Comp Committees, Or Back Scratchers In Waiting?

As Coca-Cola Co. shareholders cheered, Chairman Roberto C. Goizueta strongly defended his award of $81 million in restricted stock at the company's Apr. 15 annual meeting. What Goizueta neglected to mention is that a director who helped initiate the unprecedented award is a longtime business associate whose investment banking firm has gotten millions in fees from Coca-Cola.

Coca-Cola is hardly unique. At a spate of major corporations, including AMR, Primerica, and Philip Morris, potential conflicts loom large in the boardroom. Attorneys and investment bankers commonly sit on the sensitive compensation committees of such corporations even though their firms regularly do business with the company.

TOO COZY? For years, gadflies have decried the cozy relationships that chief executives forge with their boardroom buddies. Now, even the most conservative observers are coming to agree that members of the compensation committees should be beyond reproach. They argue that directors are unlikely to question outsize bonuses if their firms are doing millions of dollars in business with the company. The desire to protect such business relationships, they say, may color these directors' judgments.

"The compensation committee should be squeaky clean," says Thomas J. Neff, president of executive search firm SpencerStuart. John M. Nash, president of the National Association of Corporate Directors, is even more adamant. "Attorneys, accountants, and investment bankers who do business with the company shouldn't be on the board, period, never mind the comp committee," he says. "They have a conflict and a vested interest. They can't be fully independent."

Board directors counter that it's unfair to jump to such conclusions. They point out that business dealings with directors must be disclosed in the company's proxy statement--as required by the Securities & Exchange Commission. Given such disclosure, says an AMR Corp. official, "there's absolutely no reason why we can't hire the best qualified law firm just because one of our directors happens to be a partner there."

Agreeing with him is Kenneth J. Bialkin, a Primerica director who is a partner with Skadden, Arps, Slate, Meagher & Flom, which does legal work for Primerica. "It's not realistic to make too much of this, because these things turn on the integrity of the people involved," he says. "There's no ipso facto conclusion you could draw."

OLD PALS. For the critics, though, Goizueta's $81 million award may be a case in point. Goizueta and Herbert A. Allen, a Coca-Cola director, have been friends since 1982, when Coke paid $750 million for Columbia Pictures Entertainment Inc. At the time, Allen chaired Columbia while he remained president of his family's investment banking firm. In the past six years, Allen & Co. has earned nearly $24 million in investment banking fees from Coke-related deals, including $10 million when Coca-Cola sold its largest U.S. bottler to the public. All the while, Allen has served as the chairman of Coke's compensation committee, the group that sets the pay mf Goizueta and his top lieutenants.

The investment banker insists that there is no conflict between the fees his company has received and his position on the board. Allen points out that he and other directors are big Coke shareholders who wouldn't do "anything to penalize the value of their shares." Besides, he says, "our firm has done a lot of work, and every transaction we were involved in was beneficial to Coke shareholders." He and other directors vigorously defend the award to Goizueta. Adds Allen: "Thisis a gentleman with a 30-yearstellar record with the company. Part of this recognizes his past achievements."

Others, however, believe the relationship has at least the potential to influence Allen's compensation decisions. "I don't understand why that's not illegal," says Sarah A. B. Teslik, executive director of the Council of Institutional Investors. "Of course that affects you, even if you don't realize it. It just shouldn't happen."

OPTIONS GALORE. But it does--and at some of the best-known public corporations. When Philip Morris Cos. last year doled out options on 500,000 shares to retiring Chairman Hamish Maxwell--options already worth $10.4 million--it raised eyebrows. What went unreported was that Philip Morris' pay panel includes lawyer Robert E.R. Huntley of Hunton & Williams in Richmond, Va. In the past three years alone, the firm has received $24.4 million in legal fees from Philip Morris. Asked for comment, Huntley says: "I don't comment on the business of boards on which I sit."

The list goes on: The director who heads the stock-option committee at Waste Management Inc., where top executives have raked in millions in option gains in recent years, is a former vice-president of the company and draws an annual consulting fee of $127,500 from the firm. A company spokesman denies any conflict. At Pennzoil Co., the stock-option committee chairman is Allen H. Carruth, a partner in insurance agency John L. Wortham & Son. His firm has collected over $3 million in commissions in the past five years for placing insurance for the company. At Valley Bancorporation in Wisconsin, Oscar C. Boldt, chairman of Boldt Group Inc., sits on the comp committee even though Valley has done millions of dollars in business with companies affiliated with Boldt. The bank is paying $1.4 million to a Boldt-affiliated partnership for office space under a five-year lease. Another Boldt company is doing a $3 million renovation of a Valley bank. Boldt sees no conflict. "We have a $300 million business, and that contract is only 1% of it," Boldt says. "I don't think I'm influenced at all by the business we do with them."

So far, few stockholders are complaining. None asked Goizueta about his windfall at Coke's annual meeting. But as public outrage over CEO pay mounts, shareholders have reason to wonder just how impartial the hands that write those fat paychecks really are.

Before it's here, it's on the Bloomberg Terminal.