InvESGuard - Guarding investments one post at a time.

InvesGuard- New Scorecard Added – Occidental Petroleum (OXY)

2009-10-15T13:44:00.001-04:00

New Scorecard Added – Occidental Petroleum (OXY)

Company Name: Occidental Petroleum (OXY)

Industry: Oil & Gas Producers

InvesGuard has just released a Corporate Governance scorecard for Occidental Petroleum. (OXY). Devon Energy scores well in its Internal Control Environment. Its Compensation practices need to be strengthened. It also needs to increase the level of its Social and Environmental reporting.

( Click here to view Occidental’s scorecard)

Given that it is a Oil & Gas Producer, Occidental’s poor showing on the Environmental and Social Commitment front could be of concern in the long term. Another concern from a long term perspective, is compensation. For a CEO, who as the proxy quotes has “Implemented a cost-cutting initiative in advance of world-wide economic deterioration” to take home a record breaking $65 million is both contra indicative to his cost cutting efforts as well as detrimental to increasing shareholder value.

From a reporting perspective, Occidental publishes certain mandated information on Emissions and certain other environmental metrics. But other critical metrics such as percentage of oil spill recovered are not reported in its Social Responsibility Report. nor is does it make a public commitment by participation in such collaborative initiatives like the UN Global Compact. More information about Occidental Petroleum’s Social and Environmental impact can be found on Occidental’s Company Page , under the “Social and Environmental” Tab.

Also of concern is the presence of a Board Executive Committee. This committee has been granted broad powers and is chaired by Dr Irani- Occidental’s CEO. Although this committee held no meetings during 2008, such a situation can intensify the dilemma of excessive CEO power versus a fully empowered one.

The company does however perform well across our Internal Control Environment criteria and demonstrates a well developed Audit mechanism with committee members that are not overextended.

Occidental’s Overview and Scorecard

Other companies covered by InvesGuard in the Oil & Gas Producers industry include:

- Vaalco Energy

- Chesapeake Energy

- Conoco Phillips

- Devon Energy Corp

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Have you 'Stimul(us)ated' enough today?

2009-02-17T09:44:00.009-05:00

This blog has transitioned into a full website offering non financial research. You can find more blog posts and research on www.invesguard.com

I think I contributed to the American economy yesterday. I bought clothes worth $79.78c from Old Navy. All in the name of 'stimulating' the economy ofcourse...

Well if you look at the stimulus plan in detail ( I don't think you can though..it's over a 1000 pages long) but if you did and if you also heard the Treasury Secretary's "plan" on reviving the economy, you would probably understand why it's upto regular folks like us to stimulate the economy.... While some believe that we should leave stimulating the economy to the government, i hold the opposite view. Well... not an extremely opposite view... I mean you needn't go bankrupt to stimulate...but a few indulgences here and there would be just what the doctor ordered for this ailing economy.

In any case, I thought I would note some interesting facts on Prez Obama's plan including some that could directly affect some of us:(easier than reading 1000 pages, no?)

It appears to be the longest congressional vote in history after requiring 5-hours and 17 minutes.
An income tax credit of upto $400 for individuals and $800 for couples in 2009 and 2010. Individuals earning upto $75,000 and couples upto $150,000 will qualify for a full credit.
First time homebuyers will be able to claim a tax credit of upto $8,000 for purchaszes made by Dec1, 2009.
Accelerated depreciation for businesses.
More highways and bridges than mass transit ,which is expected to ceate close to 835,000 jobs.
Money for high speed rail was quadrupled to $8 billion...wholly inadequate by some accounts, California estimates it will cost $45 billion to build its high speed rail.
For the jobless, the federal government would offer premium subsidies by paying 65% of the cost of group health benefits under the Cobra law for upto 9 months.
7 Democrats joined 76 Republicans to oppose the bill in the House.
According to an analysis by the Congressional Budget Office, over 74% of the money will be spent in the next 18 months.

These and more details can be viewed in a concise and easy to read image here. (Courtesy the New York Times.)

Live Blogging- CEO's Questioned on Allocation of TARP funds.

2009-02-11T10:10:00.014-05:00

Watch CEO's of large banks who received TARP funds being questioned over their allocation of these funds at http://www.cspan.org/Watch/C-SPAN3_wm.aspx

We will be live blogging so check back often...

10.15 a.m. No action yet...politicians cat fighting over time allocation to get their 2 bits in....

10.35 a.m. CEO's start their prepared testimony...basically defending themselves...
from the kind of information that these CEO's are presenting, it looks like their lawyers have done a great job!
Citi CEO has requested his Board to pay him a $1 salary and no bonus till the bank returns to profitability.

11.21 Rep Kanjorski- When did you first realize that there is a huge problem, what did you do?

BOA CEO Lewis- August 2007 timeframe the then treasury secretary contacted us....
Goldman CEO Blankfein- Before August 2007.

Rep Kanjorski- What do you see in the future? Have we failed?
No time for answer.

11.30 Rep Waters- Since you received TARP funds have you increased credit card interest rates?
BOA- Yes increased credit card rates to 9% customers
Citi- Yes
did you reduce the amt of credit available to customers?
None
Rep Waters to BOA- Do you have a loss mitigation department offshore?
BOA CEO- I dont know
You have to be 2 months behind to receive loan modifications?
None.
According to Rep Waters BOA & CITI received processing fees for receiving TARP funds. (None of the CEO's quite understood this...)

11.40a.m. Responding to a question, CITI CEO claims that Citi is successful at helping its mortgage customers if customers talk to them, open up to them.
Rep Maloney- Questions BOA CEO on the issue that has been on everybody's min...Merill's multi billion $$ bonuses.

Shocking Markopolos Testimony on Madoff Ponzi Scheme.

2009-02-03T22:15:00.004-05:00

Mr Markopolos, the whistleblower in the Bernie Madoff Ponzi scheme, is due to testify before the House of Representatives- Committee on Financial Services on Feb 4th.

A copy of his testimony has been made public in advance......at 65 pages long, it is at once facinating and shocking.

Check it out for yourself here.

Super Bowl, Innovative Severance, etc.

2009-02-02T07:32:00.017-05:00

First a word or two about the Super Bowl. To be honest, I am not a huge fan of American Football....I follow cricket and on occasion, some basketball. The only reason I look forward to the Super Bowl is for the ads. The mega hype surrounding these ads is strong enough to compel me to tune in. I am an enthusiastic supporter and participant of online polls that vote for the Best and Worst ads. This year CareerBuilder.com's 'Tips' ad has been voted as the Best and the Worst Ad on WSJ.com. See it for yourself here.

Now lets get down to business.....

This blog has often noted irregular, bloated or ridiculous severance payments to senior executives ....these agreements are getting more and more innovative, not to mention costly for companies and shareholders. Here is another one I found for New York & Company.

Mr. Richard Crystal has consented to extend his employment agreement until Feb 11th, 2011 without a salary increase...the kind man has also given up his severance payment of $3.9 million which he might have received in 2011 if his employment agreement did not get extended at that time. One might think.....there has to be a catch somewhere, right? I mean the man works at the same 'measly' salary of about a million bucks and agrees to waive severance.

But wait....here is the catch. In exchange for 'waiving' his severance, New York & Company's shareholders have to shell out $2 million between now and 2011. It's been termed as a 'signing bonus' for Mr.Richard Crystal. Signing bonus for an existing CEO? In today's hardpressed times? After announcing a cut of 310 jobs in January of this month?

As he put it himself while announcing the job cuts and store closings earlier last month,"These are unprecedented times in the retail industry and across many other industries and geographic regions."

The times may be unprecedented, Mr.Crystal but so is your modified employment agreement.

Banks Participating in TARP.

2009-01-31T16:18:00.005-05:00

I have noticed many visitors to my blog looking for details on banks that are participating in the U.S. Government's TARP program. In the past i have made lists and posted these lists. But obviously, this information keeps changing, so I thought the best thing would be for me to point visitors to the WSJ's Interactive Graphic (subscription not required)where the most current list of banks participating in TARP has been compiled. I have also created a link to 'List of Banks Participating in TARP' in my Bloglist (right sidebar) for easy access. Check back often for updates.

Severance Payments- An Issue of Size or Accounting?

2009-01-26T10:08:00.012-05:00

The past several weeks have seen an unusual increase in the number of severance agreements that are being put together as soon as an executive announces his resignation. I blogged on the severance package at Maidenform last week that included executive outplacement services in addition to a lumpsum cash payout and other benefits.

Some of these severance agreements have also been entered into the same day as the resignation date.

H&R Block had a similar situation that was revealed by the company's 8-K filed on January 23rd. In the filing, H&R Block announced the resignation of Steven Tait, President of its subsidiary "RSM McGladrey Business Services, Inc." on January 21st. On the same day, H&R Block entered into a generous Seperation Agreement with him. Under this agreement, Mr. Tait will not only receive a lumpsum cash amount of $827,668 but will also be entitled to a short term incentive bonus for 2009 ( this inspite of Mr.Tait retiring in April of 2009) as well as full vesting of his 163,788 options as well as other outstanding share options.

Is this an obscene amount? Probably not in a market and economy that is anything unlike the one we are facing today... but in a situation where every industry and sector is clinging on to its dear life, the last thing we need is another well padded severance package for an already wallet fattened executive.

Other than the fact that such large payments stand out like sore thumbs, (gold digits nevertheless!), what I would like to understand is how do these companies just charge such expenses? Aren't these expenses to be planned out, provided for in the books and then charged off against the provision? How do you meet your forecasts with charges like these cropping up at the drop of the hat. H&R Block had a similar situation when Mr.Mark Ernst resigned as Chairman, President and CEO of one of its subsidiaries' HRB Management, as well as with the resignation of William L. Trubeck the ex-CFO at the end of 2007. Mr Ernst was paid a lump sum cash severance payment of a whopping $2,550,000 in addition to other benefits and Mr.Trubeck an amount of $900,000. As in the case of Mr. Tait, the severance agreement was entered into on the same date as Mr. Ernst's resignation date and in the case of Mr.Trubeck the severance agreement was dated after the resignation date but before his termination date.

2009-01-23T10:43:00.005-05:00

My Friday reading

1. John Thain's excesses Here is a partial list of Thain's 'indulgences' for his office:
a. $35,000 for something called a "commode on legs.”
b. $68,000 for a "19th Century Credenza" in his office.
c.$230,000 to his driver for one year’s work.

2. Potential change in India's foreign investment policy for the airlines industry

3. Windows 7 versus Vista

4. Japanese Ponzi Scheme unearthed

5. Vatican on YouTube

More Uncertainty for Citi Employees

2009-01-20T20:50:00.005-05:00

As can be expected, with all the changes happening over at Citi, there has been an increase in the number of SEC forms filed by the company. Such filings are expected to provide a greater degree of transparency and disclosure.

But a recent 8-k filing by Citi group provided hardly any 'transparency'. The filing referred to the Citi- Morgan Stanley joint venture. It stated "Citi and Morgan Stanley have agreed to certain general principles regarding the parties’ intended treatment of Citi and Morgan Stanley employees who transfer to the Joint Venture..."

There were no additional details on such what these "general principles" might be. Isn't the intention of filing an 8-K to provide full and complete information to the public? It is hard to imagine that they are still working out the specifics.

As per the Joint Venture agreement, the board of directors of the Joint Venture entity will "have veto rights" with respect to "certain employees" for a period of three years.
Oh and by the way, there will be a majority of Morgan Stanley directors on this board.
If you ask me, this does not bode too well for Citi employees.

Maidenform's Unflattering Governance Style!

2009-01-19T14:27:00.009-05:00

A few posts back, I blogged about the mass exodus of Board level directors and other senior management at some companies..... almost akin to mice fleeing a sinking ship!

Look at Maidenform Brands...the Chairman of the Board resigned on January 5th 2009. Additionally, in an 8-K filed by Maidenform on Juanuary 12th, the company announced that Steven Masket resigned as EVP, General Counsel and Secretary w.e.f 3-6-09. In a subsequent 8-K filed by the company on January 16th, this seperation is termed as a 'resignation and retirement'...never heard of such a thing...you can either retire or resign...

Other than accrued salary and benefits upto his effective resignation date,Mr.Masket will also be entitled to receive payment for any unused vacation as well as executive outplacement services up to a maximum of $10,000, which will be provided for a period of not less than 3 months commencing on the Resignation Date, until Mr. Masket obtains subsequent employment or September 6, 2009 as well as payment of an amount equal to $372,395, paid in installments over a period of 12 months from the Resignation date.

In these times of mass mayoffs, zero retirement benefits is this justifiable in any way? Oh by the way, the company, like countless others, has revised is future earnings estimate.It's reported diluted EPS reduced from the earlier range of $1.17- $1.21 per share to $1.02- $1.04 per share. An additional fourth quarter restructuring costs of $0.03 per share has also been latched on to the revised estimate.This restructuring is "for a strategic workforce restructuring of 9% of corporate staff." With severance packages like the one handed out to Mr.Masket, is it any surprise that the company had to account for an extra "restructuring cost"?

Satyam's New Auditors.

2009-01-14T10:20:00.002-05:00

A quick update on the Satyam auditor front: Exactly as I had predicted in yesterday's blog post, Deloitte Touche Tohmatsu (which in India is represented by S.B.Billimoria & Co.) has been appointed as the new external auditors.

S.B.Billimoria & Co. have an untarnished reputation in India. They represent big multinationals and large Indian conglomerates such as the TATA group, HDFC, HDFC bank etc.

Full Disclosure: I worked with S.B.Billimoria in India for close to 4 years.

Basic Governance Controls Missing at Satyam.

2009-01-13T09:32:00.012-05:00

The ongoing Satyam saga has made me very curious about the level of disclosures as well as corporate governance practices that were being followed there. Unlike U.S. public companies, which are required to make certain disclosures of their governance practices, Indian companies have a relatively lower disclosure threshold. Ofcourse, the fact that Satyam has its ADR's listed on the NYSE makes it subject to a few of NYSE listing requirements. These requirements are considerably fewer in number as compared to a U.S. company whose shares are listed on the NYSE.

On a detailed reading of Satyam's latest 20F Annual Financial report (for the year ended March 31, 2008) filed with the SEC in August 2008, I found the following striking oddities:

None of Satyam's Board Members appear to have any financial experience -accounting or auditing or any other kind of financial expertise. It is no therefore no surprise to see how the CEO could have scammed the entire Board and gotten away with it for so long.
None of the members of the Board's Audit Committee are financial experts within the meaning of 'financial expert' as laid down by the NYSE. Their review and oversight procedures while acting as members of such a Audit Committee remains a mystery.
The company does NOT have a corporate governance or a nominating committee. This naturally leads us to question the basis on which Board members were appointed. There might have been a potential conflict of interest or board interlocks which went unsupervised.
Close to 14% of the external auditor's 2007 remuneration was from "Other Services". There has been no disclosure on the details behind these "Other Services". In order to prevent auditors from performing services that may constitute a conflict of interest, many country's corporate laws or listing standards discourage auditors from performing other services other than financial or tax audits. How does one trust financial statements that have been audited by auditors who could have potential conflicts of interest?
Only 5 of their 9 Board members were independent outside directors. The other 4 were employee directors. Satyam did not follow the practice of having its non management directors meet independently without the employee directors being present. Total lack of independence in their Board and its functioning indicates weak governance practices and a lack of oversight by independent directors of the Board.
Audit Fees paid to PricewaterhouseCoopers (PwC) increased from $800 K to over $1 million in 2008. No explanation for such an increase has been provided.
One of the outside independent directors has been paid a special remuneration of $0.2 million which is far higher than is the norm. This has been supposedly provided for his "professional services". If he is being paid for professional services, doesn't that make him a non independent director?
The entire non executive board (non-management Board) was paid through commissions. The amount of such commissions is not disclosed nor is the basis of such computation of commissions given. How does a shareholder ensure that these 'independent' directors don't inflate profits to allow them to receive fat commissions?

It will be interesting to see whether and how the new Board at Satyam addresses these issues. With Mr. Deepak Parekh (chairman of HDFC corp.) on its Board, Satyam shareholders and employees can be ensured of an honest and indepth review. The Board's first step of replacing PwC as the auditors has been in the right direction. Given the fact that HDFC has had the same auditors S.B.Billimoria & Co. (member firm Deloitte Touche Tohmatsu) for over 15 years, that maybe one of the shortlisted audit firms for Satyam. Lets wait and watch.

2009-01-02T07:00:00.002-05:00

I have been enjoying the scorching Mumbai heat for the past couple of weeks... after enduring multiple brutal snow and ice storms in the U.S., I have learned not to complain about the Indian heat.

Anyway, after a short sabbatical from the webosphere, (I must admit I had some distinct withdrawal symptoms at the beginning) I found something interesting on the Wall Street Journal.

This is a commentary of a Russian professor on the potential demise of the U.S. by 2010.
The professor goes so far as to predict a a bloody civil war in the fall of 2010 followed by a break up of the United States!At 500 reader comments, it has become one of the most read articles on the Journal.

Read it hereand decide for yourself whether this is pure Murdoch style sensationalism or has any true substance to it.

Satyam Computers and Corporate Governance-N'ere The Twain Shall Meet

2008-12-18T11:04:00.010-05:00

Update 9 p.m (EST): Few of Satyam's strategic clients are looking to re-evaluate their contracts with Satyam as "they are no longer satisfied with the intent and focus of the company."

India has been in the news a lot lately....unfortunately for all the wrong reasons...here is one more...

Satyam Computers, an Indian computer services firm with ADR's listed on the NYSE, is facing a a severe governance fiasco. Satyam recently announced its decision to buy controlling stakes in two infrastructure companies in which the chairman and promoter of Satyam had sizable stakes. Founders of the Indian company Satyam held as much as 30 to 35% in the infrastructure companies - Maytas Infra inc and Maytas properties. According to analysts, the deal was not only overpriced (at $1.6 billion) but was also questionable on the grounds that the businesses (computer services and infrastructure) were not complementary by any stretch of imagination.

Satyam faced its shareholders' ire and saw its ADR price drop 55 % to a 52 week low of $5.70.
You can see the price fluctuation in the last 5 days for Satyam especially a sharp dip to the $5 levels.

Of course, seeing the market reaction, Satyam has abandoned its acquisition plans...but not without some beating to its reputation. Ironically, the company had recently been awarded the coveted Golden Peacock Global Award for Excellence in Corporate Governance for 2008. If this is the kind of governance measures that a "top governance" company practices what about the others? I shudder to think......
Satyam now faces an inquiry from India's Ministry of Corporate Affairs into the board decisions behind this acquisiton plan. The Ministry of Corporate Affairs has become more stringent on Indian companies, with a recent proposal that would require all companies, whether public or private, to have atleast a third of their directors to be independent.

Satyam has had a bad year overall...in October of this year, Satyam was banned from carrying out an offshore work for the World Bank after news one or more Satyam contractors were accused of installing a spy software at the World Bank workstations. Satyam had been the vendor of choice at the World Bank for a long time.

The Satyam governance debacle could possible be a culture issue specific to India and maybe other South Asian countries. A sizable number of large multinational corporations in India have started as family owned businesses. Even after these companies are made public, they continue to be governed at the whims and fancies of the promoter family. Personal relationships drive many business agreements....

A case in point is the ongoing battle between the Ambani brothers who run the Reliance group of companies. According to Forbes Magazine, both the Ambani brothers figure in the top 10 richest men in the world. Rich they maybe, but unfortunately, as far as corporate governance goes, they lag far behind. Their ongoing personal feud scuttled Reliance Communications' potential merger with South African MTN Communications.

Lack of governance measures maybe the norm in India but there are some notable exceptions too...on top of the list would be Infosys Technologies or the ICICI Bank ....maybe a few others. There aren't too many of them but hopefully Satyam's governance fiasco will prove a lesson to family owned businesses.

Keep checking back for updates on the Satyam story...

Mad(off) Money !!

2008-12-15T23:40:00.006-05:00

It's almost as if the plague hit Wall Street...first the credit crisis ( which of course was preceded by the subprime mortgage mess and followed by the current recession)and along its heels comes a ponzi scheme the size of Godzilla!

Much has been and will be discussed about Bernard L.Madoff and his mad ponzi scheme.
By some accounts,the $50 billion ponzi scheme created by Madoff can be labeled as one of the costliest financial frauds ever created by an individual.

As details slowly trickle in on the operations behind Madoff's ponzi scheme, i thought it would be worthwhile to go over some 'Do's and Don'ts' for avoiding a Ponzi Scheme.

I found this general list on wsj.com

According to this one which is a little more specific, investors should be on red alert when an investment manager asks for checks to be made out to him or his company.

This is what the FBI has to say about ponzi schemes (scroll down on the FBI page till you reach 'ponzi schemes')- exercise due diligence and make sure you fully understand the investment before you invest the money.

Another nugget of advice from the Asset Protection Blog- Obtain independent advice and turn your back on "guaranteed" profits if they seem unrealistic. And of course, the common refrain that should be applied in everything: If it seems too good to be true—it probably isn't true.

Oh and by the way, in case you were wondering where the "Ponzi" in Ponzi scheme came from, here is the lowdown- (courtesy Wikipedia).

" The scheme is named after Charles Ponzi, who became notorious for using the technique after emigrating from Italy to the United States in 1903. Ponzi was not the first to invent such a scheme, but his operation took in so much money that it was the first to become known throughout the United States. His original scheme was in theory based on arbitraging international reply coupons for postage stamps, but soon diverted later investors' money to support payments to earlier investors and Ponzi's personal wealth."

Yahoo's 'Extreme Makeover'- Change in its Contentious Severance Plan

2008-12-10T23:24:00.008-05:00

One of the primary criticism leveled against Yahoo, that had many shareholders up in arms during the Microsoft debacle was the fact that the company had a rock solid severance package in place to deter any potential takeover.

According to Yahoo's old severance plan, if an eligible employee’s employment with the Company is terminated by the Company without “cause” or by the employee for “good reason” within two years after a change in control of the Company, the employee would be eligible to receive severance benefits.

The benefits under the old plan related to medical, dental coverage, accelerated vesting of stock options and RSU’s, continuation of base salary for a limited period of time (maximum period of 24 months) etc.

After getting sued by angry investors over the protective nature of its severance plan, Yahoo has finally been forced to make changes to its current severance plan. In an 8-K filing yesterday,
Yahoo has sought to make some fundamental changes to its severance plans.

At the basic level, it takes away the Board’s ability to declare that a change of control event has occurred. Secondly, a Yahoo employee needs to show a material diminution in his/her salary or duties to claim severance benefits. Thirdly, a change in the Board composition will not constitute a change of control event.

A detailed reading of Yahoo's amended severance plan, revealed a very key statement that is hidden deep in Appendix B. It directly addresses the potential takeover of the company’s search business. In defining a Change of Control, the document states that , “ a sale of the Company’s search business shall not constitute a Change in Control ……”. What this statement essentially means is that in in case of a takeover of Yahoo’s search business, severance benefits related to a change in control situation will not automatically kick in.
This is a brand new statement inserted into the severance plan, seemingly to smooth the way for Microsoft to takeover all of Yahoo’s search business.

In effect, there seems to be an almost inevitable quality to the likelihood of a possible takeover of Yahoo’s search business. What do you think?

Note to Mr.CEO- "Do Unto Others As You Would Have Them Do Unto You"

2008-12-06T17:13:00.012-05:00

The big economy news this past week was the total number of job losses in the economy- 1.9 million jobs lost year to date out of which 533,000 jobs were lost in November alone. (See graph below)

To make matters worse, there have been reports of accelerated layoffs at companies in preparation for a bleak 2009.

The most obvious objective for such aggressive job cuts is cost reduction and a quick return to
profitability. But why are companies not looking at senior management job cuts or paycuts as a show of solidarity? The Europeans seem to have beaten the US to it. (UBS, Deutsche Bank and Barclays PLC have either pulled bonuses for top executives, or executives there have voluntarily forfeited them.)

At invESGuard, we pulled up a list of companies that have announced layoffs and analyzed any CEO paycut or salary review at the same company. Here's what we found:

1. Out of the 24 companies on our list, CEO's of only 3 out 24 companies (12.5%) announced a paycut. This does not include Citigroup CEO who has yet to announce the full extent of his paycut, or the Detroit Three who have outlined a conditional $1 salary for 2009 (contingent on being granted a Government loan).

2. The CEO of Hartford financial was given a $3.25 million bonus as part of a non equity incentive plan compensation.

3.Legg Mason CEO compensation includes a $1.9 million bonus.

4. Boeing CEO's base salary actually increased by $50,000.

Morgan Stanley CEO is one of the 3 out of 24 CEO's who has received a lower compensation during 2007 given the dismal company performance. However, a close look at the salaries of senior management at Morgan Stanley, reveals a different picture :
Mr.Scully (Co-President) made over $15 million
Former Chief Financial Officer, Mr. Sidwell was granted $14.61 million (including a cash bonus of $12.7 million owing to he retirement).
The new Chief Financial Officer, Mr.Kellheler made $21 million including a bonus of $6.9 million. Mr.Nides (Chief Admin Officer) made $6.33 million.
The total bonus paid to the 5 senior executives for 2007 totaled a whopping $35 million.
So much for the CEO pay cut!

One question that repeatedly comes to mind is- Do they even understand the true meaning of a bonus payout and the way that this is supposed to work?

The complete disregard with which CEO's refuse to even consider a paycut while the middle and lower management not just face paycuts but in most cases lose jobs, is completely ridiculous.

Even the Big Three Auto Industry Chiefs who have been before the Congress begging bowl in hand, have announced only conditional paycuts. That is, in return for the loans from the government, will they will accept a $1 salary for 2009.

Rep.Kanjorski rightly pointed out during the hearing, 'Instead of $1 salary for 2009, you should not be getting a greater salary that any of the successful Japanese auto executives as long as you are indebted to the United States. Until that time you should not be getting more than 20 times the salary of successful Japanese executives.'
Honestly, without the government's help, at least 2 of these auto companies would be broke and then the possibility of even earning that $1 would not exist. How ironical that no sweeping management concessions have been announced by GM when according to one news report, GM is not even replacing the batteries in its wall clocks!

Depressing as this news maybe, there have been a few bright spots:

1.In July of this year, the CEO of Midwest Air Group Inc. says he’s taking a 40% pay cut as part of the company’s restructuring, a plan that includes demands for even deeper pay cuts from union pilots and flight attendants.
2. The new AIG CEO accept ed a 1$ salary in return for government help.
3.Ky based Ashland's CEO has accepted a paycut for 2008.

If you know of any other companies that have made positive changes to Senior management compensation, drop me a line at tejus.trivedi@gmail.com

Auto Hearing Live Blogging- Detroit Three Hearing December 5.

2008-12-05T09:47:00.023-05:00

9.48 a.m.
Mr. Michael:

"Doubt that financial institutions would want to lend (to automotive industry)"
We have to worry about oversight and accountability"

Mr. Waters
Concerned about plan submitted, how will it affect jobs?
What impact will the reduction of dealerships will have on jobs in the regions where these dealers are present.

Mr. King
If we knew where the money is going, there would be reasonable assurance that the plan might just work.
What are the chances that this plan will work?

Mr. Watt
Talked to various dealers and feels there is a serious problem for example that one man did not sell a single car in October of this year.

Mr. Manzullo
The plan should address how will the Detroit Three will try to increase customer demand for cars. None of the plans address this critical issue.

Mr. Biggert
"We don't know whether granting your request, means you will not be back here in a few months time."

10.02 a.m.
Mr. Sherman
"We need to put tough standards in the bill." In order to minimize the number of executives from other industries to come to the Congress for money.
"...needs to provide the assurance that you cannot close plants without approval from the" (administration)

Mr. Scott
The Senator has raised an issue that was addressed many times yesterday which is the potential merger of GM and Chrysler.
According to Senator Scott, "Look carefully at merging your (GM+ Chrysler) operations."

10.11 a.m.
Mrs. Brown-Waite
Crisis comes from lack of foresight, governance....."GM and Chrysler ignored their liquidity problems..."

Mr. Green
Can we afford to put out of 2 million people out of work?"

Mr. McCotter (michigan)
" You have put up a very viable restructuring plan"

10.21 a.m.
Opening statements by UAW President (Mr. Gettelfinger)- Basically Mr. Gettelfinger's opening statement is no different from what he presented yesterday. Ditto for Mr.Ford Mulally and Mr. GM Wagoner.

10.42 a.m.
Ramifications in dollar terms on the failure of dealerships.
Nardelli- "240 dealer gone bankrupt since last Saturday"

Center for Automotive Research: 3 million people could lose their jobs and out of this 240000 relate to the Big Three.
Mr.Wagoner- "We have been dealing with a record number of dealer restructuring"

Senators asking more questions specifically related to the plan. Questions around what happens if the plan does not work, can failure of the suppliers bring down the whole industry including suppliers etc.

10.53 a.m.
Mr. Wilson
We should have wording that covers using funds (if given) to prop up suppliers in the auto bailout plan.

Mr.Gettelfinger- 'Men and women of the UAW should be given recognition for the sacrifices made'.

Wagoner- Short Term Financing and Oversight Board as a mechanism to force all the parties to negotiate.

11 a.m.
Mr. Klein

The Big Three should work as a Joint Enterprise,in the technology sector.They should take some money out of what they might receive from Congress and collaborate together on technology, best concepts for future development and commercialization.

Mr Nardelli agrees
Wagoner- Yes
lady nodding vigorously in the background of Mr.Wagoner.
Mr.Mulally- Yes doing it with suppliers.

Rep.Hodes
Rep Hodes to Detroit Three, "Two weeks back you were simply in another universe"
What amount of money do you put on the need of the credit companies?
Chrysler- 4 to 5 billion
Ford- $12 billion (accessed already $4 billion out $16 billion from short term asset backed federal reserve loan)
GM- no exact amount

What percentage of money lent to these auto credit companies should go towards auto loans versus other purposes?-Unadressed question.

GM- Overseas business have been profitable.
Mr.Wagoner reiterates, 'We have paid $103 billion in the last 15 years in pension and medical insurance payouts.'

Mr.Manzullo
Why would auto industry want to start commercial banks? "Your job is to make cars" .Mr Manzullo feels that financing cars should be left to community banks.
Manzullo to Ford- Are we going to lose more industries and jobs because Ford manufactures and will continue to manufacture tool and dye equipment in China?
Ford- No...you bet (after a great deal of evasiveness)

11.34 a.m.
Mr. Hensarling
"If we say yes to you then who do we say no to?"
'Should it be only the small businesses that supply to the Auto Industry that should be helped?'
According to a CBS resport, $50 million paid by the Detroit Three on lobbying efforts. How much of this money has gone into lobbying to receive money under this bailout hearing.

One of the representatives from California had a very relevant question, 'Can you meet fuel economy standards by 2015?'
Great question but none of the participants were allowed to answer because of an administrative issue with time alloted to the Representative who asked the question.
Honestly, if this is the way the Congress takes its decisions, then how can we expect any rational decision?

Rep Kanjorski
Representative to Detroit Three.

"Instead of $1 a year salary, you should not be getting a greater salary that any of the successful Japanese auto executives as long as you are indebted to the United States. Until that time you should not be getting more than 20 times the salary of successful Japanese executives."

This statement by Rep Kanjorski is quite ironical if you look at Japanese companies and their struggle with bringing their CEO pay at par with their global counterparts.(http://online.wsj.com/article/SB122782362228562381.html)

Rep Maloney (New York)
Will you cease all legal and lobbying efforts to block California greenhouse standards for cars that have been adopted in New York and many other states?

Why can't you meet standards of fuel efficiency of other countries? That may be the only way to export more cars?

Live Blogging- Automobile Industry Senate Hearing Panel 2.

2008-12-04T12:00:00.022-05:00

We are live blogging the Dec 5th auto hearing here .

Refer to the post below for Panel 1 that included questions posed by the Senate to the Comptroller General of Government Accoutability Office (GAO) on the potential bailout of the Auto Industry.

Senator Dodd introducing the second Panel.

Panel 2 consisting of :

1. President of the UAW
2. Chairman CEO of Chrysler
3. CEO-General Motors
4. CEO-Ford
5. President Automotive Retailers Association
6. President COO-Johnson Controls Inc
7 Chief Economist and founder of Moody'seconomics.com

Mr Wagoner Chairman & CEO General Motors:
Ironically, 2008 is GM's centennial year. According to Mr Wagoner, the restructuring plan almost creates a new blueprint for the revival of the company. Believes the plan is achievable. He requests $2 billion in short term loans and $6bil in line of credit. Repayment will begin as early as 2011 and complete by 2020. He wants a federal Oversight Board.

President UAW
opening statement

believes GM and Chrysler could run out of funds. Wants funds to be given to GM, Chrysler and Ford. With labor cost renegotiations, any differences in such costs as compared to international labor costs would be negligible.
Chapter 11 bankruptcy "simply not viable" neither is a pre-packaged bankruptcy.

Mr.Mulally
CEO Ford

Ford has a "laser focus" on the Blue Oval. Reduced investment in Mazda. Matching production to customer demand. Higher focus on smaller cars, fuel efficiency. "We are really focused."
Wants $9 billion in bridge financing may not use it, use this money for aggressive transformation.

Mr Nardelli
CEO Chairman Chrysler
requests $7 billion loan for continue restructuring, manufacturing fuel efficient trucks and cars, begin repayment in 2012. Wants immediate assistance from TARP.

Mr. Fleming
President Automotive Retailers Association
The Auto Industry failure will not just be a Ripple effect but a "Tsunami" (that word again!)
"Consider the human side"

Mr.Wandell
Johnson Controls-President and COO
Largest supplier of automotive batteries to the auto manufacturers.
Vast majority of minority and women owned suppliers can potentially fail .
Over 35% of their suppliers are financially distressed on the verge of bankruptcy.

Mr.Zandi
Chief Economist of Moody's economist.com

Loans requested by Auto Companies is insufficient. They will come back for more.

Q&A

Senator Dodd
1. Would you be willing to accept similar arrangement/model that had been used during Chrysler's 1979 financing.- Yes by all.
2. Cerebrus purchased Chrysler for $7 billion which is exactly the figure that Chrysler is asking the Congress for. What does that indicate?-Nardelli thinks there is no connection.
3. In view of the potential ramping up of mass transit, the big Three believe they can use their current brands to take advantage of this ramp up.
4. Mr Dodd wonders if management continuation at GM is the right way to go- Mr.Wagoner responds "I serve at the pleasure of the board"

Senator Shelby
1. Will the big Three provide full proforma financial statements for the next three years?-Yes from all.

Senator Menendez
1. Do the big Three refute the claim that they will be back for more money soon?
-GM, Ford believe their assumptions are conservative so indirectly they don't believe they will be back.

1.27 p.m.
Senator Crapo:
Congress might be able to provide the Oversight Board with the authority to impose restructuring conditions on all stakeholders.

Big Three
GM needs $4 billion immediately to tide matters over till end January 2009.
Ford just needs approval for funding if they should need it going forward.
Chrysler needs $4billion out of $7billion immediately.

Mr.Schumer
"We want to see the conditions before we give you the money"
Big Three has no leverage, not even threatening to go bankrupt will work. As Mr. Crapo put it, it is like saying "I will cut my nose to spite my face"

1.42p.m.

The President of the UAW is pushing for protecting the domestic industry versus promoting foreign competition.
Senator Schumer asks for an oral committment from all participants that they will abide by any arrangement covenants and make necessary sacrifices to make things work.

1.55 p.m.
Senator Corker to Chrysler "...you can date somebody and hopefully get married soon before you run out of money".
Chrysler Board member (representing the single major investor in Chrysler) to Senator Corker "there is no way that we are willing to make additional investments in the Auto Industry."

2.01 p.m.
Senator Corker, "Less public money (will be used) if the two of you (GM + Chrysler) consolidated"
Q to Mr.Wagoner "Why did you drop the plans to consolidate with Chrysler?"
Mr Wagoner blames liquidity issues for dropping the plan to merge with Chrysler.
Senator Corker- Would the UAW convert obligations into equity in GM?
UAW President- Cannot answer without "expert advice" (Lazard helping UAW.)

2.16 p.m
Senator Casey to Detroit Three- would you be willing to make monthly reporting and making government assistance as the most senior debt?
Yes to the first one
Maybe to the second one(after discussions with current secured creditors)
Senator Tester- Will you be back for more?
Detroit Three- Chrysler- we will get through 2009
Ford- We might be asking for the bridge loan.
GM- We might have to cut costs or require more funding

Big commotion!! Protest, Shouting

Senator Tester- Needs assurance that no dollars given would be used for mergers either domestic or international.

2.50p.m.
Senator Bennett, "everything i have seen...a merger between Chrysler and GM is a good thing"

Mr Wagoner, "We would be willing to look at it (GM+ Chrysler)" (after talking with UAW)

3.20 p.m.
Senator Corker- "We are really here because of GM."
- Senator Corker received an email from Senator Biden who runs the 136 financing plan, their applications have not been rejected but have been sent back for more information.
Senator Corker- "If we put money in GM,"....bondholders would be unwilling to take a haircut. This is a potential problem. They would want more now that GM has money.

Senator Corker to GM ,between a choice of accepting an arrangement from the Government with stipulations to be completed by Mar 31 or filing Chapter 11 bankruptcy, what would GM choose?
GM- Accept financing from government even if it has restrictive stipulations.

3.40 p.m.
Senator Dodd- "Inaction is unacceptable but we are not just going to write a check either". "We are looking at a death sentence."
Sit down over the next 24-48 hours and decide what to do next.

Committee adjourned at 3.42 p.m.

Live Blogging- Automobile Industry Senate Hearing Panel 1.

2008-12-04T10:06:00.015-05:00

We are live blogging the Dec 5th auto hearing here .

We are live blogging panel 2 (Detroit 3 on the witness stand) right now!!

Invesguard will bring you live updates from the Senate Hearing as it happens...
Keep checking back for frequent updates..

The hearing has just started... Senator Dodd thanking outgoing senators....

Senator Dodd's opening statements:
According to the Senator, he asked Mr Bernancke if there was anything preventing the Fed from providing financing to the automobile industry. The treasury and Fed representatives were invited to the hearing but declined. He believes that failure of the Auto Industry would have ramifications far beyond manufacturing and pensions" and would "worsen the crisis".
Most of his opening statement was spent on explaining the ramifications of the failure of th auto industry.
Bottomline, he supports bankrolling the auto industry. He believes that conditions levied on Auto Industry companies for getting financing should also be levied on companies from the Financial Industry who have participated in TARP.

Senator Shelby opening statements:
He intends to oppose the bailout of the Auto Industry...
The "price tag" for the bailout increased from $25 billion to $34 billion 2 weeks. What changed?

First Witness:
Gene Dodaro
Acting Comptroller General of Government Accountability Office (GAO)

Before financing is provided, there is a need to understand if auto industry crisis is national economic crisis, if there is an exit strategy, companies are willing to make concessions , the federal government must be put in a first lien holder position, there should be controls over management, clear and consistent federal controls and monitoring over disbursement and use of funds.
There should be a rigorous board to oversee the administration of monies. This board has to be established if the decision is made to go forward with financing.
Financing could be provided through short term and long term loans in view of the urgency of the crisis.
He believes that TARP legislation is broad enough to provide such financing. But Board oversight should be included because current TARP legislation does not include critical management oversight.
UPDATE: Mr. Dodaro insists that the Congress should receive collateral for the loan indicating that he may not be trusting the assumptions on which the Auto Industry has based its potential repayment schedule.

Senator Bennett

Suggests providing financing to financial companies to provide funds to Auto companies. Such financing could be through equity participation by financial institutions in such auto companies. In such a way, financial companies will ensure the success of the auto companies and provide oversight of the disbursement of the funds as well.

Senator Schumer

Does not trust the Auto Industry enough to give them the money. Needs greater oversight and cooperation from various stakeholders for the Auto Industry bailout work.

Gary Kepplinger
General Counsel to the GAO

He is providing inputs from the Chrysler government financing (from a few years back) to provide similar controlling tools here.

Senator Brown

Points out that most of these questions surrounding accountability and transparency were never posed to banks that participated in TARP. I guess the Congress is a quick learner :-) Better late than never!!

List of Banks Participating in TARP- Refer to the sidebar of this blog for the latest list.

2008-12-03T21:41:00.005-05:00

as of November 25th 2008.
Source: The Wall Street Journal
You will find the latest list under the second to last item of "My Blog List" on the sidebar of this blog.

Nordstrom's skewed incentive plan.

2008-11-25T11:03:00.011-05:00

What kind of long term incentive plan involves accelerated vesting of stock units?

This is precisely the kind of incentive that is outlined in Nordstrom's revised 2004 Equity Incentive Plan (EIP) that I found in its recent 8-K filing (11/24/08). It outlines a plan to accelerate vesting of restricted stock units from 3 years to 6 months. This has some really strong implications considering that the stock is trading at its lowest levels in the past year! Ironically, the company states the purpose of the EIP is "to promote the long-term success of the Company and its subsidiaries and the creation of shareholder value by (a) encouraging Employees and Non-Employee Directors to focus on critical long-range objectives,......"

With restricted stock units vesting as fast as 6 months, there is almost, a myopic focus on the short term rather than long term. The awards of such restricted stock units is completely at the discretion of the 4 directors on the Compensation Committee as stated by the 8-K filing, "The (Compensation) committee shall select employees and non employee directors who will receive benefits under this plan."

What will be interesting to see is who will be awarded such restricted stock units in the months to come. As per Nordstrom's latest proxy filed in April of 2008, none of the named executive officers had any outstanding restricted stock awards. It almost appears as if the company is laying the groundwork to start issuing some lucrative restricted stock units to certain executive officers and directors.

Juggling Citigroup Directors drop the ball?

2008-11-21T15:26:00.011-05:00

The idea behind having independent outside directors on a company's Board is primarily the expert third party advice that they can potentially provide. Ofcourse, 'potentially' is a key word here. Just nominating a few senior executives from other companies to your board is not enough. The 'potential' needs to evolve into an active and interested director. This transformation from 'potential' to 'actual' happens when these directors are regulars at Board meetings and devote time that is needed to provide advisory services to these public companies.

Unfortunately, another by-product of the financial crisis has been the spate of director resignations at financially troubled companies.

The WSJ recently reported on the growing number of such Board resignations at public companies. This should come as no surprise when you consider the number of boards that each of these "outside experts" are sitting on.

As an example consider the number of public company boards that some Citigroup directors are sitting on: As per the company's proxy statement issued in 2008, the final tally of directors who sat on more than 2 public company boards looked like this:
(The numbers in brackets show the total number of public company boards that these directors sit on.)

Sir Winfried Bischoff (4),Kenneth T. Derr(3),John M. Deutch(4), Anne M. Mulcahy (3),Dr. Judith Rodin (3), Robert L. Ryan(5- He retired from one in June'08)

Goldman Sachs looks like this:

William W.George (3), James A Johnson (3), Lois Juliber (3), Rajat Gupta (4) Laxmi Mittal (4)

Besides this, 3 out 13 board members at CITI are CEO's of other public companies. At Bank of America 2 board members are CEO's of public companies.

With directors sitting on multiple Boards, how can shareholders expect a focused and attentive Board? For those that sit on 3 or more Boards, they could even be getting mixed up in the issues and concerns at different companies. It wouldn't be a stretch to imagine getting mixed up while juggling meeting dates, agendas and decisions when you are managing compensation, audit, risk review etc at multiple public companies, not to mention the non profits that also vie for your attention.

image: mcglinch.com

Basel Committee Strategy to Combat Financial Crisis.

2008-11-21T11:48:00.003-05:00

Yesterday, the Basel Committee announced a "comprehensive strategy" to combat the banking crisis. Chief among the recommendations were:

Ensuring the risk capture process under the Basel II framework included both book and off-balance sheet exposures.

Increasing capital buffers that will aid in times of stress.

Increasing vigilance over liquidity levels at cross border banks through stronger supervisory frameworks.

Using Basel II to build up governance practices at banks.

For a full report click here.

While on the subject of Basel and its supervising body, Bank For International Settlements (BIS), back in September, Már Gudmundsson, the Deputy Head of the Monetary and Economic Department of the BIS, addressed the Financial Technology Congress at Boston.

A few of his observations presented at this forum on the current financial crisis:

-Financial institutions are in the process of reducing their leverage and size, by both selling assets and reducing staff. The result will be a smaller financial sector, at least for a while.
-The banking system will probably have to operate with higher capital buffers than prior to the crisis.
-There might be additional capital charges under Pillar 2 (supervisory review process). In addition, there is an active discussion taking place on the merits of introducing a limit on the leverage ratio of financial institutions, which, depending on where it is set, might call for more capital than otherwise at the peak of the next boom.
-Banking supervisors will demand high quality data and analysis.

During his speech, he painted a picture of the future of the financial sector in the years to come. Here are a few of his predictions:

"1. Higher capital and liquidity buffers and higher risk premia will entail a higher cost of capital and credit than before the crisis. That is not necessarily bad, as risk was underpriced.

2. Financial firms basing their business models on cheap access to funding in wholesale markets will either have to adapt or disappear. In the United States, the trend is currently towards universal banking. Competition for deposit financing will also be intense for a while.

3. On the product side, a premium will be put on simpler products because regulators and investors will remain sceptical of complex structured products and because management of financial firms will insist on understanding the products they offer, at least for a while!

4. The originate-to-distribute model remains to be fixed, and the interests of all the various players in the securitisation chain have to be better aligned. However, that does not mean that the model will disappear. At the fundamental level, the idea of distributing risk away from the institutions at the core of the financial system to investors that are willing and able to share in the risks is basically sound.

5. Finally, the financial sector will become smaller and less leveraged. That is the only way the sector can be returned to soundness and profitability in the environment that is likely to prevail in the post-crisis period. However, such retrenchment has to be seen against the earlier growth of the sector"

For a full report on his speech refer here.

Unrest at Citi India.

2008-11-20T14:42:00.004-05:00

Citigroup lost its CEO of India and South Asia, Mr.Sanjay Nayar. He will be succeeded by Mark Robinson, a longtime Citi employee.

Mr.Nayar is slated to join Kohlberg Kravis Roberts & Co. early next year as CEO (India).

Citi is also planning to slash 1000 jobs in India, primarily in its lending arm- Citifinancial India. These changes come close on the heels of Citi's recent sale of its 12000 employee back office operations in India.

more to come....