Corporations - Page 8

(10/4/02) - NEW YORK - Ex-Veritas Software CFO Kenneth Lonchar may not have had a master's in business administration from Stanford, but even if he did, it's doubtful that the program's required ethics course would have altered his deceitful ways.

It was Socrates who first said that virtue cannot be taught, yet paradoxically he spent the balance of his life trying to do so anyway.

Former Enron Chief Financial Officer Andrew Fastow being escorted to the federal courthouse in Houston this week.

Twenty five hundred years later, there are millions of furious, bereft shareholders who would love to teach the current crop of crooked executives a thing or two. Not surprisingly, the calamitous events surrounding Tyco, WorldCom, Adelphia Communications and Enron have business schools wondering whether they can thwart any incipient depravity by future executives.

Former Enron Chief Financial Officer Andrew Fastow has an M.B.A. from the Kellogg School and on Oct. 2 was charged with fraud, money laundering and conspiracy in a criminal complaint in Houston. Kellogg teaches a course in making ethical business decisions. Was the course poorly designed? Was young Andrew not paying attention? Or, more basically, is lawful, decent behavior beyond the power of our universities to teach?

Whether virtue, or the more modern concepts of integrity and ethics, can really be taught has been a matter of debate for millennia. Most philosophy scholars agree that by the time we hit our 20s, the extent of our integrity has for the most part been established.

"A course on ethics is not like a polio vaccine," says Wharton School professor Tom Donaldson. "We can't inoculate students who have been inclined toward unethical behavior for the past 20 some odd years."

But Donaldson and his peers at other business schools try to do what they can, nevertheless. Says Columbia Business School professor Ray Horton. "People may be formed ethically by the time they reach my classroom, but I'm not going to assume that I can't touch them."

Columbia's dean recently appointed faculty members, including Horton, to a newly formed committee for curriculum on corporate governance and ethical issues, designed to help prepare students for a complicated world. "People are fond of saying that you learn ethics at your mom's knee," says Wharton's Donaldson, "but my mother didn't tell me about highly leveraged derivative transactions."

Rather than preaching, professors agree that what they can and should do is give students the skills to deal with sticky situations and to build business systems that minimize the opportunity and temptation to behave unethically.

"With Enron, you can point to the players' bad character, or you can look at how the company's institutions, compensation methods and so forth disalign the values of executives from those of the shareholders," says assistant professor Alexei Marcoux, who teaches ethics at Loyola University Chicago's M.B.A. program. "I see business ethics as a plea for good institutional design."

Columbia's Horton agrees. "If [a company] only talks about driving up the stock price, that's a structure that can make a crook out of an otherwise decent person," he says.

Ethics courses also hope to illustrate for the students that there are different ways of looking at the business world, which in turn may effect a change in the kind of ethical decisions they make when they enter it.

"You have to give students practical clues about what to do when there is a conflict between their own personal code of behavior and what their firm asks them to do," says Horton.

For Marcoux, the heart of that issue is basic critical thinking. "An inability to diagnose a situation and think critically about it is clearly evidenced with Enron," he says. "I wonder when these proposals [to hide debt, fabricate profits, etc.] were put on the table how much debate there was."

He sees evidence of an aversion to conflict long before his students hit the executive suite. The most common prefatory remark that's made in his class is, "Building on what Jill said…"

"Students are very uncomfortable engaging in debate," says Marcoux. "They are consensus seekers. We need to be more ready to engage. I'm not talking about whistle-blowing, just internal debate about alternative courses of action."

And it's important to note that while these ethics classes are a key part of an education, there is still no doubt, as the old saw goes these days, that the majority of people in business or business school are ethical individuals.

Columbia's Horton is in fact a bit touchy on the subject. "I've known students at Columbia for 30 years, and I do not take them to be incipient criminals. People assume that you're somehow flawed if you go to business school."

But these days, can you really blame them?

(10/6/02) - Since midsummer, they have come every few weeks, with the predictability of a returning phase of the moon: A corporate "perp walk," in which the government's latest white-collar defendant is handcuffed and escorted to the courthouse, with photographers snapping shots as once highflying executives face the ultimate humiliation.

On Wednesday, it was Andrew S. Fastow's turn — the former chief financial officer who is the first senior Enron executive to face criminal fraud charges in the wake of that company's implosion.

The repeated performances clearly serve a useful purpose for a public demanding justice in the wake of a seemingly endless stream of corporate scandals. The scene sends the searing message that law enforcement is taking action to rid the corporate world of miscreants, and that other executives who might consider crossing the line in their business practices should think twice.

But in the end, experts in law, ethics and psychology say, the public's thirst for justice will simply not be sated at the courthouse. The arrest and punishment of a handful — or even a score or two — of executives will do nothing to counter what these experts see as the true challenge facing corporate America: to persuade a doubtful public that there is integrity in executive suites.

Many issues have been blended together in the public mind-set, these experts said, from cooking the books and stealing corporate cash to receiving excessive pay and perks. That, of course, mixes crime with common practices in corporate America. But with public revulsion placing them all under the same microscope, these experts said, a sense of justice will not be achieved until they are all addressed.

"A simple application of the law is not going to produce what people will perceive to be justice, because many of the things that have been happening are not necessarily illegal, even if the public considered them immoral," said Tom R. Tyler, a professor of psychology at New York University who specializes in the study of popular conceptions of justice. "So if the only response is a legal response, I think the public will end up being quite soured about corporations and the business world."

Indeed, a response that emerges solely from the law enforcement and regulatory spheres may ultimately prove contrary to the ends of justice. All too often, experts said, the mid-level executives caught up in such events are products of the corporate environment in which they work. Punishing the product without changing the environment will not correct the ethical problems that have become evident over the last year.

"A good many people who were caught up in the machinery of doing this are more like us than we would like, and simply sending them to jail is not going to be helpful and may not exactly be just," said John M. Darley, a professor of psychology and public affairs at Princeton who studies the moral behavior in groups. "What we ought to want to do is send the top people who are the originators of this behavior to jail. The lower people, if they made lots of profits, need to give those profits back. And then we need to create barriers so that in the future, fairly decent people cannot be put under these hidden pressures again."

In truth, executives have reached a turning point in terms of their relationship with the public and their place in American society. For decades they have been revered, granted near-superstar status as they dangled the prospect of an ever-improving economy and growing stock portfolios. Now they are the stuff of ridicule, literally portrayed in the Sunday comics as the monsters of children's nightmares.

"We have made chief executive officers some of the wealthiest Americans in the last 20-plus years, and that is a huge change in American capitalism," said Arthur P. Brief, a professor of business ethics at the A. B. Freeman School of Business at Tulane University. "We have infused so much money and power in the executives that they have started to behave as if they are above the rules that govern the rest of us."

In essence, these experts argue, chief executives were granted wide swaths of trust to do the right thing, but too often seemed to forget their obligation to shareholders. Now the public is reacting with a sense of betrayal, something that must be addressed by every corporation — not just those swept up in scandal.

"The public is concerned not just about the executive who commits a criminal violation," said Leon E. Panetta, White House chief of staff in the Clinton administration and now chairman of the public policy and review committees at the New York Stock Exchange. "They are concerned about whether or not there is any sense of integrity or morality in the way they do business. And that means it extends beyond whether they are doing the minimum in meeting the law. It extends to whether they are behaving as a corporation with the highest standards."

Already, private initiatives have begun signaling that parts of the private sector recognize the importance of satisfying the public demand for justice. For example, in June, a Big Board committee proposed rigorous new standards that would tighten corporate governance and disclosure requirements for member companies. Rules stemming from that proposal have been approved by the exchange's board and submitted to the Securities and Exchange Commission.

Under those requirements, the role and authority of independent directors will be increased, new qualifications will be required for directors who run audit committees and new control and enforcement mechanisms will be adopted.

Ultimately, experts said, such private initiatives — if stringent enough and if enforced — will go much further than any prosecution in instilling a sense that the public's demand for integrity in the corporate suite is being met. "The private efforts are going to have more impact in the long run," Professor Brief said. "Corporate governance has been corrupted in America, and the only way to change that is to reduce the power in the C.E.O.'s hands."

Capitalism often seesaws between abuses that harm business and waves of self-correction. Now that self-correction is beginning to flow from powerful financial institutions that have been badly singed by the torrent of scandals — from WorldCom to Tyco, from Enron to Adelphia.

In recent months, the Vanguard Group, the giant mutual fund company, sent letters to 450 public corporations, laying out a treatise for what it expected from the companies whose shares it owns, including assurances that executives are long-term holders of the company's stock. Vanguard received responses from a number of companies; others ignored the letter.

"It is absolutely clear that the mantra of growth at all costs, and the lionized C.E.O. who could spin a great story, is gone, and gone for at least a short generation," John J. Brennan, chairman of Vanguard, said in an interview. "And that is really good for the markets."

Now, Mr. Brennan said, companies that pay attention to hitting profit targets at the expense of clear ethical conduct will pay a price — not only in public prestige, but also in valuations of their securities and ability to do business.

"Three years ago, executives got rewarded for traveling at the margins," he said. "Now they'll get penalized, and that's great news. I'm an investor, and I want to invest in integrity-laden management teams. I don't ever want to be subjected to a WorldCom or a Tyco or an Enron in the rest of my career."

But what changes will be viewed as justice? And are executives truly prepared to take those steps?

The fundamental reform, according to experts who have studied American concepts of justice, would come from projecting a stronger message that management is there for the benefit of shareholders — not that shareholders' money is there for the benefit of management.

"A lot of these people seem to feel they had worked their way up the corporate ladder, and now that they got there they deserved whatever they could get," said W. Michael Hoffman, executive director of the Center for Business Ethics at Bentley College in Waltham, Mass. "This is simply a terrible attitude for corporate executives to have. Instead of having a sense of entitlement, they ought to have more of a sense of serving their constituency."

Indeed, these experts said, one level of justice would be for corporate America to address the long-ballooning pace of compensation, where each executive points to another to justify mammoth pay packages. Now, with so many companies struggling, the public will be hard pressed to accept the explanations for excessive pay.

"If the C.E.O.'s had any claim to the astronomical sums they were making, it would only be sustained if they carried the company, the workers and the stockholders along with them," Professor Darley of Princeton said. "But as soon as it became clear that they were self-benefiting in ways that were absolutely wrong, and actually harmed their employees, then their legitimacy and the claim to that compensation was stripped away."

Moreover, the daily drippings of news about chief executives who received favored opportunities from investment banks, who lived in expensive, company-owned apartments and who received vast sums even in retirement have turned up the public anger. Through those tales, executives seem separated from the realities and difficulties of living in a world where housing costs money, investments are not guaranteed to be successful and a paycheck usually requires some work.

The wealth gulf created between the executives and the public is not a matter of jealousy, or simply an outgrowth of anger about the collapsing stock market, these experts said. Rather, it reaches down to the fundamental issues of fairness that underlie American concepts of justice.

That is why even efforts by executives to compensate the victims of corporate disasters — like the recent offer by Gary Winnick, the chairman of Global Crossing, to pay $25 million to cover part of the retirement money lost by several thousand employees when the company collapsed — could well backfire. Rather than being grateful, these experts said, the public is more likely to react with anger that executives have so much to give away — even now.

"There is kind of a tin ear out there among some chief executives who think that if there is a problem, then they should write a check," Mr. Panetta said. "But it goes deeper than that. Executives have to understand that, because if they don't, ultimately investors and shareholders are going to challenge them."

The answer, these experts said, is for corporate America to demonstrate aggressively that it recognizes the rationale for the public's anger. Only that, coupled with the punishment of those who violated the law, will fully assuage the demands for justice. For now, they added, too few executives are taking that initiative.

"For people to step forward and acknowledge responsibility for what has gone wrong, to agree that there is a need for change, to step forward to help to lead an effort — those are all the kinds of things we would tell C.E.O.'s that they should do in the face of public anger," Professor Tyler of N.Y.U. said. "So it is puzzling that we haven't seen more of that happening."

But ultimately, market participants said, the changes will come, and the business world will be the better for it. "We're going to look back in three or four years and see the last 12 months as a difficult but singularly beneficial period of time," Mr. Brennan said. "And in the end, people will once again value corporations for the good they do."

LAS VEGAS, Oct. 3— The people who design and administer corporate pay plans say they bear some responsibility for excessive executive pay and they warned at a conference here that new and expected pay reforms can easily be abused to enrich executives unjustly.

About 1,600 members of the National Association of Stock Plan Professionals also agreed at their annual conference here that the people most likely to lose out under pay reforms are rank-and-file workers who now get stock options, but may lose them and not have their value replaced.

Stock options were a road to riches for many executives in the bull market. Executives liked them because a rising market lifted almost all stocks, and the cost, while deductible for tax purposes, was not treated as an expense that reduced profits reported to shareholders. Instead, options diluted ownership, which subtly reduced returns to shareholders.

George B. Paulin, president of Frederic W. Cook & Company, a leading pay consultant, said that consultants bore part of the responsibility for excesses because they did not fully warn of how stock options, restricted stock and other devices could be exploited by executives.

He said the focus now should be on adopting the best practices to make sure shareholders do not pay more than necessary for executive talent.

Mr. Paulin also warned that reforms can be abused. "As we clean up one set of abuses," he said, "we don't want to start another set of abuses."

He cited swaps of options for cash or restricted stock as an area open to abuse.

"You could make it look like you have cut the C.E.O.'s pay by 36 percent when in fact by replacing option values with cash bonuses" the executive ends up with more money than if his pay package had been left untouched, he said.

Mr. Paulin said the problem lay in the most widely used technique to value options, known as Black-Scholes. "The fact is that Black-Scholes values are too high," he said. "No investor would buy an option in the open market at Black-Scholes values."

Mr. Paulin emphasized that options and restricted stock, which became widespread in an effort to align the interests of executives with shareholders, are the main reasons that some executives were paid far too much. He added that "transparency is needed" on perks and retirement benefits because inadequate disclosure also makes them prone to abuse.

Salary and bonuses, he said, generally have not been abused. "Their salary and bonus, relative to rank-and-file pay," has not changed all that much since 1975, he said.

Back then, many chief executives earned around $300,000 in salary and bonus, or $1 million in today's dollars. A typical salary and bonus today is about $3 million, according to Pearl Meyer & Partners, a pay consulting firm in New York.

A few dozen companies, notably Coca-Cola, have announced that they will now expense options. But only a handful of association members here raised their hands in support of treating stock options as an expense on company earnings statements. Many said that if expensing was required, which is widely anticipated, the rules needed to be refined to eliminate distortions to profit statements when options lapse because of falling stock prices or are given up by departing executives.

Jesse M. Brill, publisher of Corporate Executive, a newsletter on pay practices, recounted how for years he railed against huge stock option grants and inadequate disclosure of retirement benefits, but few listened.

Shareholders, both institutions and individuals, must be vigilant about new pay practices, he said, or "the problems with runaway compensation will continue."

"As we toss out things that are bad," Mr. Brill said, "I fear they will be replaced by things that are worse, but the Securities and Exchange Commission is looking at what was and not what is coming."

Mark Borges, the senior pay disclosure expert at the S.E.C., said that news reports about pay and perks for the former chief executives of General Electric and Tyco International "have demonstrated to the staff that either the disclosure rules are not clear enough on what needs to be disclosed or else the level of monitoring by the staff is inadequate."

Referring to annual reports filed with the S.E.C., he said "there is an obvious requirement to disclose contracts with the executives, and I am astounded every time I look in the most recent 10-K and the agreement is not mentioned." He said his staff eventually found all such contracts by combing through previous quarterly reports.

Michael Gettelman, a securities lawyer who edits The Corporate Counsel, a newsletter on executive compensation, urged a rule requiring immediate disclosure of employment and departure contracts through an 8-K, a type of report closely watched by analysts, reporters and some investors. Mr. Borges agreed there was a problem with delayed disclosure and said he would consider the idea.

NEW YORK, Sept 23 - Top U.S. markets watchdog Harvey Pitt said on Monday he wants to abolish a rule that allows companies to ignore shareholder proposals, paving the way for investors to keep more tabs on corporate executives.

Pitt, chairman Securities and Exchange Commission, said shareholder efforts, such as attempts to block stock option plans awarded to corporate executives, should not be stifled.

Under current SEC guidelines, rule 14a-8 allows corporations to avoid shareholder proposals deemed to relate to ordinary business operations. Critics say that gives management the upper hand in deciding what issues shareholders can and cannot actively oppose.

"I don't think corporations should be able to exclude aggressive shareholder proposals like this under the rubric of the ordinary business exception," Pitt said at an institutional investor conference in New York. "It's my hope that we can eliminate this exception, making shareholder suffrage a reality."

Pitt said he asked the SEC's director of corporation finance, Alan Beller, to consider a proposal to eliminate the ordinary business exception rule.

Watson Wyatt has conducted a new survey of employee opinions. The results do not bode well for corporate America. Since Watson Wyatt is a management consulting group, their hands are not clean regarding the current workforce problems. They sold many of the programs and policies that are the root of today’s problems. One of the most notable failures was the cash balance pension plan.

We will give Watson Wyatt credit for not trying to hide the problems any longer. There comes a point when problems are apparent to the most casual observer. To deny the obvious is to present yourself to the world as an unabashed liar. Considering the options, Watson Wyatt decided to come clean. Corporate America is rotten. It is much too late for mere air fresheners to quell the stench!

The survey revealed the truth that everyone in the workforce already knows:

• Corporate America has a problem.

• There is a crisis of confidence among employees.

• If employee trust cannot be restored, then investor trust is a lost cause, as employees are the corporations “most visible ambassadors to the outside world.”

• Scandals, layoffs, pay freezes, accounting blunders, insider trading, reduced benefits, broken promised, stock option games, mixed with relentless change, have tested employees’ forbearance to the limit.

• There is a lack of confidence in senior management.

• There is evidence that low employee trust begets lower shareholder returns.

The opinion of Watson Wyatt is: “No company can afford to ignore these issues.”

House-Senate Conferees Poised to Repeal Law Protecting Consumers, Investors from Enron-style Accounting and Market Manipulation

WASHINGTON, D.C. - Some of the major corporations pushing Congress to repeal the consumer-protection law known as the Public Utility Holding Company Act (PUHCA) are the same ones that are being investigated for gouging ratepayers and manipulating the California energy market through schemes involving sham energy trading and the withholding of electricity, according to a Public Citizen report released today.

House and Senate conferees, who are trying to reconcile differences in energy legislation passed by both chambers, are expected to begin taking up the electricity provisions of the competing bills as early as Thursday. While most public debate has centered on the massive subsidies to energy companies in the bill, the Senate bill also repeals PUHCA, an obscure, Depression-era law that is supposed to ensure that electric, natural gas and water utilities invest profits in providing reliable service rather than fueling the Enron-style acquisition of assets unrelated to their core energy business.

"Members of Congress declare themselves to be tough on corporate crime when the camera is rolling, but behind closed doors they are trying to make it even easier for rapacious energy companies to rip off the public and investors," said Joan Claybrook, president of Public Citizen. "The energy giants that are being investigated for rigging the California energy market are the same ones that are lobbying behind the scenes to get rid of the Public Utility Holding Company Act. Rather than protecting ratepayers and shareholders, Congress is preparing to strip away any vestige of accountability and transparency there is left."

The energy industry poured $44 million into lobbying Congress on PUHCA and other issues in 2001 alone, and has contributed more than $16 million to federal candidates since 1999, according to the report. This total includes lobbying by individual companies and their various anti-regulation trade associations, such as the Edison Electric Institute and the Coalition to Repeal PUHCA Now!.

Enacted in 1935, PUHCA has historically prohibited holding companies from investing ratepayers' money in assets that will not directly contribute to low bills and reliable service, such as out-of-region power plants or non-electricity industries like water or telecommunications. However, the 1992 Energy Policy Act allowed holding companies to invest ratepayer money in foreign power projects. This permitted the development of offshore subsidiaries and sham transactions that eventually led to the downfall of sprawling corporate structures. The law has been further weakened by exemptions and lack of adequate enforcement by the Securities and Exchange Commission (SEC).

Abolishing PUHCA would largely remove government oversight from companies such as American Electric Power, Duke Energy, CMS Energy, Southern Company/ Mirant and Xcel. As some of the leading energy providers in today's deregulated markets, these corporations claim they can be trusted in the absence of supervision. But it was exactly that - the lack of government supervision - that allowed Enron to build its far-flung empire, manipulate markets and use accounting gimmickry to conceal debt and inflate income. Had there been a regulated system to ensure corporate responsibility and transparent accounting practices, it is likely that California's recent energy crisis and the accounting fraud that followed would have been impossible.

In the report, Public Citizen examines the record of five companies seeking PUHCA repeal: American Electric Power, Duke Energy, CMS Energy, Southern Company/ Mirant and Xcel - all of which are under investigation for fraudulent trading and/or accounting practices and accused by state and federal investigators of gouging billions of dollars from California consumers during the artificially created energy "crisis" of 2000 and 2001.

"The repeal of PUHCA would have devastating consequences for consumers and investors by leading to more Enron-style meltdowns, further industry consolidation and the creation of complex corporate structures that reduced transparency and accountability," said Tyson Slocum, research director for Public Citizen's Critical Mass Energy and Environment Program. "We need to demand that these energy companies be good corporate citizens, but it's clear they will not do it without strict standards of accountability. Government oversight is an indispensable measure needed to maintain an affordable and reliable energy market. Congress should be strengthening PUHCA, not ditching it."

Public Citizen's report shows:

• On Jan. 18, 2002, the U.S. Court of Appeals for the District of Columbia ruled that the SEC failed to prove that the June 15, 2000, merger of American Electric Power with Central & South West met the requirements of PUHCA and sent the case back to the SEC for further review. Specifically, the court told the SEC to revisit its conclusion that the merger met PUHCA requirements that utilities be "physically interconnected" and confined to a "single area or region."

• In early June 2002, the SEC ordered Duke Energy to release information on its trading practices, and in July the energy trader admitted that it had misled investors and federal officials about its trading operations. In July, the Commodity Futures Trading Commission (CFTC) issued a subpoena to Duke, and the company has been under investigation by the Federal Energy Regulatory Commission (FERC) since May. In addition, Duke is under investigation by the Justice Department's Houston office as part of a grand jury investigation into allegedly fraudulent trading practices. The federal grand jury subpoenaed Duke on July 12.

• The SEC, CFTC, FERC and the Justice Department have all been formally investigating CMS Energy since May 2002, making CMS Energy the most investigated energy trader next to Enron. Shortly after the investigative offensive, long-time CMS Energy Chairman and CEO William McCormick resigned. That was followed by the firing of the company's auditor, Arthur Andersen. At the time of the accounting firm's dismissal, Arthur Andersen noted that its approval of the company's books could no longer be relied upon, which should not come as a surprise since 71 percent of the $5.6 million CMS Energy paid Arthur Anderson was for non-audit consulting services.

NEW YORK - General Electric Co. said on Monday federal regulators are investigating Jack Welch's lavish retirement and employment benefits, shortly after the former chief executive said he had given up company-funded use of corporate jets and a New York apartment.

The decision by Welch, hailed for taking a stodgy conglomerate by the horns and reshaping it into an aggressive global powerhouse, comes after a barrage of criticism over his handsome benefits, details of which emerged in divorce papers.

Welch didn't apologize for taking home a retirement package stuffed with country club memberships, regular dinners at one of Manhattan's best restaurants and the cost of flowers, wine and other perks at the swank apartment as the filing alleged.

In an article penned for The Wall Street Journal, Welch defended his benefits, saying they were given in lieu of cash compensation offered by the company during his reign as CEO.

Though the benefits were not improper, perceptions matter, he said.

"And in these times when public confidence and trust have been shaken, I've learned the hard way that perception matters more than ever," Welch wrote. "In this environment, I don't want a great company with the highest integrity dragged into a public fight because of my divorce proceedings."

At his request, GE's board agreed on Thursday to change the contract so that the corporate coffers would fund only basic office and administrative support, Welch said.

A day later, the U.S. Securities and Exchange Commission requested information on Welch's pay and benefits, in an effort to uncover whether GE properly disclosed the details of the arrangement set in 1996, the company said.

"Jack Welch is under a lot of pressure," said John Challenger, chief executive of outplacement firm Challenger Gray. "In some sense it's a response to (SEC scrutiny), to cap the damage and not let it get out of control, and also to cap the public outcry over it quickly."

Nevertheless, the move is expected to make it harder for corporate boards to sign off on fancy retirement perks that became the norm during the boom years of the 1990s.

"He's the most lionized of CEOs," Challenger said. "It can't but serve as a model of what things ought not be and you hope this will inevitably lead to change. The question is to what degree."

EXECUTIVE GREED

The post-Enron focus on executive greed has resulted in much soul-searching in corporate America. Recent legislation and reform proposals have sought to curb fat pay packages brimming with interest-free loans and stock options.

In the five years ending in 2001, CEO compensation doubled at the 200 largest companies, according to compensation consultants Pearl Meyer & Partners. Though the economy, along with the stock market, has sputtered in recent years, CEO benefits on first glance haven't felt the pinch.

At IBM, outgoing Chairman Louis Gerstner will have access to the corporate jet, cars, office and apartment, complete with home security services for 20 years after retirement. An IBM spokeswomen said his contract remains in effect.

"Compensation committee boards are going to take a closer look at retirement arrangements, and I think the perks in particular have caught their attention," said Claude Johnston, managing director at Pearl Meyer & Partners. "There's just a sense of why can't these executives pay for it themselves."

A deterrent to paring retirement excesses is the fact companies are not required to spell out the dollar amount the perks cost, said Beth Young, a senior research associate at The Corporate Library, a business research group.

"Everyone involved in this knows that this was an aberration that (Welch's perks) came to light," said Young.

Details of Welch's compensation and perks -- both from his years as CEO and his retirement -- were revealed recently in divorce papers filed by his wife, Jane Beasley Welch, in a Connecticut court. The Welches separated earlier this year after media reports swirled of Jack Welch's affair with the editor of the Harvard Business Review.

The perks were slammed almost immediately, coming at a time investors are still fuming over a string of corporate scandals that usurped shareholders of their retirement savings while executives walked away with unseemly severance packages.

Welch, in response, said the divorce filings "grossly misrepresented" his contract with GE, but that he didn't want to dispute every allegation. For the record, he said he had always paid for his personal meals, and does not have a cook.

The new contract means Welch, who retired from GE a year ago after 21 years as chairman, will fork out between $2 million and $2.5 million a year for using the company's planes and an apartment overlooking Central Park in Manhattan. He also said he would provide free consulting services to GE.

(9/15/02) - Are the days of the imperial chief executive coming to an end?

Last week, the board of Adelphia Communications disclosed that it would not pay John J. Rigas, the company's founder and former chief executive, a $4.2 million severance package his contract calls for, citing the fraud charges that have been brought against him. On Tuesday, directors at WorldCom discussed whether they could take a similar step against Bernard J. Ebbers, their former leader and a company founder, who is under investigation.

On Thursday, Tyco International filed a civil suit against L. Dennis Kozlowski, who stepped down as chief executive in June, to recover his income from the last five years and his severance pay. The same day, the Manhattan District Attorney's office indicted Mr. Kozlowski on fraud and other charges.

At healthier companies, meanwhile, directors are scouring more closely than ever the pay contracts they have extended to top executives. Some are promising to redouble their efforts to connect pay to performance.

The lifetime perquisites granted to General Electric's former chairman, John F. Welch Jr. — described in a recent divorce filing by his wife, Jane — have increased the scrutiny given to the pay packages of retired executives as well.

For the first time in years, some boards appear to be responding to criticism of executive pay with actions, checking the perks, if not the power, of the nation's once-lionized chief executives. Over the last decade, those executives have come to expect not only millions of dollars of pay each year but also lavish pension plans, low-interest company loans (often forgiven) and deeply discounted use of a corporate jet for personal travel.

"Boards are increasingly considering the public perception that overly aggressive pay packages create," said Barbara M. Barrett, a director of three public companies, including Raytheon. There will be, she added, "a thoughtful curbing of rambunctious pay packages."

Ira T. Kay, the top pay expert at Watson Wyatt Worldwide, a consulting firm, added, "Boards definitely have more backbone than they did before."

How far directors go will not be known until early next year, when most companies publish their annual proxy statements. A significant decline in executive pay is very unlikely.

At the least, however, corporate directors have turned an eye on the more egregious perks that became so common during the boom years and appear to be stiffening their resolve when negotiating with executives who are on their way out.

"Boards are getting a little tighter-fisted," said Robert J. Stucker, a lawyer at Vedder, Price, Kaufman & Kammholz in Chicago, who represents executives during contract talks. "They're just being more careful about what they're agreeing to."

The plunging stock markets have already knocked many chief executives off their pedestals. Now, this new attitude may well alter a practice that boards have regularly defended even as it has outraged investors and employees. Defying their own mantra of pay for performance, directors often granted big raises, plentiful perks and enormous severance packages even to executives who failed to keep to their promises on revenue and profit.

The biggest changes so far have been at companies where the possibility of criminal charges hangs over top executives. But at even a broader spectrum of corporations, boards have decided to fight former executives over the size of their goodbye packages.

Independent directors at ABB, a European energy and technology company, shamed Percy N. Barnevik, a former chief executive who was sometimes called Europe's Jack Welch, into returning most of an $87 million severance package early this year. In New York, the Warnaco Group, a clothing company that filed for bankruptcy protection last year, and Linda J. Wachner, its former leader, are locked in a legal battle over $25 milion in severance the company has declined to pay her.

Mr. Kozlowski and Mr. Rigas have both said they are innocent of the criminal charges filed against them, and Mr. Rigas said he may file suit against his former company seeking the withheld severance.

Corporate directors pronounced themselves newly vigilant after the market downturn of a decade ago, too; they promised then to begin rewarding only those executives who succeeded. "Firms Rethink Lucrative Severance Pacts for Top Executives as Criticism Swells," read a headline in The Wall Street Journal in 1991.

By the end of the long boom, however, pay for the typical chief executive at a large company had more than tripled, according to Pearl Meyer & Partners, a pay consulting firm in New York. Upon retirement, acclaimed chiefs like Mr. Welch received benefits that sometimes included lifetime use of a company jet, office space and secretarial help. Richard A. McGinn of Lucent Technologies, Jill E. Barad of Mattel and other chief executives received multimillion-dollar severance deals when they were ousted because of disappointing tenures.

Even now, some companies that have acknowledged reporting false earnings have no plans to rescind the rich pensions of the executives who oversaw the misleading accounting — life Paul A. Allaire at Xerox. Christa Carone, a Xerox spokeswoman, said that the accounting restatements moved profits from one year to another but did not lower total earnings.

Global Crossing, the telecommunications company that filed for bankruptcy protection this year, is paying legal fees for Gary Winnick, the chief executive who oversaw much of its descent into bankruptcy. Before its stock collapsed, Mr. Winnick famously made more than $700 million selling company stock, according to disclosures.

Elsewhere, many boards have decided not to change their pay plans until the current scandals recede from the headlines, said Blair N. Jones, a senior vice president at Sibson Consulting who advises companies on pay. And when recruiting new executives, few boards are likely to insist on strict severance clauses, partly because they assume that they are hiring the right person. On that issue, Mr. Kay, the pay expert, predicts that "shareholders' advocates are going to be disappointed."

But some change is likely. Public scrutiny of corporate America is far more intense than it was a decade ago, probably because so many more people have invested in, and lost so much money in, the stock market. As a result, boards are facing greater pressure to renege on severance deals when executives depart, knowing that unusually deluxe deals might draw the attention of investors or regulators.

In an unusual speech at a Sept. 11 anniversary service near ground zero, William J. McDonough, president of the Federal Reserve Bank of New York, admonished corporate America over its pay levels. "C.E.O.'s and their boards should simply reach the conclusion that executive pay is excessive and adjust it to more reasonable and justifiable levels," he said. The rapid increases of the last two decades, he added, have been "terribly bad social policy and perhaps even bad morals."

Shareholders, who were generally willing to ignore executive pay during the bull market, are showing more signs of opposition, too. This year, even before some of the recent disclosures, investors at 19 companies introduced resolutions to restrict golden parachutes, up from 13 in 2001, according to the Investor Responsibility Research Center in Washington. On average, the resolutions have received 36 percent of the vote, up from 31 percent in 2001.

At three companies, Bank of America, Norfolk Southern and Sprint, the resolutions received at least 50 percent of the vote, the research center said. Companies control large blocs of votes and, even when they lose, are not required to adhere to shareholder resolutions. But many companies do change part of a policy when a resolution receives a large amount of support.

The recent corporate responsibility bill signed by President Bush does not specifically address severance packages, but it does widen the definition of misbehavior that would require executives to forfeit past pay. Under it, the Securities and Exchange Commission has authority to recover profit from executive stock sales if the executives have released false information. The law also tries to limit pay indirectly by outlawing company loans to top executives.

All this should serve to embolden directors who try to oust C.E.O.'s or force them to accept smaller severance packages than a strict reading of their contract would permit, lawyers and pay consultants said.

"The board has leverage today," said Yale D. Tauber, a senior compensation consultant at Mercer Human Resource Consulting.

"As a board member, I can make life pretty miserable for a C.E.O.," Mr. Tauber said. "There are always skeletons of one kind or another in the closet. There are always judgments that you wouldn't really want to have an examination of."

At Tyco, the board used this very tactic in July to persuade Mark H. Swartz, the former chief financial officer, to give up $91 million in severance pay, according to a person close to the board. Mr. Swartz, who was also indicted on Thursday, accepted $9 million, though his contract entitled him to about $100 million.

"He didn't want to be in the spotlight and he knew that walking away with $91 million would not look so hot in the current climate," this person said. "The board played that card. The implications of not taking the deal were made pretty clear."

Instead, Mr. Swartz opted to take the severance arrangement, which also protects him from being dragged through the mud by the company in court; any litigation must now take place in private arbitration hearings, according to people briefed on the arrangement.

The board's hardball tactics are a sharp turnabout from its stance in recent years, when it made Mr. Kozlowski perhaps the best-paid chief executive in the country. It also allowed him to pursue aggressively some accounting practices that now look questionable and that prosecutors have called illegal.

But the change has not happened without a fight. Some Tyco board members argued against the deal with Mr. Swartz and the lawsuits against Mr. Kozlowski, according to people who took part. Recent meetings and conference calls have often degenerated into screaming matches, they added.

On Thursday, Tyco's board voted 8 to 3 to oust itself, hoping to restore investor confidence in the company.

Tyco also hired David Boies, the lawyer who recently represented the government against Microsoft, to conduct an internal investigation into possible fraud at the company. He is scheduled to release his report tomorrow.

Mr. Boies also represents Adelphia and played a crucial role in negotiating Mr. Rigas's resignation and severance package on behalf of the company, working into the wee hours of the morning for several nights in Coudersport, Pa, where Adelphia is based. He advised the company to withhold the severance pay after Mr. Rigas was charged with securities fraud.

In the past, boards have found that giving executives enormous annual pay packages or severance deals offered little risk — simply because board members themselves faced relatively little scrutiny. Shareholder rights advocates and news media accounts often questioned Ms. Barad's $37 million severance deal, for example. But John L. Vogelstein, an executive at E. M. Warburg, Pincus & Company, an investment firm based in Manhattan, who was the head of Mattel's compensation panel when Ms. Barad left the company, received scant attention.

Similarly, Mr. Welch's benefits-rich contract has become a lightning road over the last two weeks.

"It's offensive, it's excessive, it's totally inappropriate," said Susan F. Shultz, the president of SSA Executive Search International in Phoenix, which conducts board searches for companies like Allied Waste and Wells Fargo. "No individual who is no longer contributing to the company needs to have maids, wine, country club memberships. It is draining resources from the company."

G.E. says the contract, which dates to 1996, persuaded Mr. Welch to remain as its chief executive until last year and that Mr. Welch now serves the company as a consultant.

Silas S. Cathcart, the chairman of G.E.'s pay committee in 1996, has rarely been mentioned during discussions of Mr. Welch's pay. Yet as someone who once reported to Mr. Welch — while running Kidder, Peabody & Company, a G.E.-controlled Wall Street firm — and who spent more than 20 years on G.E.'s board, Mr. Cathcart fits the profile of an insider who many corporate-governance experts say should not make pay decisions.

Calls last week to residences listed as Mr. Cathcart's were not returned. Mr. Vogelstein was traveling and unavailable to comment, his assistant said.

Some analysts predict that, finally, board members are unlikely to remain as anonymous as they have been. After Enron's collapse, some of its directors faced pressure to resign from positions at other companies.

Over the last decade, however, executives and board members, usually executives themselves, have repelled almost every attempt to halt the growth in pay. This time, under the increasingly bitter scrutiny of disillusioned investors, they might resort to shifting more pay to their pensions or retirement, where disclosure rules are limited, pay experts say. For instance, G.E. described Mr. Welch's perks in only the most general terms in its filings.

Harvey L. Pitt, the S.E.C. chairman, has often spoken about the importance of more detailed corporate disclosure, but he has not announced plans to require more disclosure for the pay of retired executives. The commission is studying the issue, an S.E.C. official said.

Still, most pay experts — whether the consultants who design the deals or the critics who pick them apart — believe that boards will make some changes this year.

"We've been looking at increasingly good practices, but it has been devastatingly slow and inappropriately slow," said Ms. Shultz, the recruiter. Even so, she added, "this is the beginning of a positive period."

"The scrutiny alone is going to help reform the practice of rewarding C.E.O.'s for failed performance," she said. If Ms. Shultz is correct, it should be obvious soon. The turmoil in the stock market and the weakness of the economy almost ensure that more chief executives will fail to meet their goals in the coming year.