British Government Takes on the Fat Cats

0 Comments | Insight on the News, July 8, 2003 | by Jamie Dettmer

Byline: Jamie Dettmer, INSIGHT

British Government Takes on the Fat Cats

The fat-cat pay culture remains at the center of attention in the United Kingdom following the British government's publication in June of a consultation paper that explores ways of curbing the compensation of executives. Entitled "Reward for Failure," the document looks specifically at whether it is desirable to prevent directors and executives walking away from failing companies with huge payoffs. "Britain has some of the best and most successful businesses in the world. But the good reputation of the majority is being tarnished by the bad practice of the minority," said Trade and Industry Secretary Patricia Hewitt.

She added: "We have no problems with big rewards for big success, but shareholders are rightly concerned when directors leave failing companies and walk away with excessive payouts. We have already taken action by introducing new disclosure requirements on remuneration policy and an annual vote on remuneration reports for shareholders."

The British government's rules requiring an annual shareholder vote on executive remunerations already has had an effect, with some shareholders voting down executive-remuneration packages. The options considered in the consultation document include:

* restricting notice periods to less than one year and capping the level of compensation;

* introducing measures to ensure that compensation reflects performance when directors' contracts are terminated; and

* limiting severance payments in cases where a company has performed poorly.

The consultation document deals with encouraging self-regulation but does not rule out the possibility of legal reform. Conservative opposition politicians are supportive of the document but argue that new laws should only be introduced as a last resort. Conservative Tim Yeo said: "I entirely share the concern about excessive payoffs for company directors who have failed. Some recent settlements have been offensive, especially to many loyal employees who have suffered from management incompetence."

Clinton Happy That His Talk Isn't Cheap

Fat-cat compensation or deserved reward? According to Bloomberg financial-news wire, Bill Clinton earned more than $9.5 million making speeches in 2002, $314,000 more than in 2001. The former president delivered about 60 speeches here and abroad. The companies he talked to included PeopleSoft Inc., Compuware Corp. and the Warburg Pincus private equity fund. More than 70 percent of Clinton's fees came from engagements outside the United States, and in one week last May he made more than $1 million speaking in Japan, China, Singapore and New Zealand.

Senate disclosure reports filed by Sen. Hillary Rodham Clinton (D-N.Y.) show that the couple owe between $1.7 million and $6.5 million in legal fees.

Chairman Gives Hollinger a Black Eye

New allegations of impropriety have been leveled against media magnate Conrad Black, owner of newspapers in the United States, Israel and Britain. In an official complaint filed with the Securities and Exchange Commission (SEC), an investor claims improper payments were made to Lord Black, chairman of Hollinger International, and other directors.

The allegations follow claims made at Hollinger's annual shareholders meeting earlier this year that Black and some directors have received improper or inflated payments. They were paid $200 million by Hollinger through a series of management-service agreements. The two new allegations center on the divestment of assets by Hollinger.

Skeletons Rattling in Freddie Mac's Closet?

The dramatic clean-out of the top echelon of Freddie Mac (the Federal Home Mortgage Corp.) amid claims of accounting irregularities, and the launching of an SEC investigation and a criminal probe, so far have not spooked the markets or resulted in the downgrading of the company's triple-A rating. Bill Gross, the manager of Pacific Investment Management, isn't alone in believing that "there's no reason to panic." He says "Freddie Mac is a conservative agency relative to other agencies, perhaps the most conservative of them all."

Maybe so, but some Wall Street analysts worry that Freddie Mac, a government-chartered entity that along with Fannie Mae (the Federal National Mortgage Association) owns or guarantees almost one-half of the mortgages in the country, may be hiding more problems that will surface later. And a small group of naysayers is anxious that the firing of president David Glenn and the forced resignations of two of his top colleagues has ramifications for the U.S. economy.

At first glance, Freddie Mac's difficulties do not seem too severe. At the heart of the problem is the misapplication of derivatives used by the company to reduce the risk on the value of its huge portfolio of mortgages. But a restatement likely would increase reported earnings for 2000, 2001 and 2002.

However, some analysts suspect that Freddie Mac has tried to delay booking income to make earnings look better in the years ahead. If it turns out that this is indeed the case, then a shock wave could hit the financial markets. Investors could balk at buying its bonds, forcing the company either to pay higher interest rates or to buy fewer mortgages. And that in turn could undermine the one bright spot in the U.S. economy the housing market.