Commentary: Reliance Holdings: Dismal Management, Stellar Pay
Saul P. Steinberg, the '80s corporate raider turned '90s insurance executive, amassed a fortune in the age of hostile takeovers and greenmail.
Lately, though, Steinberg, who runs Reliance Group Holdings Inc., the nation's 23rd-largest property and casualty insurer, is in a whole mess of trouble. His company needs a lot of capital and the main insurance unit risks losing its A-minus (excellent) rating, which is just the kind of thing that scares away customers. Its 9 3/4% senior notes, due in 2003, are trading at an effective yield of roughly 17%, indicating that investors have serious questions about the company's solvency. It has $500 million worth of debt coming due next year--$230 million in the first quarter alone. And it continues to lose money--the company surprised Wall Street Tuesday, Nov. 9, with a 15 cents-a-share loss when analysts were expecting positive earnings.
Yet despite years of weak financial performance, Steinberg continues to command compensation typically reserved for executives who get boffo results. Now, his pay is coming in for more heated criticism. In 1998, Steinberg's salary was $2.2 million--and his bonus rose 80%, to $6.3 million, even though operating earnings (net income before one-time gains or charges) were flat from the previous year.WAY OFF. His brother, Reliance President Robert M. Steinberg, received salary and bonus of $8.1 million. That's a lot of money by any measure. Maurice R. Greenberg, chairman and CEO of insurance giant American International Group Inc., got $1 million in salary and $5 million in bonus last year, even though AIG's stock market value dwarfs that of Reliance: $166 billion today, vs. roughly $409 million for Reliance.
David Schiff, who grew up in the insurance-brokerage business and today writes an industry newsletter, Schiff's Insurance Observer, has been highly critical. "He's grossly overcompensated," Schiff says. "The company has done terribly, and he's one of the highest-compensated in the industry."
Particularly galling, Schiff adds, is that Steinberg and his brother draw huge compensation on top of the $16 million in annual dividend payments they and several other family members get for their 43% share in the company. Steinberg would not comment for this story despite repeated requests.
Another critic is Patrick McGurn at Institutional Shareholder Services in Rockville, Md., proxy advisers to nearly 500 large institutional investors. Of the Reliance board's 13 members, 6 are officers of the company. That makeup, he says, is "out of step" with practices in Corporate America. "This is not a board that instills a great deal of confidence," he adds. The board also includes several prominent outside directors, including Bernard L. Schwartz, chairman and CEO of Loral Space & Communications Ltd., and Richard E. Snyder, chairman and CEO of Golden Books Family Entertainment Inc. Schwartz and two other directors have served for at least 16 years--too long, McGurn says, to retain the necessary independence to challenge management. A number of directors also know each other through shared affiliations. Jewell J. McCabe and Saul Steinberg serve on the Wharton School board of overseers, and a third, Thomas P. Gerrity, was until recently dean of the school.SPIN-OFF. Reliance announced last month that it would sell 20% of the shares of its Reliance Surety business to the public. It also plans to spin off its Internet-based business unit that underwrites workers' compensation insurance for small businesses and sell 10% of the shares to the public. The stakes are high, but in a recent interview, Chief Financial Officer Lowell C. Freiberg said he is fully confident that the company will raise capital and maintain its ratings.
In some ways, Reliance has made enormous progress since the beginning of the '90s. It has pared debt from 80% of capital to 40% today, though that's still twice the acceptable limit. But Steinberg and his board may want to take a look at a 1997 study's finding that at companies with long-serving chairman-CEOs and weak boards, those CEOs were paid more handsomely than their peers--and their companies had weaker returns and stock performance than peer companies. Note to Steinberg: The study was produced by three Wharton professors.By Pamela L. Moore