Forum Home Page [see Broadridge note below]

 The Shareholder ForumTM`

Fair Investor Access

See related case examples of

Dell Inc.

appraisal rights for intrinsic value realization

and

Walgreen Co.

stock buyback policies

"Fair Access" Home Page

"Fair Access" Program Reference

For graphs of specific company and related industry returns, see

Returns on Corporate Capital

For graphs of specific company voting for the past 5 years, see

Shareholder Support Rankings

 

 

 

Forum distribution:

Raising the question of why investors support a company's management compensation

 

Source: The New York Times | Fair Game, September 13, 2017 column

 


Business Day

Consumers, but Not Executives, May Pay for Equifax Failings


Fair Game

By GRETCHEN MORGENSON    SEPT. 13, 2017


A security guard outside the Equifax office in Atlanta. Kevin D. Liles for The New York Times

The stunning data breach recently disclosed by Equifax, one of the nation’s top three credit reporting agencies, has imperiled millions of consumers, opening them up to identity theft, monetary losses and colossal headaches.

Equifax investors are also shouldering the burden associated with the company’s apparently lax security practices. Since disclosing the breach, Equifax’s stock has fallen more than 30 percent, losing its shareholders $5.3 billion in market capitalization.

It remains unclear, though, whether the company’s executives will take a financial hit for the failures that allowed thieves to steal Social Security numbers, driver’s license numbers and other sensitive data. Indeed, Equifax’s top managers may not feel any financial ill effects, given the company’s past compensation practices.

 

Fair Game

A column from Gretchen Morgenson examining the world of finance and its impact on investors, workers and families


Sarbanes-Oxley, Bemoaned as a Burden, Is an Investor’s Ally SEP 8

The Accounting Tack That Makes PayPal’s Numbers Look So Good Aug 4

Big Pharma Spends on Share Buybacks, but R&D? Not So Much

Jul 14


The Trump Effect on C.E.O. Pay

May 26


Meet the Shareholders? Not at These Shareholder Meetings Mar 31

Want Change? Shareholders Have a Tool for That

Mar 24


Your Mutual Fund Has Your Proxy, Like It or Not

SEP 23 2016


EpiPen Price Increases Could Mean More Riches for Executives Sep 1

Bloated Pay Came Before Hain Celestial’s Error AUG 19

A Simple Test to Dispel the Illusion Behind Stock Buybacks Aug 12

Investors Get Stung Twice by Executives’ Lavish Pay Package

Jul 8


How to Gauge a C.E.O.’s Value? Hint: It’s Not the Share Price

Jun 17


Fantasy Math Is Helping Companies Spin Losses Into Profits

Apr 22


BlackRock Wields Its Big Stick Like a Wet Noodle on C.E.O. Pay

APR 15


In Yahoo, Another Example of the Buyback Mirage

Mar 25


Stock Buyback Plans, Seen as Shareholder Boon, Can Backfire

MAR 11


FASB Proposes to Curb What Companies Must Disclose

Jan 2

2016


Valeant Shows the Perils of Fantasy Numbers

OCT 30

2015


Safety Suffers as Stock Options Propel Executive Pay Packages

SEP 13


Why Putting a Number to C.E.O. Pay Might Bring Change

Aug 9


Tech Companies Fly High on Fantasy Accounting

Jun 21


Stock Buybacks That Hurt Shareholders

Jun 5


Shareholders’ Votes Have Done Little to Curb Lavish Executive Pay

May 16

2015


When the Stock Price Hides Trouble

Oct 12

2013


An Unstoppable Climb in C.E.O. Pay

Jun 30 2013


When Shareholders Make Their Voices Heard

Apr 8

2012


See More »

   

Over the last three years, when Equifax determined its top executives’ incentive compensation, it has used a performance measure that excluded the costs of legal settlements made by the company. If it follows this practice after dealing with the costs of settling legal claims arising from the security breach, Equifax’s top managers will essentially escape financial accountability for the blunder.

This troubles Charles M. Elson, a professor of finance at the University of Delaware and the director of its John L. Weinberg Center for Corporate Governance. “To the investors in the company, the legal settlement does impact earnings and stock price,” Mr. Elson said in an interview. “If the shareholders suffer because of this breach, why should management be excluded? These folks take home all of the upside and want none of the down.”

I asked Equifax whether its board would stop excluding legal settlement costs from executive compensation calculations so that management would be required to absorb some of the pain.

An Equifax spokeswoman supplied this statement: The board is actively engaged in a comprehensive review of every aspect of this cybersecurity incident.”

Equifax is not alone in excluding certain costs of doing business from the financial factors it uses to determine executive pay. Such practices have become prevalent among large United States companies.

Equifax uses two main performance measures to decide incentive pay. One, called corporate adjusted earnings per share from continuing operations, is not calculated using generally accepted accounting principles, or GAAP. It is figured by excluding certain costs — such as those related to acquisitions — that normally flow through a company’s profit-and-loss statement. This has the effect of making Equifax’s earnings per share look better in this measure than they actually do under accounting rules.

Equifax says in regulatory filings that it uses the adjusted earnings figure because it best represents the company’s profit growth. Top managers at the company get a larger or smaller annual incentive award based on increases in this measure over the course of a year.

Acquisition expenses make up the bulk of the costs Equifax has excluded from its profit calculation in recent years. But Equifax has also excluded costs associated with impaired investments and legal settlements from the figure.

In regulatory filings, Equifax said its exclusion of legal charges from certain financial results “provides meaningful supplemental information regarding our financial results” and is consistent with the way management reviews and assesses the company’s historical performance.

This approach is not unusual. Roughly one-fifth of the companies in the Standard & Poor’s 500-stock index excluded legal settlements and fees in their non-GAAP earnings measures in 2016, according to Jack Ciesielski, publisher of The Analyst’s Accounting Observer and a close follower of companies’ financial reporting.

When settlements are small, of course, excluding the legal costs associated with them is a nonevent. And in recent years that has been the case at Equifax, with settlements equaling around 1 percent of net income.

In the fourth quarter of 2016, for example, Equifax recorded a $6.5 million charge for a settlement with the Consumer Financial Protection Bureau. Under that settlement, which involved deceptive marketing of credit scores to consumers according to the bureau, Equifax paid $3.8 million in restitution to customers, a fine of $2.5 million and $200,000 in legal costs.

But the scope of Equifax’s recent security breach is so far-reaching that legal settlements arising from it will most likely be enormous. And this brings up another question: whether Equifax executives should return past pay because of the security failure. Certainly, last year’s proxy filings indicate that the pay received by the company’s top three executives was based in part on their accomplishments in keeping consumers’ data secure.

Consider Richard F. Smith, the chief executive and chairman of the Equifax board, who received $15 million in total compensation in 2016, up from $13 million in 2015. One rationale for his pay package, the proxy said, was Mr. Smith’s “distinguished” work in meeting his individual management objectives for 2016. Among those objectives was “employing advanced analytics and technology to help drive client growth, security, efficiency and profitability.”

Or take John Gamble, Equifax’s chief financial officer. He also received a rating of “distinguished” on his individual objectives, the proxy said, because he continued “to advance and execute global enterprise risk management processes, including directing increased investment in data security, disaster recovery and regulatory compliance capabilities.” Mr. Gamble received $3.1 million in 2016.

John J. Kelley III, the company’s chief legal officer, also achieved a “distinguished” rating from the Equifax board last year. One reason: He continued “to refine and build out the company’s global security organization.” Mr. Kelley received $2.8 million in compensation last year.

Will these executives be asked to return any of this pay given that their ratings on security are now looking a little less distinguished?

Equifax declined to answer this question.

What the Equifax mess seems to show, yet again, is the heads-I-win, tails-you-lose deal between executives and shareholders that is so prevalent at major corporations today.

As for Equifax’s exclusion of litigation costs in its profit measure, Mr. Ciesielski, the accounting expert, said that should only be allowed for events that are outside of management’s control. “A hurricane, an earthquake, falling space debris — all those things are exogenous, outside of management’s control and ultimately more forgivable,” Mr. Ciesielski said. “Bad management leading to customer harm is exogenous and forgivable? That’s a lot harder to accept.”


 

A version of this article appears in print on September 17, 2017, on Page BU1 of the New York edition with the headline: Who’ll Pay For the Mess At Equifax?.

 


© 2017 The New York Times Company

Performance and Shareholder Support

The following graphs of competitive corporate performance and of shareholder voting support for executive compensation are presented for the company addressed in the article.

Full-size graphs of these and other companies you may select can be generated on the Shareholder Forum's websites for Returns on Corporate Capital™  and for Shareholder Support Rankings™. Definitions of both analyses are presented below.


♦ ♦ ♦

Returns on Corporate Capital™ (ROCC) is based on published Methodology and Specifications for calculating net income plus interest expense and income taxes, divided by the balance of total assets less current liabilities other than current debt, according to each company's audited statements of GAAP-defined data as reported to the SEC, without adjustment. The ROCC of each company’s industry competitors is based on the same calculations of the aggregated assets and income for all SEC-reporting companies in the relevant industry other than the subject company. The analyses are produced by the Shareholder Forum using data provided by EDGAR Online from SEC records of approximately 5,700 currently reporting public companies.

Shareholder Support Rankings™ analyses are produced by The Shareholder Forum from research data provided by Proxy Insight, based on company SEC reports of total votes cast in advisory “Say on Pay” shareholder approvals of executive compensation.

© Copyright 2012-2017 The Shareholder Forum, Inc.

 

 

 

This Forum program is open, free of charge, to anyone concerned with investor interests in the development of marketplace standards for expanded access to information for securities valuation and shareholder voting decisions. As stated in the posted Conditions of Participation, the Forum's purpose is to provide decision-makers with access to information and a free exchange of views on the issues presented in the program's Forum Summary. Each participant is expected to make independent use of information obtained through the Forum, subject to the privacy rights of other participants.  It is a Forum rule that participants will not be identified or quoted without their explicit permission.

This Forum program was initiated to address issues and objectives defined by participants in the 2010 "E-Meetings" program relevant to broad public interests in marketplace practices, rather than investor decisions relating to only a single company. The Forum may therefore invite program support of several companies that can provide both expertise and examples of leadership relating to the issues being addressed.

Inquiries about this Forum program and requests to be included in its distribution list may be addressed to access@shareholderforum.com.

The information provided to Forum participants is intended for their private reference, and permission has not been granted for the republishing of any copyrighted material. The material presented on this web site is the responsibility of Gary Lutin, as chairman of the Shareholder Forum.

Shareholder Forum™ is a trademark owned by The Shareholder Forum, Inc., for the programs conducted since 1999 to support investor access to decision-making information. It should be noted that we have no responsibility for the services that Broadridge Financial Solutions, Inc., introduced for review in the Forum's 2010 "E-Meetings" program and has since been offering with the “Shareholder Forum” name, and we have asked Broadridge to use a different name that does not suggest our support or endorsement.