Good Governance Begins at Home

Delta, Tyco make moves with an eye to pleasing shareholders. Also: The Conference Board becomes a roaring bull; Computer Associates gets its accounting lawsuits settled; and more.


For many companies, the current widespread revamping of corporate-governance plans is likely to be merely matter of regulatory compliance: marching in lockstep the tune of the Sarbanes-Oxley Act and New York Stock Exchange or Nasdaq rules.

But sometimes the governance-related moves are a strictly voluntary response to the demands a different set of drummers: the companies’ shareholders. For example, along with a bevy of governance moves done to bring its board up to scruff with Sarbox and NYSE strictures, Delta Air Lines has voluntarily acted on a couple of non-binding shareholder proposals that received majority votes at its 2003 annual meeting.

Among the moves Delta plans to make is to seek shareowner approval for future executive-severance agreements that provide benefits of more than 2.99 times the sum of the executive’s salary plus bonus. By “benefits,” the company means both severance amounts payable in cash or stock and the value of any special benefits or perks, subject to certain specified exceptions.

The airline’s announcement of its moves come several weeks after its chief executive, Leo Mullin, unexpectedly announced his resignation. He is slated to receive a pretax retirement package of $16 million, according to published reports. Mullin’s $4.8 million in total compensation in 2002, including was $2.2 million in annual pay.

Delta also plans to expense stock options. To be sure, handling stock-option outlays as an expense on corporate financial statements isn’t likely to be a matter of choice for very long. After all, the Financial Accounting Standards Board is gearing up to issue an exposure draft of a stock-based-compensation accounting standard for public comment in February. But for now, expensing is a matter of corporate discretion. “Delta will expense stock options in 2005 once FASB has adopted a standardized valuation method,” according to a release issued by the airline. Delta executives feel that it wouldn’t make sense to expense options before FASB comes up with standardized way to gauge their value.

Meanwhile, Freeport-McMoRan Copper & Gold will divvy up the roles of chairman and chief executive officer in an effort to strengthen its corporate governance structure.

And Tyco International Ltd., which has been widely criticized for being based in the tax-haven Bermuda, will hold its next annual meeting in March will be held in the United States–specifically in North Haven, Conn., where the company’s U.S. Surgical subsidiary has a facility, according to published reports.

Of course, this still doesn’t change the tax status of the conglomerate, which is trying to rebound from its accounting scandal.

Indeed, former chairman Dennis Kozlowski and former CFO Mark Swartz are currently on trial for stealing $600 million from the company. Critics have claimed that if Tyco were domiciled in the United States, shareholders would have more protection from corporate and executive wrongdoing.

Conference Board Bullish on 2004

Next year will be the best economically in the past 20 years, according to The Conference Board.

The non-profit business group projected that real GDP growth will hit 5.7 percent in 2004, an upward revision from an earlier forecast. Productivity, which set a 20-year record in the third quarter, will rise by 3.6 percent in 2004 after gaining 4.3 percent this year, the group predicted.

Growth in business spending and continued strength in consumer spending will fuel the robust expansion, according to the rosy scenario. For example, Board prognosticators expect real consumer spending to increase by 4.7 percent next year and by 4.3 percent in 2005, up from about 3.2 percent in 2003.

The forecasters also think the strong growth will spawn more jobs. Nevertheless, they don’t see companies tearing up their currently tight staffing budgets. The unemployment rate will only drop to an average of 5.6 percent next year from the 5.9 percent most recently measured, they expect.

And although the dollar continues to fall further in value compared with the euro, the Board forecast calls for the dollar to be worth more than the euro by the end of the year.

Other projections:

  • Real capital spending, which will rise by only 2.7 percent this year, will climb 11.7 percent in 2004 and another 8.6 percent in 2005.
  • Pre-tax corporate operating profits will top $1 trillion next year, up from a projected $928 billion in 2003. Another trillion-dollar-plus gain in profits is expected in 2005.
  • Inflation will slowly rise to around 3 percent by the end of the year.

Computer Associates Settlement Approved

A U.S. District Court signed off on the settlement of all outstanding accounting-related lawsuits against Computer Associates International, according to CA. The litigation including shareholder and Employee Retirement Income Security Act (ERISA) class-action suits and related derivative legal actions. The company announced the settlements in August 2003.

When all claims are processed, CA will issue 5.7 million shares of common stock to the shareholders represented in the three class-action lawsuits. Plaintiffs’ attorney fees will be covered by this stock issuance.

If CA’s share price is below $23.43 per share at the time of distribution, up to 2.2 million of the 5.7 million shares will be payable in cash at that price, or a maximum of $51.546 million in cash. In that case, the stock portion of the settlement will be reduced to no fewer than 3.5 million shares. The 5.7 million shares represent roughly 1 percent of CA’s outstanding common shares.

The company took an after-tax charge of $97 million in its second quarter of fiscal 2004 in connection with the settlements. Investigations by the Securities and Exchange Commission and the U.S. Attorney’s Office remain ongoing, according to CA.

In October, Ira Zar, the finance chief; Lloyd Silverstein, senior vice president of finance; and David Rivard, vice president of finance, resigned at the request of Sanjay Kumar, the computer giant’s chairman and CEO. Kumar’s request followed a report by CA’s audit committee on its probe into the company’s timing of revenue recognition in the fiscal year ending March 31, 2000.

Short Takes

  • Kathleen Quirk was named CFO of Freeport-McMoRan Copper & Gold. She has been with the company 14 years, most recently as treasurer–a title she will retain in her new post–and vice-president of finance and business development. She has a played key roles in the Freeport-McMoRan’s recent financings, according to the company.
  • The University of Michigan’s preliminary reading of consumer sentiment slid to 89.6 in December from November’s final reading of 93.7, according to Reuters. The news service cited market sources who saw the report, which was released on Friday to paying subscribers. Economists thought the index would rise to 96.0, Reuters added.
  • Investors poured $384.5 million into junk-bond mutual funds in the week ended December 10, the sixth straight week of inflows to the funds, according to research firm AMG Data Services.
  • General Motors expects its pension plans to be nearly fully funded by the end of 2003, reflecting 18 percent asset returns and hefty cash contributions. GM also plans to contribute an added $4.1 billion in cash to its pension plans by the end of 2003 if the company is able to complete its planned divestiture of Hughes Electronics by year-end. Those pension pay-ins would bring GM’s total contributions in calendar year 2003 to $18.5 billion. Based on these contributions and normal asset returns, GM does not expect to have to make added cash contributions to its pension plans until at least 2010.
  • The Coca-Cola Company will boost its payout for share repurchases to at least $2 billion in 2004. It also intends to contribute as much as $125 million to its pension plan next year. Coke executives expect the company’s pension and postretirement expenses are to rise by about $30 million to $40 million in 2004.

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