Lawyer Article

Published in the September 28, 2004 issue of Southeast Tech Wire.

The Securities and Exchange Commission announced September 23, 2004 that it had entered into a settlement agreement with General Electric Company regarding GE’s proxy disclosure of executive compensation. The SEC charged that GE failed to fully describe in its proxy statements from 1997 to 2002 the substantial retirement benefits to be received by GE’s former Chairman and CEO Jack Welch under his employment agreement.

In December 1996, GE and Welch entered into an employment agreement under which Welch agreed to continue as CEO until age 65 and serve as a consultant thereafter. As compensation for such consulting services, Welch was to receive lifetime access to the perquisites and benefits that he received as CEO. GE’s proxy statements disclosed that Welch was entitled to “continued lifetime access to Company facilities and services comparable to those that are currently made available to him by the Company” but did not provide any specific information about those facilities and services. The benefits that Welch actually received in the first year following retirement totaled approximately $2.5 million and included access to GE aircraft for personal use, use of a furnished apartment, personal use of a chauffeured limousine, office space, the services of a personal assistant and professional estate and tax advisors, security systems and bodyguard security.

The proxy rules generally require an issuer to describe the terms and conditions of any compensatory plan or arrangement that results from a named executive officer’s retirement if the amount involved exceeds $100,000. According to the SEC, the purpose of such disclosure is to improve shareholders’ understanding of all material forms of compensation paid to senior executives. The proxy rules also prohibit any materially false or misleading statements or omissions in the proxy materials. The SEC alleged that GE failed to adequately describe the substantial benefits that Welch would receive as part of his employment agreement. As a result of the settlement, GE agreed to cease and desist from future violations of the proxy rules.

This SEC action is just the latest example of regulatory and investor interest in executive compensation. Other recent developments include:

• In May 2003, the Delaware Court of Chancery allowed shareholders of The Walt Disney Company to sue the Board of Directors of Disney for breach of fiduciary duty in approving the compensation package for Michael Ovitz. Ovitz received severance pay and other benefits alleged to equal $140 million after serving as Disney’s president for 14 months. The Disney case goes to trial later this month and could result in Disney's directors being held personally liable for the Ovitz compensation package.
• In August 2004, Tyson Foods, Inc. announced that the SEC intends to recommend an enforcement action against the company for failure to fully describe and disclose perquisites totaling approximately $1.7 million provided to Don Tyson, the company’s former Chairman.
• The SEC staff recently stated informally that the SEC is considering whether existing proxy statement disclosure rules, which were last overhauled in 1992, should be updated to reflect current investor disclosure concerns.
• An IRS pilot audit project assessing employer compliance with executive compensation rules has found a number of instances of noncompliance and is expected to result in increased scrutiny of executive fringe benefits.
• Companies continue to be bombarded by proxy statement shareholder proposals and other corporate governance watchdog initiatives regarding executive compensation matters.

These developments illustrate the importance of full and complete disclosure regarding executive pay, including cash and noncash benefits. They also emphasize the need for prudent and thoughtful compensation committee decisionmaking.