The Executive Compensation Controversy - Fondazione Rodolfo ...

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THE EXECUTIVE COMPENSATION CONTROVERSY: 24 MAY 2010A TRANSATLANTIC ANALYSISshares to their wives. 68 The outrage over compensation practices in the privatized utilities ledto the influential report by the Greenbury (1995) committee, which called for changes in thetax rules and structure of UK stock options, and significantly expanded disclosure rules forUK executive compensation.In Germany, the “isolated event” related to UK-based Vodafone’s hostile takeover ofGerman-based Mannesman in 2000, at the time the largest corporate merger ever. On the daybefore Mannesman and Vodafone announced they had an agreement, Mannesman’ssupervisory board (led by Josef Ackermann, the CEO of Deutsche Bank) approved nearly€60 million in bonuses and severance payments to Mannesman’s CEO Klaus Esser and othertop executives. In 2003, Ackermann and other members of the supervisory board facedcriminal charges for breaching their fiduciary duty by paying the bonuses; Esser – who wasthe primary beneficiary of the bonuses but did not take part in the decision process – facedconspiracy charges in connection of the bonuses. The presiding judge determined in 2004that Ackermann’s actions were atrocious but not criminal; prosecutors successful appealedthe acquittal and the case was ultimately settled in 2006. However, the trial set off acampaign for more-transparent corporate governance in Germany, including legislationrequiring historically secretive companies to disclose more details on their compensationpackages.Plans in France to make stock options more attractive through tax advantages werederailed in late 1999 after Elf’s CEO Philippe Jaffre received a golden-parachute optionpayout of €30 million following Elf’s acquisition by Totalfina. 69 One of the most vocalcritics of Jaffre’s golden parachute payment was Vivendi’s CEO Jean-Marie Messier, whochastised Jaffre’s payout in his 2000 autobiography, insisted this his own contract had nosuch clause, and promised his board that he would never negotiate one. 70 But Jean-MarieMessier’s world was about to get, well, messier, as he personally added to the flap overexecutive compensation and excessive severance pay.68 Under UK tax laws at the time, option gains were taxed as capital gains when the stock was eventuallysold, with a £6000 tax-free allowance, See Barrie, et al., “Fury as National Grid chiefs use loophole to avoid taxon share option profits,” Guardian (May 26, 1995), p. 2.69 Graham, “Fabius sets date for stock option plan,” Financial Times (April 26, 2000a), p. 8; Delaney andWessel, “Lumpy Gravy: Suppose Stock Options Involved More Pain Than Financial Gain – That's the Case inEurope, Which Helps to Explain High-Tech Lag There – `A Bit Perverted' in France,” Wall Street Journal(December 21, 1999b), p. A1.70 Harding and Johnson, “Messier can expect a rough ride over golden parachute exit package,” FinancialTimes (July 4, 2002), p. 25.-55-
THE EXECUTIVE COMPENSATION CONTROVERSY: 24 MAY 2010A TRANSATLANTIC ANALYSISBetween 1994 and 2002, Messier had transformed a recently privatized water utilityinto one of the largest media conglomerates in the world through over €70 billion inacquisitions. Once France’s best-known and most-admired businessmen, Messier wascriticized after relocating to a €13 million apartment in New York City purchased withcorporate funds (following Vivendi’s acquisitions of Seagram and Universal). 71 After a€13.6 billion loss in 2001 (the largest in French corporate history) and a credit downgrade tonear-junk status, Messier was pressured to resign from the company on 1 July 2002. 72 Aspart of his agreement to leave, Messier reputably broke his public promise and negotiated acontroversial severance package worth €20.6 million, signed on behalf of Vivendi byMessier’s close associate and chief operating officer. Reports of the severance pay caused anuproar in France, and Messier’s successor at Vivendi ultimately refused to pay it, claimingthat the agreement wasn’t valid because it hadn’t been approved by the full board or byshareholders as required under French law. 73 Messier sued the company for the severance,which in turn countersued Messier for damages. Finally, as part of a $51 million (€36million) civil fraud settlement with the SEC against both Vivendi and Messier, Messieragreed to pay $1 million of the $51 million in fines and forgo his severance claim againstVivendi.In the midst of the public dispute over Messier’s severance pay, shareholders and morethan 2,000 employees at Alstom – the recently privatized manufacturer of France’s highspeedTGV train – held a rally demanding return of the “scandalous” €4.1 severancepayments received by ousted CEO Pierre Bilger. Bilger had been removed from his post inMarch 2003, after being placed under judicial investigation for embezzlement and after hiscompany lost €1.4 billion in the prior year, and 90% of its market value over the prior twoyears. In August 2003, the French government bailed out the company with a €2.8 billionrescue package in return a 31.5% stake in the company. Less than two weeks later, Bilgeryielded to increasing public criticism and returned the €4.1 payment (which had been beenfixed in 1999), explaining that he did not want to be the “subject of scandal.” 74In Sweden, perceptions of exorbitant pension pay ruined the reputation of PercyBarnevik, who had led the Swiss-Swedish engineering giant ABB from 1988 through 2001.71 Carreyrou, “A French CEO's Taste For America Is Hard To Swallow Back Home --- Move to New YorkWas Faux Pas For Vivendi's Mr. Messier; A Rocker's Hail to the Chief,” Wall Street Journal 2002), p. A1.72 Johnson, “Messier under pressure from board to resign,” Financial Times (July 1, 2002), p. 1.73 Carreyrou (2003a); Carreyrou, “Vivendi, Messier to Pay $51 Million to Settle Charges,” Wall StreetJournal (December 24, 2003b), p. A3.74 Harrison, “Ex-Alstom chief waived severance pay for “honour”,” Reuters News (October 22, 2003).-56-
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