Pay for Success

$82.7BN IN STOCKHOLDER GAINS FOR ONLY $190MM IN

CEO COMPENSATION - SOUNDS LIKE A BARGAIN

The new TCL study highlights 10 of the largest companies in the U.S. that combined performance-related levels of CEO compensation with remarkable performance over the past five years

Portland, Maine, June 12, 2006 – A just-released study by The Corporate Library (TCL) of executive incentive compensation practices finds that the pay/performance link is not broken at all companies. At the ten companies in the study, Pay for Success: The Compensation Committees Responsible, TCL found that the companies awarded only $190 million in pay to the CEOs who presided over the $82.7 billion in gains. The ten companies are:

AutoNation, Inc.
AutoZone, Inc.
Express Scripts, Inc.
Franklin Resources, Inc.
Humana Inc.
NCR Corporation
Nordstrom, Inc.
Nucor Corporation
Progressive Corporation (The)
Whole Foods Market, Inc.

Each of the ten companies: received a low risk governance rating from TCL; paid their CEOs less than $30 million in the last two available fiscal years; had a greater than 100% return to stockholders over the last five years; and outperformed their peers over the same period. “What these compensation committees have achieved is not rocket science. The difference is that they have not been led by the market, but rather have looked inwards, to see what would work for them, not just doing what everyone else is doing because everyone else is doing it. Compensation policy is remarkably disparate at the companies,” says one of the report’s authors, TCL Senior Research Associate Paul Hodgson.

The study, a companion to TCL’s recent report, Pay for Failure: The Compensation Committees Responsible, examines in detail the incentive policies at each of the ten companies, finding simple and effective approaches to performance-related pay, along with very low levels of fixed compensation. The report also looks at the make-up of the compensation committees at the companies, listing the members by name.

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About The Corporate Library, LLC

The Corporate Library, headquartered in Portland, Maine, is the leading resource for independent corporate governance and compensation information and analysis of U.S. public corporations. Founded in 1999, it continues to be the authority on corporate governance matters, as evidenced by the frequency with which key media, business and government leaders seek its unique insight and objective perspectives. Additional information on The Corporate Library and its suite of online corporate governance data and analysis products can be found on its website at www.thecorporatelibrary.com.

Pay for Failure

A newly released study by The Corporate Library ("TCL") of executive incentive compensation practices finds that the gap between pay and performance over the past five years is most pronounced at 11 of the largest U.S. companies. At the 11 companies in the study, Pay for Failure: The Compensation Committees Responsible, The Corporate Library found that compensation committees authorized a total of $865 million in pay to CEOs who presided over an aggregate loss of $640 billion in shareholder value. The 11 companies are some of the biggest household names in Corporate America. They are:

AT&T Inc. (T)
BellSouth Corporation (BLS)
Hewlett-Packard Company (HPQ)
Home Depot, Inc. (The) (HD)
Lucent Technologies Inc. (LU)
Merck & Co., Inc. (MRK)
Pfizer Inc. (PFE)
Safeway Inc. (SWY)
Time Warner Inc. (TWX)
Verizon Communications Inc. (VZ)
Wal-Mart Stores, Inc. (WMT)

Each of the 11 companies: received a high risk rating from The Corporate Library; paid their CEOs in excess of $15MM in the last two available fiscal years; had a negative return to stockholders over the last five years; and underperformed their peers over the same period. “Our research shows that the link between long-term value growth and long-term incentive awards is broken at too many companies – if it was ever forged properly in the first place,” says one of the report’s authors, TCL Senior Research Associate Paul Hodgson.

The study examines in detail the incentive policies at each of the 11 companies; finding high proportions of fixed pay, poorly chosen performance metrics, and rewards for below median performance. The report also looks at the make-up of the compensation committees at the companies, listing the members by name, along with their compensation. The report also gives examples of Pay for Success compensation.

Funds Ranked on Support for Corporate Governance Proposals in 2005

The Corporate Library is soon to release a report on the voting behaviour of 45 large mainstream and socially responsible investment (SRI) funds over the two years that funds have been required by the SEC to publicly report their proxy voting.

The table below ranks 43 of these fund families on their level of support for Corporate Governance-related shareholder-sponsored resolutions as reported in their 2005 proxy voting records ('N-PX' Filings).

The six most supportive fund families (who may be termed the most 'activist' funds on governance issues) are all SRI funds.

Goldman Sachs, TIAA-CREF and Franklin are amongst the most activist of the mainstream funds.

The least activist fund families include Aim, Federated and Fidelity.

Support is computed as the percent of votes for, against and abstained that are cast for a proposal.

rank	fund	percent support for CG resolutions
1	CITIZENS	88.1%
2	DOMINI	82.5%
3	CATHOLIC FUNDS	81.6%
4	PAX	80.6%
5	CALVERT	80.0%
6	PARNASSUS	69.4%
7	GOLDMAN SACHS	67.5%
8	TIAA-CREF	67.3%
9	FRANKLIN	66.7%
10	JP MORGAN	65.1%
11	SMITH BARNEY	62.8%
12	BRIDGEWAY	61.8%
13	JANUS	61.7%
14	CREDIT SUISSE	61.1%
15	LIBERTY	59.1%
16	INTEGRITY	58.0%
17	SALOMON BROTHERS	56.3%
18	GARTMORE	55.0%
19	AMERICAN	51.5%
20	INCOME FUND OF AMERICA	51.2%
21	T ROWE	51.0%
22	INVESTMENT CO OF AMERICA	50.5%
23	DREYFUS	48.6%
24	SCUDDER	47.6%
25	AMERICAN CENTURY	45.1%
26	ALLIANCE	44.4%
27	STRONG	44.4%
28	MERRILL LYNCH	44.2%
29	ABN AMRO	41.5%
30	ARIEL	41.2%
31	LEGG MASON	39.8%
32	OPPENHEIMER	39.3%
33	BLACKROCK	38.0%
34	ENTERPRISE	37.6%
35	MORGAN STANLEY	36.1%
36	VANGUARD	35.3%
37	BARCLAYS GLOBAL INVESTORS	32.1%
38	DODGE & COX	25.5%
39	STATE STREET	23.8%
40	PUTNAM	18.9%
41	AIM	17.8%
42	FEDERATED	16.7%
43	FIDELITY	16.2%

EU proposes stronger voting rights for investors

John Rega of Bloomberg reports, "The European Union proposed to
strengthen investor voting rights, especially across borders, to
give shareholders more clout in response to scandals including
the Parmalat SpA bankruptcy.
The proposal, issued formally by the European Commission in
Brussels yesterday after months of public consultations, would
abolish voting impediments found in several EU countries.
Obstacles include share-blocking rules, which bar trading ahead
of a shareholder vote, and identification requirements that
disallow ballots being cast electronically or by proxy."

However, Rega notes, "the drive to empower cross-border voting may revive
concerns about the influence of foreign shareholders in Europe,
seen in criticism of investors -- particularly hedge funds --
that pressured Deutsche Boerse AG to fire Werner Seifert as
chief executive officer last May."


This report on the response to the EU's initial "consultation document" on the subject shows a high level of support for more accountability to shareholders, though some concern about the logistical challenges.

Flyi's Skeen May Have Averted Pay Loss

Kerry B. Skeen, chairman and chief executive of Independence Air, may have avoided the loss of more than $3 million in deferred compensation by renegotiating his contract in March, months before the budget carrier entered bankruptcy protection, according to specialists in bankruptcy law and executive compensation and a review of company documents. See more here.

 

Justice for Scrushy

It seems that finally some justice will be meted out to Richard Scrushy as a judge has ordered that bonuses worth almost $50MM should be paid back, not because he was 'involved' in the fraud, but because they were awarded based on misstated figures. Hopefully this is the first in a long list of unjust enrichments that will be demanded in repayment. See: http://www.iht.com/articles/2006/01/04/business/scrushy.php for details.

To Battle, Armed With Shares - New York Times

As corporate reform gains more and more attention, directors and shareholder-activists are finally coming face to face. Some still question whether all the fuss is worth the while, and whether shareholders will likely give up the fight. But does it really need to be a battle? Is there any room for compromise? See: http://www.nytimes.com/2006/01/04/business/04deal.html

The SEC and Electronic Reporting - News Review

Two recent developments suggest a greater commitment by the SEC to transparency via electronic reporting.

All public companies in the US are required to file the bulk of their public reports in electronic format. The repository of these documents (known as EDGAR – Electronic Data Gathering and Reporting) is made publicly available via the SEC’s website. This repository, known as EDGAR (Electronic Data Gathering and Reporting), goes back to 1996. It represents a hugely valuable resource for investors, analysts and corporations themselves and is the largest and most comprehensive such system in the world.¹

1. Earlier this month SEC's new chairman, Christopher Cox, expressed his support for introducing the XBRL² reporting format more widely: “SEC's New Chief Has a Thing for High Tech”.

Presently, the SEC only requires that ownership filings on forms 3, 4 and 5 be filed in eXtensible Markup Language (XML) format.

Since the beginning of 2005 the SEC has had in place an XBRL Voluntary Program. It is, as yet, an experiment to determine the costs and benefits of widespread adoption. Companies that wish to do so can file reports in XBRL format, based on US GAAP standards of financial reporting. A handful of companies appear to have experimented with this system in filing some 8-K and 10-Q reports. These remain unofficial, unaudited documents, supplemental to the official documents filed in HTML or text format.

2. On Tuesday the SEC announced that it was proposing a rule change that would let companies and proponents of competing solicitations post their corporate election materials on the Internet: “SEC Plan Would Let Firms Put Ballot Materials Online”.

This rule change supposedly entails reduced costs to issuers as well those mounting challenges to incumbent management. Furthermore, online availability of corporate election materials may increase the efficiency of the communications with beneficial owners via intermediaries, such as banks and brokers.

The Business Roundtable last year proposed rule changes to the current shareholder communications system, particularly with respect to companies’ access to intermediaries’ (such as brokers and banks) beneficial shareholder lists, in order to facilitate more direct communication between companies and shareholders.

This petition was widely opposed by shareholder advocates as well as smaller companies, mostly with reference to the advantage that this would give larger companies in corporate elections relative to shareholder activists, who would not have access to the same channels of communications or resources to exploit them. It is interesting to consider how the proposed rule change on electronic reporting of corporate election communications relates to these concerns.

Furthermore, the proposed provisions would not be binding – it appears that companies will be able choose whether or not to make use of this rule change. It is unlikely that they would opt-in to such a system where incumbent management fear this could weaken their position in corporate elections.

The important test of this proposal will, therefore, be whether it shifts the balance of control over the shareholder communications process (already skewed against shareholder activists) even more in favour management of public corporations.

The discussion period over the next 60 days will shed some light on the implications for shareholder democracy.

<sup>1. The Canadian counterpart of EDGAR, SEDAR (System for Electronic Document Analysis and Retrieval)), is an electronic repository of Canadian public company reports, mostly in Portable Document Format (pdf). It is the project of the Canadian Securities Administrators.

2. XBRL, which stands for eXtensible Business Reporting Language, comprises a set of standards for presenting business and financial information in a XML format using a standard set of tags. This will facilitate automatic comparisons across companies, reporting periods, groups of companies, and even reporting jurisdictions using different accounting standards. XBRL International is the international non-profit consortium that has been driving this process since 1998.</sup>