Incentive Compensation – The Next Options Backdating

What do Home Depot, Computer Associates (CA) and the Diocese of Rockville Center, NY have in common?

Strangely enough, they all have a connection to the ongoing lawsuits to reclaim the $139.5m payment Richard Grasso received in 2003 for his eight years as chairman of the New York Stock Exchange.

There are players in common, auditors in common and problems in common. Let’s start at the beginning…

Let’s turn the “Wayback Machine” back to 2002.

In 2002, Richard Grasso was still New York Stock Exchange CEO and Chairman (1995 to 2003)
-Member of the Board of Directors of Computer Associates (CA)from 1994 to 2002 (Member of their Compensation Committee and Corporate Governance Committee)
-Member of the Board of Directors of Home Depot in 2002 and 2003

Ken Langone is a co founder of Home Depot and sits on their Executive Committee, Audit Committee and Corporate Governance Committee)
-He was a member of the New York Stock Exchange Board of Directors (until end of 2003) and famously head of the Compensation Committee that presided over the awarding of the Grasso incentive compensation package.
-He is a member of the Rockville Center, NY Diocese Finance Council

Lewis Ranieri is founder and Chairman of the Hyperion Capital Corp and group of funds.
-He was elected to the Computer Associates (CA) Board of Directors in 2002 and continues on this Board. He was elected as Lead Director, member of the Operations Committee and Chair of the Compensation Committee, the same year Mr. Grasso retired, after eight years of service on the CA Board.
-He is a member of the Rockville Center, NY Diocese Finance Council

Home Depot’s Options Investigation Uncovers Errors (Update2)
By Mark Clothier
Dec. 6 (Bloomberg) — Home Depot Inc., the world’s largest home-improvement retailer, said it “routinely” backdated option grants to benefit employees for 19 years and had unrecorded expenses of about $200 million related to its grant practices. …Backdating occurred “at all levels of the company” and involved management who have since left, Home Depot said.

COMPANIES INTERNATIONAL: Accounting lapses anger CA investors
By: By Richard Waters in San Francisco, Financial TimesPublished: Sep 18, 2006
Directors of CA, the software company that was at the centre of a $2.2bn accounting fraud earlier this decade, are set to come under renewed fire from shareholders today over their failure to prevent a continuing stream of accounting lapses.

At the centre of the latest storm is Alfonse D’Amato, a former New York senator who has been a director since 1999, making him the only remaining person to have been on the board in 2000 and 2001, when the fraud was committed. Sanjay Kumar, former chief executive officer, pleaded guilty in April to securities fraud and obstruction of justice over the affair.
…Three US proxy advisory groups, which advise institutional investors how to vote at corporate meetings, have called for shareholders to withhold their votes rather than support Mr D’Amato’s re-election at CA’s annual meeting today. Glass Lewis, one of the three, also advised shareholders not to support three other directors, including Lewis Ranieri, chairman, and Walter Schuetze, head of the company’s audit committee, and not to reappoint auditors KPMG. A former bond salesman, Mr Ranieri has been chairman since 2004. He and Mr D’Amato are both prominent members of the business and social community in Long Island, the New York suburb where CA, under former chairman Charles Wong, grew to become of the world’s biggest software concerns.

CA Reports Preliminary Results of Stockholder Voting at Annual Meeting
All Directors Elected – You can bring a horse to water but you can’t make him drink. The “shareholders” approved the retention of all nominated Directors and of KPMG as auditors.

CA shareholders also previously rejected, based on management’s recommendation, a proposal to mandate recovery of the bonuses paid to Sanjay Kumar and others that resulted ion his recent guilty please and 12 year sentence.

COMPANIES THE AMERICAS: CA shareholders reject bonus action
By: By Richard Waters in San Francisco, Financial Times Published: Aug 26, 2004
“Shareholders of Computer Associates yesterday rejected a sweeping proposal that the scandal-plagued software company demand the return of bonuses paid to executives and former executives. However, Lewis Ranieri, chairman, said the company still planned to seek the return of “money subject to ill-gotten gains by evil deeds” once its investigations into accounting irregularities were completed.

CA has become one of the most prominent symbols of how excessive executive pay and improper accounting went hand-in-hand in corporate America during the boom years. The company’s three top executives were handed a joint bonus of $1bn in the late 1990s, shortly before a profits warning severely dented its stock. An internal investigation revealed this year that in 2000 more than $2bn of sales were reported earlier than they should have been – about one-third of its total sales recorded that year…Shareholders voted at its annual meeting yesterday on a proposal by the Amalgamated Bank Long View fund, an activist investment fund, that called on CA’s board to pursue the repayment of bonuses paid to executives. CA’s board had advised shareholders to vote against the proposal.”

Where were the auditors at CA and Home Depot during the period of backdating of stock options and in the case of CA, other numerous accounting issues?

The Auditors
From the 2006 Proxy for Home Depot
“The Audit Committee of the Board of Directors has appointed KPMG LLP to serve as the Company’s Fiscal 2006 independent registered public accounting firm. KPMG has been the auditor of Home Depot in 2006, 2005, 2004, 2003, 2002, 2001, 2000, 1999, 1998, 1997, 1996…”

From the 2006 Proxy for CA
KPMG LLP was the independent registered public accountants (independent auditor) for the Company for the 2006, 2005, 2004, 2003, 2002, 2001 and 2000 fiscal years (Before that the auditor was Ernst & Young. )

COMMENT & ANALYSIS: Off the leash: what will bring executive pay under control?
By: By Adrian Michaels, Financial Times Published: Aug 24, 2004
…At the top end, US packages run into the tens of millions of dollars. Glass Lewis, an independent research firm whose leading researcher is Lynn Turner, the outspoken former SEC chief accountant, says that in 2003 10 US chief executives were paid over $30m in cash, shares, share options and other compensation. Cash is usually the smallest part of total pay. This month, data compiled by Mercer Human Resource Consulting that examined the cash component of chief executive compensation among 350 company heads in the US, UK and Japan, showed that in the US, the cash portion had a median level of $570,000. Even at the weak dollar exchange rate, that is still 2½ times the UK’s £119,000 ($215,000), and twice Japan’s Y32.3m ($290,000).
The Corporate Library says it is sceptical that pay restraint is on the horizon because the recovery of the stock market has probably damped any potential irritation from shareholders at high pay packages. The chances of new legislation are also slim, mostly because politicians believe the Sarbanes-Oxley Act has done the job of restoring market confidence.
Furthermore, it appears that shareholders and directors of companies that are performing poorly are reluctant to act. “A surprising number of companies continue to pay their executives stratospheric sums for mediocre performance” says Glass Lewis in its recent report on renumeration. “Some of America’s highest-paid CEOs continue to manage some of the nation’s worst performing companies…Stephen Cutler, the head of enforcement at the SEC, points out that there is a time lag in the cases the regulator brings. “By definition, an enforcement programme focuses on past problems. We are bringing many cases related to behaviour from two or three years ago and you probably won’t see the impact of Sarbanes-Oxley [the new corporate governance legislation] and other changes in our case mix for another couple of years,” he says. Still, regulators say some accounting tricks remain widespread. Donald Nicolaisen, the SEC’s chief accountant, says: “Absolutely the biggest concern is revenue recognition; that still remains one of the main causes of [financial] restatements.

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Trackbacks & Pingbacks

  1. […] Sometimes when an external or internal auditor been told when raising concerns or questions about lack of segregation of duties, improper expense reports, lack of proper authorizations for stock options or shady compensation decisions: […]

  2. […] How many times has an external or internal auditor been told when raising concerns or questions about lack of segregation of duties, improper expense reports, lack of proper authorizations for stock options or shady compensation decisions: […]

  3. […] How many times has an external or internal auditor been told when raising concerns or questions about lack of segregation of duties, improper expense reports, lack of proper authorizations for stock options or shady compensation decisions: […]

  4. […] pay shouldn’t be flogged.” I’ve mentioned some of the cases Jake mentions, like Grasso, and pointed out the willingness of the compensation consultants to enable the addiction to […]

  5. […] I predicted almost three years ago that incentive compensation would come under the microscope due to the Computer Associates scandal.  That was such an egregious example of ill-gotten gains distributed on the back of a proven fraud by corporate executives. Some restitution will be made by the CA CEO as part of his plea agreement but not nearly enough given the amounts at stake. […]

  6. […] that attracts the dollars. The Chairman of the Senate Banking Commmittee (Senator Dodd and retired Senator Alfonse D’Amato before him) have significant influence over the way things go for the Big 4 firms. This is also […]

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