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Securities Sleuth: Board Decisions and Public Scrutiny

Mark McNair
0 Comments|May 9, 2007

CEO compensation decisions may be unpopular, but they are not improper.



CEO compensation decisions may be unpopular, but they are not improper.

Sometimes when boards make decisions not everyone is happy. Decisions made by company boards may raise the ire of its employees and investors. But generally boards make decisions, even unpopular decisions, publicly and let others comment or react as they desire.

Two board decisions have received a significant public response recently - the pay package that Northwest's CEO received and the retirement package that AT&T's (NYSE: T, BullBoards) CEO received.

Northwest Airline's CEO, Douglas Steenland, will receive $26.6 million of restricted stock and options once the company emerges from bankruptcy next month. The airline's pilot union, as you would expect, condemned the arrangement. From their perspective, the reason the company was able to emerge from bankruptcy protection was because of sacrifices made by union workers. The unions believe their past concessions were excessive and they should share in any gain from the company's turnaround. For its part, the board knew the CEO's package wouldn't popular, but presumably felt it was necessary to recruit and retain key executives.

The other compensation arrangement that is in the news is the $158.5 million retirement package that ATT's Edward Whitacre will receive when he retires. Definitely better than just a gold watch. Plus, he will receive other perks, such as a $24,000 per year automobile benefit and $25,000 for his country club dues for the next 3 years. During these three years, besides presumably playing golf, he will also receive $1 million per year to be a consultant for the company.

Some corporate activists have been shocked by the size of the retirement package. However, there has been little outrage from shareholders. AT&T's stock has performed very well under Mr. Whitacre's leadership.

The compensation decisions made by Northwest and AT&T were both clearly disseminated as soon as the decisions were made. No attempt was made to use improper gimmicks to mislead the public regarding the amounts that would be received. They knew they would receive some criticism.

This makes what some other companies did to backdate options they gave their executives all the more galling. In many of these cases, if the companies had decided to just raise the salaries of their executives, few shareholders would have complained. But instead, executives at some of the companies decided to mislead, not only the public, but often their boards about the options they received. It is little wonder that the stocks in these companies dropped when their improper backdating options practices were revealed. Such companies include Transaction Systems Architects, Inc. (NASDAQ:TSAI, BullBoards), Sonic Solutions (NASDAQ: SNIC, BullBoards), and Active Power, Inc. (NASDAQ: ACPW, BullBoards)

Another situation we are investigating involves Allot Communications (NASDAQ: ALLT, BullBoards). On April 2, 2007, its stock declined precipitously - approximately 40% below its IPO price. This drop occurred after the company lowered its previous guidance. It has been alleged, among other things, that the company's Registration Statement and Prospectus were negligently prepared, contained untrue statements of material facts, and omitted facts necessary to make the states in the documents not misleading.


Mark McNair is an attorney in private practice who represents investors in securities litigation and was formerly an attorney at the Securities and Exchange Commission. For additional information, go to securitiessleuth.com


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