.
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Monday, November 20, 2006
In a research note published Monday, Sri Nagarajan of RBC Capital Markets called Blackstone’s offer “attractive” for Equity Office’s shareholders and said he thought competing bids were unlikely. By targeting Equity Office, Blackstone is probably betting that it can further reduce corporate overhead at the company and profit from a rise in office rents in late 2007 or early 2008, Mr. Nagarajan wrote.
Also on Sunday, mining giant Phelps Dodgesaid it would be acquired by smaller competitor Freeport-McMoRan Copper and Gold in a cash and stock deal worth $25.9 billion. Earlier this year, Phelps Dodge unsuccessfully tried to arrange a three-way transaction with two Canadian miners.
John Tumazos of Prudential Equity Group suggested Monday that Freeport-McMoRan is getting a bargain in the proposed transaction, which calls for each Phelps Dodge’s share to be swapped for $88 in cash plus 0.67 of a Freeport-McMoRan share. Mr. Tumazos wrote in a research note Monday that the offer is “not the full or maximum value that [Phelps Dodge] could obtain,” even though it represents a 33 premium over Phelps Dodge’s closing price on Friday.
Early Monday, Nasdaq unveiled a $5.1 billion offer for the London Stock Exchange, marking its second attempt to buy Europe’s largest stock market. And Charles Schwab said Monday morning it would sell its U.S. Trust wealth-management unit to Bank of America for $3.3 billion in cash.
Friday, November 17, 2006
Researcher Dealogic reported today--and I know, this is a shock--that global M&A volume has hit an all time record....
Before too long, we're likely to see another record broken, as investment bankers share the largest bonus pool in history.
I know, everyone hates a buzz kill. But I won't be surprised a few years from now if the M&A party is followed by a huge hangover, as more and more of the principal on the junk bonds used to finance these deals has to be paid back. It's a borrowers market. Lenders are competing to win deals. I hear a number of them have been offering easy terms, in which a few years of interest-only payments are allowed. But if financial sponsors can't make an exit, they will be stuck with huge bills when the payments on principal kick in three, four, five or more years down the road. Weaker acquisitions are going to be under extreme pressure at that point, as limited cash flow is stretched to pay back expensive junk debt. It's like the corporate version of an exotic mortgage.
Thursday, November 16, 2006
Chalk it up to their success. According to Financial News Online, so much capital has flown in that managers cannot find enough savvy employees to maintain that momentum. Hedge funds collected $111 billion in the first nine months of 2006, swelling hedge fund assets under management to $1.3 trillion and helping pump up salaries and bonuses more than 20 percent to an average of $1.5 million before profit sharing. While one would think that enviable, that rise in investors’ money has created a “structural problem” for the industry.
Individual managers, attracted to the billions being poured into hedge funds, are striking out on their own, leaving the established firms that are favored by most institutional investors without enough help.
Wednesday, November 15, 2006
The suit is the first civil action taken against the buyout funds, several of which already have received letters from the Justice Department regarding potentially anticompetitive behavior. At the heart of both suits seem to be club deals, when private-equity firms form consortiums to collectively bid on a target.
Tuesday, November 14, 2006
Last month, Ben Stein wrote in The New York Times that management buyouts of public companies should be outlawed. Pretty surprising for a free-market Republican who made his bones in the Nixon White House, before becoming an economic pundit, actor, gameshow host and economic pundit (again). So surprising, in fact, that some financial bloggers wondered if it was a fit of pique that has since abated.
It hasn’t. I spoke with Stein yesterday about the article, and have posted the entire audio interview at peHUB.com. My goal was to let Stein expound on the points he made in print, but also to play a bit of Devil’s Advocate. For example, if management buyouts are such good deals for company management, how come they don’t get outbid? Aren’t there certain operational efficiencies a company can recognize as a private entity that it can’t as a public entity? Isn’t there a possibility that company management will overvalue its corporate assets (the “falling in love with your own players” problem)? Don’t shareholders have the ultimate responsibility here, since they have the final vote?
At the same time, a senior official at the New York Stock Exchange said that Wall Street’s prime brokerages, which lend to hedge funds and process their trades, might be held accountable if they failed to catch illegal conduct.
The S.E.C.’s enforcement director, Linda C. Thomsen, said that federal regulators were concerned about illegal trading and the potential for harm to hedge fund investors.
“I expect to see activity in connection with both,” she said yesterday at a securities conference in Manhattan.
Pelosi, a Democrat, already has identified revising the law as a priority when she becomes the speaker of the U.S. House of Representatives in January.
Venture capital firms have been lobbying the White House, legislators and regulators for months to water down the law, arguing that higher auditing and legal fees were driving companies to take initial public offerings overseas. This year, Pelosi has received more campaign money from partners at Kleiner Perkins Caulfield & Byers, which helped get Google and Amazon.com started, than she got from the labor federation AFL-CIO.
Middle Market Back En Vogue
The middle market is back in the “in crowd.” For the past three years the mid-sized buyout firms have been an easy target for critics that wallow in the platitude of too much money chasing too few deals. There are even investment strategies, such as the barbell theory, based on avoiding the “ugliness” seen in the middle market. And by now every weathered soul that targets companies around $500 million in size knows that JAMBOG derisively stands for “just another mid market buyout group.”
But rather than wonder when mid-market investors became PE’s version of Willy Loman, a more timely question to ponder is when exactly Willy Loman became so damn cool? The answer to that, apparently, is last week.
That’s when news broke that both Texas Pacific Group and Silver Lake Partners each had designs on launching new mid-market vehicles, bringing long-overdue attention to what might be the largest overlooked segment in finance.
It’s easy for the mainstream press and others to neglect what’s been going on in the middle market. Most mid-sized firms aren’t buying gigantic brands like Dunkin’ Donuts or Hertz. They’re not necessarily attracting the Lou Gerstners or Jack Welches of the world to sit on their boards. But what shouldn’t be missed is the very reason that TPG and Silver Lake are moving in – there’s money to be made.
Proof can be found by perusing the return data of the reporting public pensions. A quick look at some of the investments that fell between 2001 and 2003, for example, reveals Thomas H. Lee’s fifth fund is being currently being topped by a Thoma Cressey vehicle launched the same year; KKR’s famed Millennium Fund, while generating a robust 40% IRR, is still running short of Advent’s less heralded 2002-vintage fourth fund; and the 38.7% IRR being generated by Apollo’s 2001 vehicle stands shy of TowerBrook Investors I! , raised that same year.
It’s time to call Maury Povich for a booking. The red-headed stepchild has turned out to be legitimate, and her hair has developed into a lovely auburn with age.
The class action, Glen Billing v. Credit Suisse First Boston Ltd., charges that common practices such as setting prices and allocating shares among themselves is essentially illegal collaboration among competitors.
Aside from the threat to current IPO practices, the case already has sparked a turf battle between the Securities and Exchange Commission, the primary regulator for Wall Street, and the Department of Justice, which has jurisdiction over antitrust enforcement.
Monday, November 13, 2006
The changes will be proposed to the S.E.C.’s five commissioners at a December meeting in Washington, the agency chairman, Christopher Cox, said yesterday. He did not specify how the agency might limit the pool of hedge-fund investors.
Two other KB Home executives were also ousted, including the head of human resources, whom the company said worked with Bruce E. Karatz, the company’s chairman and chief executive, to set the dates for stock option grants.
Friday, November 10, 2006
Thursday, November 09, 2006
The preliminary filing said the I.P.O. could raise as much as $750 million by selling a 10 percent stake in the company, giving Fortress an implied value of $7.5 billion.
Those in the M&A world got a taste of what Tuesday, Nov. 7's elections mean for them in the comments of Rep. John Dingell, the Michigan Democrat in line to chair the Commerce Committee, following his party's dramatic takeover of the House of Representatives. Dingell, whose panel will oversee competition in nearly every sector of the economy, made media consolidation one of his first shots.
Similar antagonism is expected from John Conyers, also of Michigan, who is slated to take over the House Judiciary Committee, the chamber's primary overseer of antitrust policy.
Although which party will control the Senate remained unclear Wednesday, a change in leadership of the Antitrust Subcommittee is nevertheless guaranteed. Sen. Mike DeWine, who chaired the panel, was defeated in his bid for a third term. Uncertainty over a Virginia Senate seat Wednesday offered Republicans a long-shot chance of retaining the Senate, but DeWine's most likely successor will be Democrat Herb Kohl of Wisconsin.
Regarding the financial services industry, the shift in power means that Massachusetts Rep. Barney Frank is expected to succeed Ohio Republican Michael Oxley as head of the House Financial Services Committee.
The House panel oversees the U.S. Securities and Exchange Commission and the Federal Reserve, and it helps in setting policy for the banking, securities and mortgage industries. Frank, a social liberal, is expected to take a much more activist approach than his predecessor, but one not always unsympathetic to business.
Wednesday, November 08, 2006
While Mr. Frank’s priorities as the committee chairman are likely to be issues such as affordable housing and consumer protection, some items on his agenda are apt to affect Wall Street more directly. High on that list is the issue of executive pay, one of the most hotly disputed corporate-governance issues of recent years.
Smithfield, based in the Virginia town of the same name, agreed to pay more than $810 million in cash and stock, including debt assumption, for Premium Standard Farms, the nation's second-largest pork producer and the sixth-largest pork processor. After a 30-day initial review at the DOJ, the agency has formally issued a second request for information, a move that could mean another six months or so before the agency makes a decision on the deal.
Tuesday, November 07, 2006
The meeting shows Treasury officials’ mounting concerns about suspicious market activity in the trading of U.S. bonds. Investment bank UBS recently said it was cooperating with U.S. authorities who are reportedly investigating possibly manipulative trading practices.
Officials are concerned that primary dealers are using their positions unfairly, making it difficult for investors to buy the securities at market prices. Forbes.com quoted one market researcher who said the inquiry would likely extend to hedge funds that work with primary dealers on bond trading.
NEW YORK (MarketWatch) -- American and U.K. regulators are looking into their oversight roles in the exploding private-equity market, and the U.S. Department of Justice is reported to be looking particularly closely at the purchase of former Ford unit Hertz.
The moves by regulators come just a week before Hertz is set to take itself public in one of the year's richest deals.
The U.S. Department of Justice has added Merrill Lynch & Co's private-equity arm to its informal inquiry into the private-equity world, in a move that suggests the Hertz Global Holdings Corp. auction is being looked at, according to a report in The Wall Street Journal. The report cited people familiar with the matter.
And, in a separate announcement Monday morning, Britain's Financial Services Authority (FSA) said it's studying whether it needs to more closely regulate the private-equity market. It will add private-equity supervisory responsibilities to a unit that already monitors hedge funds.
The M&A market is proving to be a handy escape hatch for venture capitalists trying to cash out of portfolio companies. Outright sales of venture-backed companies account for just a sliver of M&A deals each year and are rarely eye-catching, but M&A remains an intriguing option to liquify a VC portfolio at a time when the more publicized exit mechanism—the IPO—has gone into deep freeze for venture investors.
In fact, recent M&A trends involving VC-backed targets are nothing to shout about. Total disclosed deals, according to the National Venture Capital Association (NVCA) and Thomson Corp., continued to slide in the third quarter to 74 from 91 in the second quarter and 104 in the opening leg of 2006. But compared to IPOs, the deals outlet shines. A mere eight venture-backed firms went public in the third quarter against 19 in the second and 10 in the first. NVCA President Mark Heesen says the M&A slowdown may be a “quarterly aberration” that reflects a “slower summer business climate.” Deal flow may be up 15% to 20% in the final quarter, he suggests. Heesen makes no bones about the difficulty in floating new issues, saying IPO activity is at “alarmingly low levels” and that public markets may not be “the destination they once were for emerging growth companies.”
For the first nine months of 2006, the NVCA-Thomson Exit Poll found, 269 venture-backed targets were acquired compared with about 6,300 deals overall. Disclosed values—for 119 deals—came in just shy of $1.2 billion versus around $856 billion overall. Average deal price for a VC-backed sell-off was $99.9 million for the first nine months against $95.8 million.
Venture capitalists seem to have historically preferred IPOs because the new-issues market has bought growth stories and because public markets have allowed follow-on cash-outs—the proverbial extra bites of the apple. But M&A is no slouch in rewarding them either. Investors sold for less than their total investment in 13 of the 34 third-quarter deals with disclosed prices. But they made money in the others—including 10 times the investment in seven deals and four to 10 times in one other deal, while doing as well as four times their investment in 13 others.
By Marty Sikora
Monday, November 06, 2006
Says Elizabeth MacDonald of Forbes.com:
So where are all those expensive auditors who are paid a lot of shareholder money to catch such problems? Right now, just as in past accounting scandals, they're reverting to type: They're trying to run away, or at the very least, blame the accounting rules.
The heads of Treasury bond trading and compliance officers from the 22 primary dealers -- the banks and securities firms that trade government securities directly with the Fed -- were summoned to a meeting at 4 p.m. today by Dino Kos, executive vice president of the Federal Reserve Bank of New York.
The executives will be addressing concerns raised by the Interagency Working Group on Market Surveillance, a group set up after Salomon Inc. admitted to rigging five Treasury auctions in 1991. The group, made up of officials from the Treasury Department, Federal Reserve, Securities and Exchange Commission and Commodity Futures Trading Commission, is probing firms including UBS AG for allegedly hoarding securities to profit by boosting prices. Regulators are concerned because an average $528 billion of Treasuries trade each day and provide the benchmarks for borrowing costs around the world.
Hedge funds are more often taking large stakes as well. The study found that in one-fifth of all public companies, hedge funds hold stakes of 10 percent or more, twice the proportion as in 2004.
Resumes, it turns out, can be deceiving. Cox, a securities lawyer who holds MBA and law degrees from Harvard University, says he never contemplated overturning existing regulations or going easy on corporate crooks. ``It was maddening,'' says Cox, who was under instructions to make no public statements before his Senate confirmation hearing. ``I might have set a lot of the speculation to rest if only I could have said something.''
More than a year after taking office, Cox has taken no action to unravel the 2002 Sarbanes-Oxley corporate reform law, which set up strict new accounting rules, or any of the new regulations adopted under Donaldson after bitter battles and 3-2 votes.
He has won passage of a rule requiring more and clearer disclosures of pay and benefits for top executives.
The F.S.A. said it hopes to get feedback from private equity executives and public policy makers on a number of initiatives related to leveraged buyout activity, which has been setting records in both the United Kindgdom and in the United States. For example, the agency said it plans to create an alternative investment team to bolster its oversight of private equity deals. It may also conduct regular surveys on leveraged loans, which are used to fund private-equity takeovers.
Despite the concerns outlined in the 102-page report, it did not call for tighter oversight of the industry in general, which is likely to come as a relief to many private equity professionals. On the subject of private equity, the F.S.A. said it believes “our current regulatory architecture is effective, proportionate and adequately resourced.”
Here is a "must read" article and free video from Friday's Financial Times: "Jeffrey Immelt, chairman and chief executive of General Electric, has urged company leaders in the US to ensure their pay does not dramatically outstrip that of their senior managers and to limit the influence of compensation consultants.
Mr. Immelt's intervention in the debate over executive pay - featured in a video interview with the Financial Times - underlines the growing importance of the issue for shareholders and executives of America's largest companies. "These are public jobs, there were so many abuses in the late 90s and in the early part of this century and that created concerns," he said.
Mr. Immelt argued that chief executives should not have multi-year contracts, which could lead to large pay-offs if they were dismissed, and the bulk of their compensation should be linked to performance. Yesterday, the FT revealed that a group of leading public pension funds had urged the top 25 companies in the US, including GE, to ban pay consultants from advising the board and working on other company matters.
Mr. Immelt, who took over the leadership of the industrial conglomerate five years ago from Jack Welch, did not mention the letter but said the board should be the final judge of executive pay. "I think it should be based on the good judgment of the compensation committees, the board and the CEO," he said. "I don't think consultants should be involved."
In a separate conversation with the FT, he said that, to motivate staff and avoid excesses, chief executives' pay should remain within a small multiple of the pay of their 25 most senior managers. "The key relationship is the one between the CEO and the top 25 managers in the company because that is the key team. Should the CEO make five times, three times or twice what this group make? That is debatable, but 20 times is lunacy," he said. Mr. Immelt, who last year received $3.2m in salary and no cash bonus, added that his pay was within the 2-3 times range."