Severance deals are hot topic of investor concern

http://www.thecrossbordergroup.com/pages/165/IR+magazine.stm?article_id=12736

Jun 20, 2008

Sullivan’s AIG exit package brings fresh anger

NEW
YORK -- Shareholder outrage over executive severance didn’t go away
with the payouts to Home Depot’s Bob Nardelli and Pfizer’s Hank
McKinnell. The issue is still in investors’ minds and in the news.

This
week there was intense focus on the multi-million dollar package for
ex-AIG chief Martin Sullivan as he was being pushed out following $13
bn in losses. Activists said the situation mirrored other so-called
‘pay for failure’ moments this year when Citigroup’s Charles Prince got
$40 mn in severance and Merrill Lynch’s Stan O’Neal $160 mn after their
firms wrote down huge subprime losses.

There is protest even at
companies where executives aren’t surrounded by controversy. Earlier
this month Proxy Governance recommended shareholders withhold votes for
two compensation committee members at Liberty Media as a way of
complaining about chairman John Malone’s potential severance benefits.

RiskMetrics
research shows that overall there are fewer shareholder proposals this
proxy season asking for an investor vote on severance. But those that
are on ballots have traction. The National Legal and Policy Center
(NLPC), a corporate accountability group, asked for shareholder
approval of ‘golden parachutes’ for senior executives at Boeing that
exceed two times their base salaries and bonus. Hardly a force on its
own, holding just 58 Boeing shares, NLPC lined up 35 percent support
for the proposal at the AGM, says president Peter Flaherty.

The
SEC’s 2006 rule changes aimed at improving disclosure of compensation
are providing investors with clearer walk-away numbers for executives.
While the focus may help eliminate excesses, it won’t happen overnight.
‘Severance is embedded into old contracts. Compensation committees
often have their hands tied in what they can do,’ says Allie Monaco, VP
of research for Proxy Governance. ‘I think there will be improvements
with new agreements.’

Meanwhile, watchdogs will continue to
parse disclosure. After news reports put Sullivan’s severance at
between $35 mn and $50 mn, the Corporate Library issued a special
‘analyst alert’ tallying the deal at $68 mn.

Companies will be
lucky to be glossed over. The Corporate Library has issued papers
‘recently covering everyone from Nardelli at Home Depot, to Pfizer, to
Morgan Stanley, to a whole collection of severance and potential
severance at financial services companies worst affected by the
subprime crisis,’ says senior research associate Paul Hodgson. ‘In the
past we have written reports on Kilts’ severance from Gillette, the
former CEO of EDS and numerous others. In fact, we catch, analyze and
estimate most of the significant golden goodbyes that come up.’

By Anna Snider