Archive for January, 2010

Commentary by David F. Larcker, James Irvin Miller Professor of Accounting & Director, Stanford GSB Corporate Governance Research Program; and Brian Tayan, Stanford GSB Case Writer, MBA ’03.

(Footnoted.org originally reported on this disclosure)

On January 22, 2010, BWAY Holding Company released the compensation paid to nonexecutive chairman Jean-Pierre Ergas for fiscal year 2009. The amount: $1.45 million. The pay package included $660,000 in salary, $438,000 in deferred compensation, and $305,000 in “other compensation”—primarily consulting fees but a portion ($27,000) for travel benefits for Mr. Ergas’ wife. By comparison, nonexecutive directors of the largest 100 companies listed on the New York Stock Exchange received approximately $200,000 in total compensation.

Ergas no doubt brings expertise to the board. He had served as chairman and CEO of the company from 2000 to 2007. For those services he was paid amply, including $6.3 million in his last year as CEO. However, given the company’s size ($903 million in revenue and $23.5 million net income for 2009), shareholders may wonder what they are paying such a full price for a chairman. They may also wonder why they have to pay “consulting fees” to a director who is also receiving a salary for his services.

Commentary by David F.  Larcker, James Irvin Miller Professor of Accounting & Director, Stanford GSB Corporate Governance Research Program; and Brian Tayan, Stanford GSB Case Writer, MBA ’03.

Warren Buffett raised the question of whether corporate directors have an obligation to disclose whether they believe a company’s shares are overvalued or undervalued when selling shares to the public. In an interview with CNBC, Buffett made the following comments regarding the proposed acquisition of Cadbury by Kraft, which includes the sale of stock:

“Kraft issued a 78-page proxy statement close to a month ago. And the sole issue was the issuance of 370 million shares of Kraft stock. That was the only thing to be voted on. And in 78 pages, they told you about the deal […], and they told you a lot of other things about how the directors recommended this and everything else. There’s one thing that they didn’t tell you. They didn’t tell you […] how the directors felt about the value of Kraft stock. Now, after I came out and said Kraft stock was significantly undervalued, the directors immediately came out and said they thought it was significantly undervalued, too. What point could possibly be more important when asking shareholders to vote on issuing 370 million shares [than] the directors’ views on whether they were going to get fair value for these shares? In other words, if the directors thought those shares were significantly undervalued, when they issued that proxy statement, I think they had the duty to tell shareholders that they felt that way.”

Companies are required to receive a fairness opinion from third-party professionals that attest to the value of an acquisition. And yet they do not issue a fairness opinion in conjunction with the sale of their own shares. One exception: Buffett himself and his partner Charlie Munger who wrote the following in the prospectus materials associated with the sale of Berkshire Hathaway Class B shares in 1996: “Berkshire’s stock is not undervalued at the current market price. Neither Mr. Buffett nor Mr. Munger would buy shares at that price, nor would they recommend that their families or friends do so.” (Warren Buffett interview with CNBC, January 20, 2010.)

Commentary by David F. Larcker, James Irvin Miller Professor of Accounting & Director, Stanford GSB Corporate Governance Research Program; and Brian Tayan, Stanford GSB Case Writer, MBA ’03.

Source: OYO Geospace Corporation, Form DEF 14A, Filed January 5, 2010

OYO Geospace, a provider of seismic imaging technology used in oil and gas exploration and production, has developed an innovative annual incentive plan that applies to all employees in the U.S. and selected foreign countries. Under the plan, the company uses an elaborate profit sharing calculation to allocate bonuses into separate pools, or tiers. The Tier I bonus pool is established by accruing 18 percent of consolidated pretax profits above a specified amount. Employees receive a share of the pool proportionate to their pro rata share of the company’s total payroll. All employees participate at this level. Only after the Tier I bonus pool is fully funded and distributed is the Tier II bonus pool established. The Tier II bonus pool is established by accruing 18 percent of pretax profits above the Tier I threshold. Only one executive participates at the Tier II level, the company’s vice president of human resources. After Tier II is funded and distributed, Tier III is established, by allocating 18 percent of pretax profits above the Tier II threshold. Three named officers—the CEO, the CFO, and the chief technology officer—participate at the Tier III level.
That is, the higher the position the executive holds, the higher the tier that individual is placed in. This brings potentially higher rewards, but only after bonuses have been distributed to lower level employees. It is nice to see senior executives voluntarily stand in line for their rewards.