I like to read Bill Carlino's editorials - not because he's my boss, but because I like his style. He usually starts with an innocuous phrase, i.e. "When I was 12, I had a two-wheeler and delivered newspapers ..." or "I was sitting at a bar in Los Angeles when this blonde ... ." There follow some more non-sequiturs as Carlino contemplates pouncing on his victim like a tiger salivating as he studies his inert prey.In the May 1-May 14, 2006, issue of Accounting Today, editor-in-chief Carlino's regular column partnered with my commentary, "An open letter to the comptroller general of the U.S." With a rare combination of moxie and chutzpah, Carlino took on both the chairman and president/CEO of The New York Times, which has a Sunday circulation of over 1,600,000. Specifically, his critique was aimed at the scion of the Sulzberger dynasty, Arthur Ochs Sulzberger Jr., the great-grandson of the legendary Adolph Ochs. Carlino compared the increase in stock options granted to Sulzberger with the downward trend of the company's stock.
Speaking of stock options, the Babe Ruth of stock options is probably William W. McGuire, chairman and CEO of UnitedHealth Group. The Wall Street Journal on March 18, 2006, reported, "As of late February [2006, McGuire] had 13.87 million unexercised options left from the October 1999 tranche. His profit on those options, if he exercised them today, would be about $717 million."
The Journal continued, "According to his 1999 employment agreement, he is supposed to choose dates by giving oral notification to the chairman of the company's compensation committee. The agreement says the exercise price shall be the stock's closing price on the date the grants are issued. Arthur Meyers, an executive compensation attorney with Seyforth Shaw LLP in Boston, said a contract such as that sounded 'like a thinly disguised attempt to pick the lowest grant price possible.' Mr. Meyers said, 'Such a pact could pose several legal issues, possibly violating Internal Revenue Service and stock exchange listing rules that require directions to set a CEO's compensation. If he picks the date of his grant, he has arguably set a portion of his pay. It's just not good corporate governance.'"
The Journal on May 12, 2006, published an article titled "UnitedHealth Cites Deficiency in Options Grants - As SEC Steps Up Probes, Insurer Warns Restatement Could Total $286 Million."
The Journal opened with, "Widening the scandal over stock-option grants, giant health insurer UnitedHealth Group Inc. warned that a significant deficiency in how it administered and accounted for such grants could force it to restate results for at least three years - cutting net income by as much as $286 million over that period." Per the Journal, "But the disclosure likely will increase investor pressure on longtime chief executive William McGuire."
Per this writer, what kind of corporate ethics would permit an executive to select the lowest strike date and the lowest strike price on stock options? Where does greed and avarice begin and end?
To burnish UnitedHealthcare's portrait, the U.S. Department of Justice on Dec. 13, 2004, announced that UnitedHealthcare had agreed to pay $3.5 million to settle allegations that the company defrauded the Medicare program.
As senior citizens, my wife and I, like thousands of other seniors, went bananas trying to understand and to select a drug plan under the horrific legislation passed by the Congress and signed by the president. We probably made a mistake, as did Mr. and Mrs. Dixie Leavitt, who made a wrong drug plan choice, but were rescued by their son Michael Leavitt, the secretary of Health and Human Services, according to the June 2006 issue of The Lowdown, edited by James Hightower and Phillip Frazer.
The same article noted that, "Such giants as UnitedHealthcare, Humana and WellPoint (which have already scarfed up more than half of the new drug program's market) are given both a new source of monthly premiums and a generous federal subsidy to provide prescription coverage."
Perhaps the health industry's contagion for low-strike-price stock options infected HealthSouth chairman and chief executive Richard Scrushy. He scraped out of the criminal trial in his hometown of Birmingham, Ala. He is now surrounded by civil suits galore, a pending bribery case, and an investigation by federal regulators or prosecutors concerning low strike prices on stock options granted by HealthSouth's board. On Feb. 29, 2000, he received 800,000 stock options at a strike price of $4.87, which was the lowest price for the year, and HealthSouth's shares reached $16 by the end of the year. On June 5, 1995, Scrushy received stock options at the lowest price for the year.
According to the Journal, the pattern of 11 grants that Mr. Scrushy received between 1995 and 2002 is improbably fortuitous. Two grants carried the lowest closing price of the year in which they were granted. Three more were dated at quarterly lows. An additional grant was dated at a monthly low, at the bottom of a sharp dip in share price.
One might ask what ExxonMobil's retiring CEO is going to do with his tremendous golden parachute. In 2005, Lee Raymond received a compensation package of $48.5 million. His golden parachute also included a retirement pension with a lump-sum value of $98.4 million. By the end of 2005, Raymond had accumulated $183.1 million worth of ExxonMobil stock, and had options worth $69 million in additional company shares. ExxonMobil also paid for his club memberships and private use of corporate jets. American automobile drivers will be delighted to know that the $3 per gallon pumped into their tanks paid for Mr. Raymond's golf and jet junkets.
Speaking of stock options, my favorite stock-option recipient is Jack Welch, past chairman and CEO of General Electric. Shares of GE, which I gave to each of my grandchildren, quadrupled in value - thanks, Jack. As GE's CEO, he received a fair share of media coverage, but nothing like what occurred during 2005.
The press reported that at the same time that Welch was being interviewed by an editor of the Harvard Business Review, he was interviewing her. The news of the interview reached the second Mrs. Welch, a smart attorney, who had insisted on a cap on their pre-nup agreement, which had expired, and she sued for divorce.
Lots of figures came out during the divorce proceedings, including details of Welch's retirement deal provided by GE. He received a luxurious apartment at One Central Park West in New York City, including small amenities such as flowers, maid service, etc. He was promised box seats at Madison Square Garden to view the Knicks basketball games and the Rangers hockey games. Since he was a Red Sox fan, he also received box seats at Fenway Park. During retirement, Welch had typical use of a corporate jet, as well as reimbursement for investment counseling. It was reported, correctly or otherwise, that his net worth approximated $600 million, which may have been altered by the confidential divorce settlement. Did it include the One Central Park West apartment?
Speaking of retirement schemes, media reports relating to the past chairman and CEO of Citigroup, Sanford "Sandy" W. Weil, made interesting reading. His 2001 agreement with the company provided that he would receive, among other things, the use of a corporate jet, car driver, office, secretary and security for the remainder of his life. However, Citigroup's board recently threatened to rescind some of Weil's benefits, including use of the corporate jet. In view of the outcry generated by golden retirement perks, Weil has agreed to reduce his use of the company jet after 2012.
Years ago, I met an attorney who told me how, as a young lawyer, he was involved with a stockholder suit against the American Tobacco Co., where the eccentric George Washington Hill was president. Hill had received an annual salary of $1million, which was nice money during the 1930s. When George Washington Hill was on the witness stand wearing his famous straw hat, the young lawyer asked, "Did you not receive $1 million in salary, as well as a bonus of $1 million?"
Hill replied, "Correct."
The young lawyer continued, "Why did you receive a $1 million bonus?"
Hill replied, "Because I worked very hard for the company."
The young lawyer followed with, "For a $1 million salary you would not have worked as hard?"
Hill walked from the witness stand.
In this age of Sarbanes-Oxley and transparency, the incredible greed of multimillionaire and billionaire executives bargaining for plane trips, drivers, financial counseling, etc., strikes one as petty and shameless. It is high time for boards of directors to earn the trust of their shareholders, who pay the bills for the gluttonous titans.
Eli Mason, CPA, is a past president of the New York State Society of CPAs, a past chairman of the New York State Board for Public Accountancy, and a past vice president of the American Institute of CPAs, and the recipient of the American Accounting Association's Exemplar Award. He recently wrote Conscience of the Profession - A Personal Journey.
