Governance: Look Who's Still at the Trough

Bonuses, loans, free BMWs--boards are up to their old games

On Aug. 8, Kenneth Potashner was fired as CEO of consumer-electronics maker SONICblue Inc. (SBLU ) Potashner has told people that he was axed after challenging three board members to repay $600,000 in loans from the company--or resign. Interim CEO L.Gregory Ballard says Potashner was not fired over the board dispute, but he, too, is taking a second look at the forgiven loans.

SONICblue isn't the only company with this problem. Even as much of Corporate America has toned down its boom-era excesses in the wake of the recent governance and accounting scandals, some companies are still up to the same old games. These range from the bonuses one board awarded itself to the BMW another gave its ousted CEO. The deals are legal, but critics say some boards could use a course in Sensitivity 101, not to mention basic governance. "It's just abominable," says Nell Minnow, co-founder of the Corporate Library, a research house specializing in corporate governance.

The most contentious issue is the loans boards have granted to executives or themselves. The recently passed Sarbanes-Oxley Act prohibits future loans to most company officers and directors. But many boards still have previous loans on their books, and some continue to let the recipients walk away from them. In May, theater chain AMC Entertainment forgave $8 million-plus in loans its board granted CEO Peter C. Brown and COO Philip M. Singleton in 1998 to buy 625,000 shares. To top it off, the Kansas City (Mo.) company paid $8.8 million in taxes on the loans. AMC's Brown says the forgiven loans were compensation for performance that included keeping AMC from bankruptcy. But critics say AMC execs exuded confidence in the company's future by buying its stock, which likely prompted investors to buy shares. When the stock price fell, the execs were taken care of.

Boards still dole out other forms of questionable compensation, too. Financial-services firm Conseco Inc. (CNC ) gave CEO Gary C. Wendt an $8 million bonus in July even though the Indianapolis company had seven quarters of losses totaling $5.7 billion in his two years at the helm. On Aug. 9, Wendt admitted his turnaround efforts had failed and that he had hired an investment bank to consider a restructuring. Still, Conseco spokesman R. Mark Lubbers says the bonus was part of Wendt's contract and that to consider withdrawing it would be "distasteful." Board members contacted declined to comment.

In some cases, the very board members brought in to whip underperforming CEOs into shape end up participating in the mischief. In April, the board of Costa Mesa (Calif.) ICN Pharmaceuticals Inc. (ICN ) awarded then-CEO Milan Panic $33 million in cash for spinning off subsidiary Ribapharm Inc. in an offering that raised $2 billion. Each board member pocketed $330,500--including three elected last year to stem losses and tame Panic, whose stormy reign prompted lawsuits alleging fraud and sexual harassment.

To accept cash at a time when companies are under fire for self-dealing "takes a lot of chutzpah," says Larry Smith, an analyst for Gerard Klauer Mattison. A spokesman for Panic says the bonus was appropriate and that the board decided to give him cash rather than options. ICN board members declined to comment. Shareholders are suing ICN, and the board's legal counsel is considering asking for the bonuses to be repaid.

Despite the shareholder backlash and new legislation pressuring companies to stem such abuses, many fear boards will continue to play games. There's little Congress can--or should--do to limit perks and bonuses, provided they are disclosed. Those fears appear justified. In August, Dallas software maker i2 Technologies Inc. revealed that its board gave ex-CEO Greg Brady, ousted after a year of heavy losses, a $500,000 "consulting fee" and a BMW Z-8. "This type of severance package is standard in our industry," says i2 spokesperson Melanie Ofenloch. Clearly, the investor outcry over board shenanigans continues in some cases to fall on deaf ears.

By Arlene Weintraub and Ronald J. Grover in Los Angeles, with Pallavi Gogoi in Chicago and bureau reports

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