NEW YORK, April 11 /PRNewswire/ -- The TIAA-CREF Institute on April 4-5 sponsored
its first Corporate Governance Forum, focusing on issues related to executive
pay and the use of stock options. More than 100 individuals -- including corporate
executives and directors, institutional investor representatives, academic experts,
compensation consultants, regulators and others -- gathered to discuss these
issues, and whether boards of directors (and their compensation committees)
are sufficiently in control of the process of setting executive pay.
The conference, which took place at TIAA-CREF's New York City headquarters,
was co-sponsored by TIAA-CREF's Corporate Governance Group, headed by Peter
C. Clapman, TIAA-CREF senior vice president and chief counsel, Corporate Governance.
The mission of the TIAA-CREF Institute, created in 1998, is to broaden and strengthen
TIAA-CREF's longstanding leadership role in supporting lifelong financial security
for individuals and their families. The Institute's fields of research and education
include: pension and retirement issues; health, life and long-term care insurance;
investment products and strategies; endowments and planned giving; higher education
financing and trends; corporate governance; and financial literacy.
"The Forum provided an unusual opportunity for frank and open-minded exchange
of views among a broad range of observers on executive compensation," said
Clapman. "There was general consensus among the diverse participants that
the role of the compensation committee can be strengthened -- that board compensation
committees can do more to sharpen pay practices to be sure they deliver value
to shareholders." Clapman noted calls for action from various Forum participants
to evaluate the functioning of board compensation committees generally, and
perhaps to set forth guidelines for best practice.
In keynote remarks, John H. Biggs, chairman, president and CEO of TIAA-CREF,
said compensation practices present "probably the most pressing issue of
corporate governance in the United States today." Like a number of other
speakers, Biggs expressed concern that some companies rely too heavily on stock
options because they do not have to account for the cost of fixed-price options
in their earnings statements.
Biggs noted that under the optional Financial Accounting Standard 123, companies
are permitted to use accounting that does factor in stock option costs, and
may provide a basis for more rational consideration of compensation alternatives.
Few companies avail themselves of the FAS 123 standard, however. Boeing, at
which Biggs is a director, is one of the few companies that use this form of
accounting, which increases transparency for investors. Biggs challenged companies
to make use of the newer FAS 123 standard, rather than remain locked into the
older standard that prevails today. Biggs described this older standard (APB
25) as a "straightjacket" that can prevent rational consideration
of compensation alternatives that may be best for shareholders in the long run.
Another key issue discussed by participants was the need for stronger stock
market listing requirements for shareholder approval of option plans. The issue
is even more pressing given the recent decline in share values. One method some
companies are using to shield executives and others from lower stock prices
is to issue large numbers of new stock options, with exercise prices at the
more recent low prices. Some corporations may be particularly motivated to avoid
shareholder approval requirements in this situation.
A problem for the shareholders of companies that rely too heavily on this approach
is ballooning potential dilution. "Under these circumstances, a number
of companies appear to be implementing plans that do not require shareholder
approval under current New York Stock Exchange and NASDAQ listing standards,"
said Clapman. "The NYSE has indicated a willingness to address this issue,
but the Exchange says that NASDAQ must go along so that the markets compete
for company listings on an even playing field. We are hopeful that NASDAQ will
soon take steps to address the issue."
The conference featured a number of papers and presentations. David Yermack,
associate professor of finance at New York University, and a critic of some
pay practices, examined certain difficulties and quirks connected to current
option compensation, as identified in recent academic research. Leading compensation
consultant Frederic W. Cook, chairman of Frederic W. Cook & Co., discussed
executive compensation trends, and emphasized the positive role played by stock
options in aligning interests of shareholders and executives. Michael J. Mauboussin,
chief U.S. investment strategist for Credit Suisse/First Boston, discussed important
shifts in equity compensation resulting from the movement to a knowledge-based
economy, but said recent market swings have shown that many option programs
are poorly constructed. Mauboussin advocated the use of stock options indexed
to peer groups or broad market benchmarks, such as the S&P 500. Stuart Gillan,
research economist with the TIAA-CREF Institute, described rapidly rising potential
dilution from stock option plans, and discussed issues of option valuation.
Gillan also discussed alternatives companies are using to deal with the large
number of so-called "underwater" options, with exercise prices above
current market prices.
A number of speakers, including Frederic Cook, discussed ways in which CEO
pay has been ratcheted upward, as companies seek to pay at or above the median.
Some observers call this the "Lake Wobegone Effect," where all the
CEOs are above average, leading to the pay equivalent of grade inflation.
Other speakers included former corporate director Clayton Yeutter, the former
Secretary of Agriculture; Sanford R. Robertson, partner in Francisco Partners,
a private equity fund; Harvard Business School Professor Joseph L. Bower; Samuel
C. Scott, chairman president and CEO of Corn Products International; Peter N.
Larson, former chairman and CEO of Brunswick Corporation; Larry G. Stambaugh,
chairman, president and CEO of Maxim Pharmaceuticals; B.A. (Dolph) Bridgewater,
senior consultant on corporate governance to TIAA-CREF, and former chairman
and CEO of Brown Shoe; B. Kenneth West, senior consultant on corporate governance
to TIAA-CREF, and former chairman and CEO of Harris Bankcorp.; Eric D. Roiter,
senior vice president and general counsel, Fidelity Management and Research
Company; Pearl Meyer, president of Pearl Meyer and Partners, a compensation
advisory firm; Brian J. Hall, associate professor, Harvard Business School;
and Abbie Smith, professor at the University of Chicago Graduate School of Business.
