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The following report is copied with permission from Corporate Governance Highlights, a private weekly newsletter for clients of Investor Responsibility Research Center ("IRRC"), the leading source of impartial, non-advocacy research for institutional investor interests in corporate governance and proxy voting issues.


Corporate Governance Highlights

Vol. 15, No. 34

August 27, 2004

Shareholders Exert Pressure

to Recoup ‘Unearned’ Bonuses

MESSAGE IS SENT WITH SHAREHOLDER PROPOSALS, LAWSUITS. Shareholders concerned that executives are being paid millions of dollars in undeserved bonuses are submitting shareholder proposals and filing lawsuits in attempts to recoup funds, enforce accountability and bring about reforms in this area of governance.


   Preliminary voting results show that approximately 26 percent of the votes cast at Computer Associates’ August 25 annual meeting supported a shareholder proposal submitted by Amalgamated Bank’s LongView Collective Investment Fund asking the company’s board to adopt a policy that if financial results are restated, the board will review any executive bonuses that were awarded for meeting performance targets and recoup for the company any bonuses that were not, in fact, earned. Private Capital Management, which controls about 10 percent of Computer Associates’ voting power, had planned to vote against the proposal. (See Highlights, August 20, 2004.)


   LongView said it submitted the proposal following Computer Associates' disclosure last October that it had inflated revenue in the fiscal year that ended March 31, 2000, by reporting profits from contracts before they were signed. Bonuses for top executives in that year were based on the amount that net income exceeded goals. This was one of several years for which Computer Associates had to restate its financial reports because of accounting issues.


   Computer Associates Chairman Lewis Ranieri reportedly told shareholders at the meeting that “money subject to ill-gotten gains based on evil deeds” will be recalled, but that investors should be patient until a review of the results of an investigation is complete.


   By contrast, Nortel Networks, a Canadian company, announced last week that in addition to firing 10 finance officials, it would immediately seek repayment of about $10 million in bonuses that had been paid to them. An internal investigation found that Nortel finance officials used noncash accounting entries to ensure that the company reported a profit in the first half of 2003. At that time, the company paid out tens of millions of dollars under a “return to profitability” bonus program for executives and employees. “Nortel’s cleaning house and demanding repayments shows leadership, which is not what we are seeing at CA,” said Con Hitchcock, LongView’s legal counsel.


   Shareholders had expressed dismay with the company’s executive compensation practices long before this announcement. The company originally was scheduled to hold its annual meeting July 1, but appealed to the Ontario Securities Commission for an extension as a result of its accounting problems. The commission granted the company an extension until September 30. In January, shareholders had submitted several proposals for inclusion in the proxy statement for the July 1 meeting. One asked that compensation for the 10 executives receiving the highest pay be subject to shareholder approval, another asked that senior executives’ bonuses not be included when calculating their pensions, and a third asked that all senior executive salaries be rolled back to their Jan. 1, 1998 levels. It is not clear if the proposals will remain in the proxy for the 2004 annual meeting, which has not yet been scheduled.


   In another case of executives repaying bonuses under pressure from shareholders, FPL Group managed to recoup $22.25 million in bonuses awarded to eight executives as part of a failed merger agreement, under the settlement of a shareholder lawsuit. In December 2000, shareholders approved a merger between FPL and Entergy. After the vote, FPL paid out a total of approximately $62 million to eight executives. The company said the approval of the merger constituted a “change in control” event, which triggered the payments under the long-term incentive plan. Four months later, the deal fell apart but the executives kept the payments. The company contends that under the terms of its long term incentive plan, which was originally adopted by shareholders vote in 1994 and was reauthorized by shareholder vote in 1999, these executives would, over time, have received a substantial portion of the amounts awarded regardless of whether the merger vote occurred.


   Under the settlement, which still requires the approval of a federal judge, the eight FPL executives will pay $9.75 million, while the insurance company that covers FPL’s officers and directors, National Union Fire Insurance, will be responsible for the remaining $12.5 million.


   At FPL’s May 21 annual meeting, shareholders approved several changes to the company’s long term incentive plan, including a provision specifying that bonuses related to a merger will not be paid until the deal is completed—with 50 percent being paid when the merger is consummated and 50 percent on the one-year anniversary of the date when the change in control takes place.   





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            Editor: Rosemary Lally


Contributors: Ben Bricker and Jamie Carroll





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