IAC/InterActiveCorp chief executive Barry Diller responded to the widespread criticism he received after his pay topped the charts at more than $296 million in 2005, calling his critics "birdbrains". He insists that this criticism is undeserved; after all, the majority of his income (98%) for the year came from exercising options that he had obtained 11 years ago after he took over the then-risky HSN Inc. in St. Petersburg. Since then, he turned the troubled TV shopping network into a $10 billion multimedia conglomorate. Isn't this money well deserved?

He also expressed outrage at many corporate governance groups who automatically penalized his company, most notably the "D" rating that the Corporate Library issued. On that topic, he noted, "I think the whole consultant group should be flushed into the East River and no value loss would ever be seen by man". Moreover, he faced criticism from many in the media, including the New York Times which recently ran a story on his compensation that called him "the laziest man in America". Diller said the issue of governance is "completely misunderstood, certainly by the birdbrains that write about it. I mean their reactions to everything are so dim, and I am talking about The Corporate Library and I'm talking about these people that analyze these things and haven't a clue ... My problem with governance is that it's really hurting American business."

While this is true in some cases, there are many more instances of poor corporate governance. Clearly, many compensation committees failed to prevent the options backdating scandals, ill-defined bonuses (abusing regulation 162m), and countless other instances. Some executives, like Barry Diller, are unfairly targeted; however, perhaps this is a necessary evil in order to protect shareholders in the long run.

Mentioned Companies
IAC/InteractiveCorp (IACI)

Metropolitan Capital Advisors demanded today that Cyberonics (NDAQ:CYBX) Director Kevin Moore be immediately removed from the Board. The demand stemmed from a conflict of interest that Metropolitan called a "glaring violation of law and appropriate corporate governance practices". Apparently, Moore had a longstanding friendship with ex-CEO Robert Cummins - it turns out they were college buddies at Dartmuth. Soon after Moore joined the board in January of 2004, he was appointed to head the compensation committee. This conflict of interest ended up costing shareholders dearly.

The first major problems began on June 15, 2004, when Mr. Cummins managed to pull in $2.5 million overnight thanks to a conveniently timed options grant that we previously reported on. Then in 2005, Moore approved a raise for Mr. Cummins despite an existing contract with three years still left on it! That brought his salary up to $800,000 along with $17 million in additional option grants. And these were not options that were acquired when the company was in its infancy; rather, they were acquired in periods when shareholders were losing money.

If Metropolitan succeeds in removing Kevin Moore from the Board like they did Robert Cummins, they will finally have a clean slate to work with. They hope to then find a CEO that will be able to help lead the company return value back to the shareholders.

Mentioned Companies
Cyberonics (NDAQ:CYBX)

Board independence and executive compensation are issues experiencing more and more media attention lately, but what is being done to correct the problems? While regulators are working to enact new laws, these take a long time to enact and enforce. As a result, many activist and passivist investors have voiced their concerns recently (which led to the current media blitz). One of the most important instances occured on October 23rd when a coalition of pension funds with over $850 billion under management sent out letters to the top 25 U.S. companies by market capitalization expressing concern over executive compensation. In particular, the funds voiced their concern over the independence of the board committees that determine executive pay within a company. Often times these compensation committees also work closely with management in other areas; such relationships could lead to the inflation of executive pay at the expense of shareholders. How does this occur? In the end, these committees are often failing to prevent abuse of Regulation 162(m). This abuse is characterized by performance goals (developed by these compensation committees) containing vague vocabulary designed to maximize the liklihood of meeting goals. When these goals are achieved, bonuses are granted to executives (and they're even deductible!). The pension fund coalition hopes that these letters will remind investors to be mindful of executive pay levels as well as encourage companies and regulators to work to remove any conflicts of interest that may exist between management and shareholders. In the end, it may be shareholders that may have to take action through the use of publicity and proxy threats. After all, it was regulators that passed Reg 162(m) in an attempt to combat excessive compensation in the first place!

Public companies are structured in such a way that shareholder interests and management interests are seperated - at least that's the theory. Problems arise when management holds the position of Chairman, which often leads to their "friends" being appointed to fill the other seats. Shareholder interests are in great jeopardy when this happens because management has complete control and very little oversight. This type of situation can be particularly costly during mergers or acquisitions, when management interests can differ greatly from shareholder interests. Often times, management receives cash bonuses, severence packages, and other benefits that are not realized by shareholders. Occasionally, these benefits are offered by bidders who want to restrict the marketing done to sell the company in order to assure a lower cost of acquisition.

One such instance of this taking place is the Lone Star buyout by private equity firm Lone Star Funds. While the value of such a transaction should be over $40 (based on the analysis of a hedge fund), the company agreed to a buyout priced at only $27.10. Moreover, the company did not solicit any bids until after the company agreed to the $27.10 buyout with a contigency stating that Lone Star Funds would have the right to match any future bids! Combined with an $18 million breakup fee, the company is giving little chance for other bidders to make a higher offer. Why would a company do this? Well, management has a lot of money vested in stock options that will expire soon. If the buyout goes though, the CEO alone stands to make $80 million through the exercise of risk-free options. However, if the buyout fails (or if they would have had to consider other bids) he would have had to spend $14 million to exercise those options with no guarantee that a buyout would take place anytime soon.

Instances like this can cost shareholders a lot of money while management benefits. The problem can be traced back to the fact that management and the board are not adequately seperated - a problem which not only affects M&A decisions, but also executive compensation, performance metrics, capital allocation, and many other things that can cost shareholders. This is a growing problem that is currently policed by hedge funds, but should be addressed by Corporate America before it grows.

Mentioned Companies
Lone Star Steakhouse & Saloon Inc. (NDAQ:STAR)

Richard Causey, the last executive implicated in the downfall of Enron, was sentenced today to five and a half years in prison for his involvement in the scandal. The Chief Accountant who signed off on manipulated accounting documents plead guilty in December 2005 to securities fraud and agreed to repay $1.25 million in damages and forfeit over $250,000 in deferred compensation. The judge showed no mercy at trial as he sentenced Causey to just a half year below the maximum and imposed additional financial penalties to the judgement, although prosecutors opted not to go after his $950,000 home in a Houston suburb. Meanwhile, CEO Jeff Skilling was order to report to prison in Minnesota on December 12th to begin his 24 year sentence, although he plans an appeal.

Clearly executive compensation is a problem for many public companies, but what can shareholders do to curb the pay? Well, data from Institutional Shareholder Services - a proxy firm - suggests that activist shareholders have been stepping up in their efforts to draft resolutions to curb executive pay. An article in Business Week quoted ISS as citing as many as 170 pay proposals submitted to U.S. public companies this proxy season alone - and that number will only grow. This compares to only 140 submitted during the last proxy season in February.

Many of these resolutions are drafted in the fall months for presentation during annual meetings, the bulk of which are during the spring months. These resolutions are then brought up at the meetings where it is decided whether or not they will be put on the proxy statements. These proxy statements are then sent out to all shareholders, so any mention of executive compensation definitely raises awareness very quickly.

Several unique proposals are in development, demanding everything from better reporting on stock option grants to peer performance based compensation. These new proposals, combined with the SEC's upcoming regulations, will enable investors to better track and even regulate executive compensation. For more free, detailed executive compensation figures and analysis check out ExecutiveDisclosure.com.

Most investors are aware of the options backdating scandal that has hit the market recently, but many questions still remain: How widespread is this problem? And, are there other ways in which executives can take advantage of options to profit off of shareholders? Unfortunately, there are several studies that have concluded that option grants have uncanny timing in the the majority of public companies. In fact, it was studies like this that eventually brought the current instances of backdating fraud to the SEC's attention - in particular UI Professor Erik Lie's paper, which suggested that many option grants were given at such unpredictably opportune times that it must be been set after the fact. Obviously, this turned out to be true as the SEC continues to investigate several companies. Meanwhile, many other companies continue to practice other shady techniques to provide executives with even more money.

While backdating is currently in the spotlight, there are many other similar techniques that executives can use to profit from shareholders. One such technique is known as "bullet-dodging". This is a technique whereby option grants are awarded shortly after a negative press release, so that they are issued at the lowest possible prices. The opposite of this is "spring-loading", where executives will delay positive press releases until after option grants take place. Both of these techniques involve profiting off of non-public information; however, their usage remains widespread due to a lack of legal definitions. The SEC has yet to pursue any of these cases, and as a result there are few court cases to create more refined legal definitions. Until this happens, the practices will likely to continue and investors will have to simply be watchful. Currently, the SEC does require companies to report option grants within two days of their issuance, so it does make it possible for investors to track. Portals like ExecutiveDisclosure.com can help investors find such dates in order to somewhat predict good or bad news releases.

The options backdating scandal continues to haunt the markets today as KB Homes CEO Bruce Karatz resigned as head of the company amid an internal options investigation. A preliminary report found that the home construction company had incorrectly reported around $50 million in options grants, which the CEO agreed to repay. Several other members of the company were also found guilty, which prompted the board to fire HR head Gary Ray and encourage the resignation of VP and chief legal officer Richard Hirst. The board found that Mr. Karatz and Mr. Ray had selectively chosen grant dates under the company's stock option plan for personal gain.

According to an 8K filed by the company today:

"On November 12, 2006, the Company announced that a subcommittee of the Audit and Compliance Committee of the Board of Directors and its independent legal counsel conducting an investigation into the Company’s past stock option practices have concluded that the Company used incorrect measurement dates for financial reporting purposes for annual stock option grants during the period from 1998 to 2005. The Company expects that the incremental non-cash compensation expense arising from these errors is not likely to exceed an aggregate of $50 million, spread over the vesting periods of the options in question. The errors may also require an increased tax provision. The Company is evaluating, with its independent auditors, whether a restatement of certain previously-filed financial statements will be required. The Company has cooperated and will continue to cooperate with the inquiry of the SEC and other government agencies." (Read More)

This latest investigation has again pushed the bounds of these investigation to companies outside of the tech sector, which was hit especially hard. Although the number of investigations has slowed as of recent, there continues to be many new instances while older cases are just beginning to be settled by the SEC. So far, only a handful of executives have faced criminal charges.

Mentioned Companies
KB Home (NYSE:KBH)

We all know that the Democrats recently took control of the House and Senate, but what does this mean for executive compensation? Currently these kinds of issues are handled by the House Committee on Financial Services, which oversaw the development and implementation of laws like Sarbanes-Oxley. Prior to the elections, the chairman of this committee was Republican Michael Oxley from Ohio; however, it is likely that he will be replaced by Democrat Barney Frank from Massachusetts. Barney Frank has pledged to push legislation that will give shareholders much more control over executive compensation. One of the aspects discussed the most is the social implications of corporate profit-sharing; some believe that the stagnated middle-class could benefit from money that would otherwise be lining the pockets of upper-class executives. Essentially, they seek to close the growing income gap between executives and employees, which has grown even greater according to recent reports that executive compensation was growing at 20% per year while employee salaries remained nearly even. So far these ideas have not gained much political traction; however, this could change as the Democrats have taken control of the House and Senate and more media attention has been drawn to executive compensation.

Enron has become one of the greatest examples of fraud in corporate America - when a company with a $60 billion market cap disappears overnight, it draws some attention! But what really happened at Enron, and what can we learn from it? Well, here's the story: In early 2001, the high-flying energy company was the darling of Wall Street, trading at over $80 a share with analysts at their feet strongly recommending the stock. A few months later the stock began to slowly drop; however, so did the rest of the market, so few analysts voiced any concerns. Many just assumed that it was trading alongside the rest of its sector. Little did people know that executives were dumping millions worth of stock while trying to keep their financial statements in order for just a few more months...

The first sign of trouble came in August 2001, when Enron's CEO Jeffrey Skilling unexpectedly resigned. Shortly after, the company's chairman and previous CEO Ken Lay took over. However, by the end of the month the stock was trading at just $35 per share - less than half of its early 2001 highs. But the real news didn't hit until two months later when the company stunned Wall Street with a $638 million loss along with a $1.2 billion write-down in its book value. This turned out to be far less than the actual losses, which came as a result of losses suddenly realized on a series of partnerships setup by CFO Andrew Fastow. It turns out that Enron had guaranteed the partnerships' debt, making its true liabilities much higher than what was shown on Enron's financial statements. It was this fact that ultimately caused both investors and customers to flee, leading to the company's bankruptcy.

As if this weren't enough, investors and employees soon discovered that senior executives had received over $750 million in salaries, bonuses, and stock options for good performance in the same year before the company declared bankruptcy! It turns out that executives were bailing out of the stock while the partnership losses remained hidden. Soon after, even more conflicts of interest on Wall Street were revealed: It turns out that Enron's accounting firm, Arthur Anderson, turned a blind eye because they wanted to keep the lucrative contract they had with the company. Meanwhile, analysts continued touting the stock in order to help the investment banking side of their firms get more business from Enron in future offerings.

Luckily, financial statements and securities laws have come a long way since this scandal first started; however, there is still much work that needs to be done. With the new executive compensation disclosure requirements (recently approved by the SEC) and web portals like ExecutiveDisclosure, investors will have tools at their disposal to find problems and conflicts of interest before they become full-blown scandals like Enron or WorldCom.

Dana Corp. (NYSE:DCN, OTC:DCNAQ) announced today that it had reached an agreement to provide CEO Mike Burns with $6.75 million in cash and stock if he can meet certain financial goals in the next two years as the company struggles to emerge from bankruptcy. Other company executives are also entitled to over $4.75 million under the newly approved agreement. This news comes after the CEO fought for retention bonuses of $4 million (plus his base salary) if he was able to successfully bring the company out of bankruptcy or sell it off, while fighting to give other CEOs $4.3 million in similar bonuses. However, a judge said that the plan violated a law aimed at preventing executives from taking large bonuses while workers suffer cuts in pay or benefits. Under the new agreement, the bonuses are tied to specific performance objectives that are more stringent than simply bringing the company out of bankruptcy. If the bonuses are not met, then the executives may only receive their base salaries. Mr. Burns had been making as much as $11.7 million in 2004 before receiving a sharp pay cut to $2.2 million when the company declared bankruptcy. A hearing on the latest plan is scheduled for November 21, where creditors, shareholders, unions, retirees, and others will have their input. This is likely to draw some opposition, as it has in the past, because Dana has been long trying to trim health-care benefits for retirees.

Bonus data is out today on executives working on Wall Street and the results are surprising. Compensation at major brokerage houses increased nearly 30% (after a record year last year) to its highest levels ever. This increase is due in part to a surge in M&A activity along with a strong IPO market and continued economic growth in the world's markets. These factors led to record profits reported by the Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers, and Bear Stearns. Private equity and hedge funds also managed to do well with a widened salary range for managing directors of $700,000 to $7 million compared to a range of $1.5 million to $2.5 million just one year ago. There are indications that private equity and hedge funds are making riskier bets with record amounts of cash being poured into the funds, resulting in over $2.9 trillion in takeovers and a surge in loans, according to reports by Bloomberg and Private Equity Intelligence. Whether this activity continues or not remains to be seen; however, there are few signs now to indicate any slowdown in M&A activity by hedge funds and private equity.

Sanjay Kumar, the ex-CEO of CA Incorporated (NYSE:CA), was sentenced today to 12 years in prison and ordered to pay an $8 million fine for his role in the company's $2.2 billion accounting fraud. The primary concern was over the so-called "35-day month" scheme, which consisted of the company keeping its books open past the end of the quarter to realize additional revenue and meet Wall Street expectations. One person, testifying for immunity, also revealed that the company had regularly backdated contracts to manipulate sales - even going so far as to say that within the company, they referred to the practice as "the CA way".

The verdict comes after many years in the court system, tied up after the government agreed to a deferred prosecution agreement in 2004. The agreement soon went sour, however, after the fed discovered the company's executives were destroying evidence and lying to investigators. This led to additional obstruction of justice charges imposed on Kumar and other executives facing conviction. Investigators noted that they were very suprised at the number of senior executives who participated in the scheme or tried to cover it up. As one law enforcement official put it, "nearly every executive listed in the company's 2000 annual report ended up pleading guilty to something in the case".

Mentioned Executives
Sanjay Kumar

After three trials over the course of nearly a decade, U.S. Federal Prosecutors were finally able to put Walter Forbes behind bars after he masterminded one of the largest cases of stock fraud in history back in 1998. A jury found the 63 year old ex-chairman of Cendant guilty of conspiracy and two accounts of submitting false documents to the Securities and Exchange Commission, where he overstated his company's earnings by $250 million. He was acquitted, however, on a forth account of securities fraud. Forbes is currently free on a $1.5 million bond, but will be sentenced on January 17th, facing up to 25 years in prison.

The U.S. Securities and Exchange Commission filed civil charges yesterday against the former CFO and CEO of Delphi along with 11 others, charging them with altering the company's financials between 2000 and 2004. The SEC said that Dawes has agreed to pay around $687,000 to settle with the SEC, while six others took similar deals. The rest of the defendants are fighting the charges.

The problems began last year, when an internal investigation by Delphi's audit committee revealed a series of accounting problems. These problems included improper accounting for $237 million worth of warranty claims to GM as well as several million dollars of debt that could not be found on the company's balance sheet. These accounting misstatements led to an inflated net income number and an artificially higher value (due to less debt appearing on the balance sheet). Typically such misstatements are used to reach financial targets to achieve bonuses or other executive perks. In a press release, current CEO Robert Miller said, "We have cooperated fully with the commission's investigation and will continue to do so. We are pleased to put the SEC investigation behind us and consider this settlement an important step in our transformation process."