The Beginning of the End of the Golden Parachute: A Case Study

PHRED DVORAK of the Wall Street Journal

Top executives at Double Eagle Petroleum Co. signed employment agreements this month that curtailed a time-honored executive perquisite: the executives don’t get severance in cases of “poor performance.”

Sigmund Balaban, a Double Eagle director, says the board wanted to make sure departing executives deserve the money they walk away with. He jokes that the new severance plan is a “golden parachute with a hole in it.”

Double Eagle’s contracts show one company’s attempt to solve a persistent compensation problem: rich severance packages for failed executives.

The issue flared anew last week, with news that Daniel Mudd and Richard Syron, the ousted chief executives of Fannie Mae and Freddie Mac, could be due as much as $24 million combined, after the government took over the companies. Several lawmakers, including U.S. presidential candidate Sen. Barack Obama, asked regulators to review or reduce the payments.

Other payouts last year were larger: $29.5 million for former Citigroup Inc. CEO Charles Prince, $161.5 million for former Merrill Lynch & Co. CEO Stan O’Neal and $210 million for former Home Depot Inc. CEO Robert Nardelli. Each was ousted or resigned under pressure.

Compensation experts say outsized exit packages remain a tricky problem, even as more pay is linked to performance. Severance pay is typically written into employment agreements crafted to attract top talent, they say.

“It’s all negotiated at a time when everyone is sure that nothing bad is going to happen — sort of like prenuptial agreements,” says Mark Borges, a principal at San Jose, Calif., consultancy Compensia Inc.

A 2007 study of 137 large companies by data-tracker Equilar Inc. found that 72% of the CEOs had severance agreements and 82% were promised exit packages if they lost their jobs following a corporate takeover, or “change in control.”

Also stoking criticism of severance pay: new rules requiring companies to disclose prospective payments. In Equilar’s study, the median CEO would receive $21 million for being ousted and $29 million following a change in control. Those figures included cash severance payments and the value of accelerated equity grants. They also included deferred compensation and retirement benefits, which many pay consultants argue are less severance than payment for past service.

Pension and deferred compensation accounts for $5 million of Mr. Mudd’s estimated $9.2 million in exit pay and $1.5 million of Mr. Syron’s $14.9 million. Messrs. Prince and O’Neal didn’t receive any cash severance: their awards consisted mainly of stock and options.

Severance packages typically include two to three times an executive’s annual salary and bonus, plus equity and perquisites ranging from lifetime health care to relocation payments, consultants say.

Some companies are trimming once-lavish plans. Pharmaceutical company Wyeth in 2006 amended its change-in-control provisions, effective next year, to drop some perks and exclude the value of stock grants in calculating severance.

The changes reduced to $18.3 million, from $38 million, the amount due CEO Bernard Poussot if he is fired following a takeover, according to Wyeth’s 2008 proxy. Wyeth attributed the changes in its proxy to “changed circumstances” of the company and the pharmaceutical industry.

Rimage Corp., a maker of high-tech gear, last year reduced its change-of-control severance to one year of salary and bonus, instead of two. Chief Financial Officer Rob Wolf says the change followed a survey that found most peers offering one-year payments.

Some companies are changing plans that calculated severance payments based on targeted bonuses, rather than the amounts earned, says Michael Sirkin, who heads the executive-compensation practice at law firm Proskauer Rose LLP. Others are abandoning the accelerated vesting of stocks for departing executives, or linking such vesting to performance.

Double Eagle, a Casper, Wyo., oil-and-gas exploration and development company, had advantages in crafting reformed severance policies. Many executives were new, and didn’t object to the board’s intent; their predecessors hadn’t had employment agreements.

Directors drafted severance agreements that granted up to three years of salary in some cases. But directors wanted to make sure shareholders wouldn’t be penalized if an executive failed, says Mr. Balaban.

The board hired a compensation consultant. Directors and executives had a “lively discussion” on how to define poor performance, recalls Kurtis Hooley, Double Eagle’s chief financial officer. Executives asked: “What if you don’t like me any more?”

The directors and executives agreed on performance goals, including financial targets like earnings per share and revenue growth as well as individual job objectives. Ultimately, executives trusted the board to be fair, says Mr. Hooley.

“If you’re going to provide me with security, I should provide some security back to the company that I’ll perform as promised,” says Mr. Hooley.

Editor’s Note: The Anti-Corporate League has long held that executive pay is a non-issue. It is interesting, however, that so many executives cut off low-paying jobs without offering a parachute. Yet these same people give themselves a nice one, even if they run their companies into the ground. Case in point is Merrill Lynch, whose former CEO landed with $161 million as he exited a company that is now in bankruptcy. Why corporations tolerate this from their impervious “leaders” is beyond us … the smartest guys in the room … who indeed are the smartest men in the room because they have their hands in the cookie jar while the corporate board is looking the other way. Corporations really do deserve better leadership, and so does the United States. Once corporations clean up their leadership culture, they will commit less abuses against their workers, communities and nations. 

Judge Orders Release of Documents on Lilly’s Zyprexa

By Mary Williams Walsh

New York Times

 A federal judge in Brooklyn decided on Friday to unseal confidential materials about Eli Lilly’s top-selling antipsychotic drug Zyprexa, citing “the health of hundreds of thousands of people” and “fundamental questions” about the way drugs are approved for new uses.

The decision by Judge Jack B. Weinstein of Federal District Court came as part of a ruling that gave class-action status to a case brought by insurance companies, pension funds and unions that want Lilly to repay them billions of dollars they spent on the drug. They contend that Lilly hid the side effects of the drug and marketed it for unapproved uses.

The confidential documents were produced by Lilly in response to a related lawsuit filed by patients who said that Zyprexa had caused excessive weight gain and diabetes. The papers were placed under a protective court order soon after the suit was filed in 2004.

“Lilly’s legitimate interest in confidentiality does not outweigh the public interest in disclosure at this stage,” Judge Weinstein wrote.

A spokeswoman for Lilly, Marni Lemons, said the company would not appeal the decision to make the documents public but that it would appeal the judge’s certification of a class action.

The issue of confidential information arose in 2006, when some of the Zyprexa papers were provided to a reporter for The New York Times, Alex Berenson. He wrote front-page articles based on evidence they contained that Lilly executives had kept information from doctors about Zyprexa’s links to obesity and high blood sugar.

Eli Lilly denied having withheld such information and said that the documents Mr. Berenson had seen were “cherry-picked” to give a one-sided view.

The publication of sealed information led Judge Weinstein to issue a sharply worded ruling last year, stating that Mr. Berenson had engaged in a conspiracy with a doctor and a lawyer and that they had used others “as their agents in crime.”

The judge said the sealed documents belonged to Lilly and ordered the doctor, David S. Egilman, and the lawyer, James B. Gottstein, to return them. Dr. Egilman had been serving as an expert consultant for the plaintiffs at the time, and Mr. Gottstein was working on Zyprexa litigation in Alaska.

Since then, insurance companies, unions, medical researchers and other publications have filed formal requests for copies of the documents. Many of the papers were entered into open court proceedings in Alaska, and copies of some have been posted on the Internet.

In his ruling on Friday, Judge Weinstein repeated that the information had been “obtained illegally” by The Times but also cited “this country’s general policy of accessibility of court records.”

Dr. Egilman said on Friday that he felt vindicated.

“The public can now decide for itself what these documents stand for,” he said.

Mr. Gottstein said he still disputed Judge Weinstein’s rulings that he had obtained the documents illegally.

“I think I did get them properly,” he said, adding that the new order unsealed only a small number of the Zyprexa documents that Lilly has provided to the court. “There are a lot of other documents that are hidden.”

Elanco Buys Prosilac from Monsanto

From Elanco

August 20 —

 

Greenfield, IN – Elanco, a division of Eli Lilly and Company (NYSE:LLY), today announced that Lilly has signed an agreement to acquire the worldwide rights to the dairy cow supplement, Posilac® (sometribove), as well as the product’s supporting operations, from Monsanto Company (NYSE:MON).

“Global dairy demand is increasing, outstripping supply, and consumers are seeing rapidly rising prices,” said Jeff Simmons, president, Elanco. “With the purchase of Posilac, Elanco can enhance its overall product portfolio and work together with the industry to provide dairy farmers more options and give consumers affordable choices. Critically, we remain focused on the health and care of the cow in working with farmers to increase global milk supply.

“With our rich history and experience in the dairy industry, Elanco is the ideal steward of this vital technology,” Simmons said. “Elanco remains committed to using science to address the growing need for safe, affordable food; and to choices for consumers, retailers and producers.”

Elanco has exclusively sold sometribove outside of the United States for a decade. Posilac has been safely used for more than 14 years. Under the terms of the agreement, Lilly will acquire all rights to the Posilac brand, as well as the product’s U.S. sales force and its manufacturing facility in Augusta, Georgia. In return, Monsanto will receive a $300 million upfront payment, as well as contingent consideration. The Posilac dairy business manufacturing and sales teams will be integrated into the Elanco business. The transaction is expected to close near the beginning of the fourth quarter of 2008, contingent upon clearance under the Hart-Scott-Rodino Anti-Trust Improvements Act and other customary closing conditions.

Lilly confirmed that the acquisition will not result in a change to the company’s full-year 2008 

 

financial guidance, as detailed in its second quarter 2008 financial results press release issued July 24, 2008.

About Posilac®

Posilac (rbST) is approved by numerous regulatory authorities worldwide to help dairy farmers improve milk productivity. BST (bovine somatotropin) is a natural protein produced in all cattle, helping adult cows produce milk. Milk from cows receiving Posilac is unchanged from milk from cows not receiving this supplement.

Since it received U.S. FDA approval in 1994, Posilac has become a leading dairy animal supplement in the United States and many other countries. Supplementing dairy cows with Posilac enhances milk production and serves as an important tool to help dairy producers improve the efficiency of their operations and produce more milk more sustainably.

About Elanco

Elanco is a global innovation-driven company that develops and markets products to improve animal health and food animal production in more than 100 countries. Elanco employs more than 2,000 people worldwide, with offices in more than 30 countries, and is a division of Eli Lilly and Company, a leading global pharmaceutical corporation. Additional information about Elanco is

available at http://www.elanco.com.

About Eli Lilly and Company

Lilly, a leading innovation-driven corporation, is developing a growing portfolio of first-in-class and best-in-class pharmaceutical products by applying the latest research from its own worldwide laboratories and from collaborations with eminent scientific organizations. Headquartered in Indianapolis, Ind., Lilly provides answers – through medicines and information – for some of theworld’s most urgent medical needs. C-LLY

Editor’s Note: Monsanto is one of the most favored targets of the anit-Corporate movement, because of its production of Agent Orange, Aspartame (NutraSweet), Prosilac, Round-Up, life patents, the Round-Up Ready line of GMO seeds and the technology agreements it requires farmers to sign. 

 

Cell phone carrier’s early termination fees contravene California state law

By Steve Johnson, Mercury News

Californians fed up with being charged for ending their cell phone service prematurely won a major victory in a Bay Area court decision that concluded such fees violate state law.

In a preliminary ruling Monday, Alameda County Superior Court Judge Bonnie Sabraw said Sprint Nextel must pay California mobile-phone consumers $18.2 million as part of a class-action lawsuit challenging early termination fees.

Though the decision could be appealed, it’s the first in the country to declare the fees illegal in a state and could affect other similar lawsuits, with broad implications for the nation’s fast-growing legions of cell phone users.

The judge – who is overseeing several other suits against telecommunications companies that involve similar fees – also told the company to stop trying to collect $54.7 million from other customers who haven’t yet paid the charges they were assessed. The suit said about 2 million Californians were assessed the fee.

Whether Sabraw’s ruling will stand isn’t clear. Experts say an appeal is likely, and the Federal Communications Commission is considering imposing a rule – backed by the wireless industry – which might decree that only federal authorities can regulate early termination fees.

Sprint Nextel also argued in the lawsuit that such fees – which ranged from $150 to $200 – were outside the purview of California law. But Sabraw rejected that argument.

 

ACLUSA editorial comment:

Let’s hope that this leads to a national trend to sweep away early termination fees and to restore some power to the consumer.

Americum

11 Aug 2008

Another small step forward: Coca Cola

By Jeanette Wiemers, ClimateChangeCorp

Coca-Cola Enterprises announced its sustainability goals–including reducing carbon emissions from manufacturing to 5% below 2004 levels by 2015, and ultimately recycling the equivalent of 100% of its packaging–in its recently-released 2007 Corporate Responsibility and Sustainability Report. Coke says it will be recycling or recovering over 90% of materials at its production facilities by 2010, and guarantees all sales and marketing equipment will be an average of 20% more energy efficient by the same year.

Big Tobacco sustains efforts to hook children

by STEPHANIE SAUL, The New York Times July 17th, 2008

A new Harvard study claims that the tobacco industry in recent years has manipulated menthol levels in cigarettes to hook youngsters and maintain loyalty among smoking adults. The report could further inflame a controversy over menthol in pending tobacco legislation. The study by researchers at the Harvard School of Public Health, released Wednesday, concludes that manufacturers have marketed brands to what it called a “vulnerable population” of adolescents and young adults by “manipulating sensory elements of cigarettes to promote initiation and dependence.” Young people, the study said, tolerate menthol cigarettes better than harsher nonmenthol cigarettes. In low-level menthol cigarettes, the menthol primarily masks harshness, making it easier to begin smoking. But as smokers become more accustomed to menthol, they prefer stronger menthol sensations, according to the study. “Tobacco companies researched how controlling menthol levels could increase brand sales among specific groups,” the study said. read the entire article: http://www.corpwatch.org/article.php?id=15135