April 2001


New York, NY - April 11/PRNewswire/ - The TIAA-CREF Institute on April 4-5 sponsored its first Corporate Governance Forum, focusing on issues related to executive pay and the use of stock options. More than 100 individuals -- including corporate executives and directors, institutional investor representatives, academic experts, compensation consultants, regulators and others -- gathered to discuss these issues, and whether boards of directors (and their compensation committees) are sufficiently in control of the process of setting executive pay.

The conference, which took place at TIAA-CREF's New York City headquarters, was co-sponsored by TIAA-CREF's Corporate Governance Group, headed by Peter C. Clapman, TIAA-CREF senior vice president and chief counsel, Corporate Governance. The mission of the TIAA-CREF Institute, created in 1998, is to broaden and strengthen TIAA-CREF's longstanding leadership role in supporting lifelong financial security for individuals and their families. The Institute's fields of research and education include: pension and retirement issues; health, life and long-term care insurance; investment products and strategies; endowments and planned giving; higher education financing and trends; corporate governance; and financial literacy.

"The Forum provided an unusual opportunity for frank and open-minded exchange of views among a broad range of observers on executive compensation," said Clapman. "There was general consensus among the diverse participants that the role of the compensation committee can be strengthened -- that board compensation committees can do more to sharpen pay practices to be sure they deliver value to shareholders." Clapman noted calls for action from various Forum participants to evaluate the functioning of board compensation committees generally, and perhaps to set forth guidelines for best practice.

In keynote remarks, John H. Biggs, chairman, president and CEO of TIAA-CREF, said compensation practices present "probably the most pressing issue of corporate governance in the United States today." Like a number of other speakers, Biggs expressed concern that some companies rely too heavily on stock options because they do not have to account for the cost of fixed-price options in their earnings statements.

Biggs noted that under the optional Financial Accounting Standard 123, companies are permitted to use accounting that does factor in stock option costs, and may provide a basis for more rational consideration of compensation alternatives. Few companies avail themselves of the FAS 123 standard, however. Boeing, at which Biggs is a director, is one of the few companies that use this form of accounting, which increases transparency for investors. Biggs challenged companies to make use of the newer FAS 123 standard, rather than remain locked into the older standard that prevails today. Biggs described this older standard (APB 25) as a "straightjacket" that can prevent rational consideration of compensation alternatives that may be best for shareholders in the long run.

Another key issue discussed by participants was the need for stronger stock market listing requirements for shareholder approval of option plans. The issue is even more pressing given the recent decline in share values. One method some companies are using to shield executives and others from lower stock prices is to issue large numbers of new stock options, with exercise prices at the more recent low prices. Some corporations may be particularly motivated to avoid shareholder approval requirements in this situation.

A problem for the shareholders of companies that rely too heavily on this approach is ballooning potential dilution. "Under these circumstances, a number of companies appear to be implementing plans that do not require shareholder approval under current New York Stock Exchange and NASDAQ listing standards," said Clapman. "The NYSE has indicated a willingness to address this issue, but the Exchange says that NASDAQ must go along so that the markets compete for company listings on an even playing field. We are hopeful that NASDAQ will soon take steps to address the issue."

The conference featured a number of papers and presentations. David Yermack, associate professor of finance at New York University, and a critic of some pay practices, examined certain difficulties and quirks connected to current option compensation, as identified in recent academic research. Leading compensation consultant Frederic W. Cook, chairman of Frederic W. Cook & Co., discussed executive compensation trends, and emphasized the positive role played by stock options in aligning interests of shareholders and executives. Michael J. Mauboussin, chief U.S. investment strategist for Credit Suisse/First Boston, discussed important shifts in equity compensation resulting from the movement to a knowledge-based economy, but said recent market swings have shown that many option programs are poorly constructed. Mauboussin advocated the use of stock options indexed to peer groups or broad market benchmarks, such as the S&P 500. Stuart Gillan, research economist with the TIAA-CREF Institute, described rapidly rising potential dilution from stock option plans, and discussed issues of option valuation. Gillan also discussed alternatives companies are using to deal with the large number of so-called "underwater" options, with exercise prices above current market prices.

A number of speakers, including Frederic Cook, discussed ways in which CEO pay has been ratcheted upward, as companies seek to pay at or above the median. Some observers call this the "Lake Wobegone Effect," where all the CEOs are above average, leading to the pay equivalent of grade inflation.

Other speakers included former corporate director Clayton Yeutter, the former Secretary of Agriculture; Sanford R. Robertson, partner in Francisco Partners, a private equity fund; Harvard Business School Professor Joseph L. Bower; Samuel C. Scott, chairman president and CEO of Corn Products International; Peter N. Larson, former chairman and CEO of Brunswick Corporation; Larry G. Stambaugh, chairman, president and CEO of Maxim Pharmaceuticals; B.A. (Dolph) Bridgewater, senior consultant on corporate governance to TIAA-CREF, and former chairman and CEO of Brown Shoe; B. Kenneth West, senior consultant on corporate governance to TIAA-CREF, and former chairman and CEO of Harris Bankcorp.; Eric D. Roiter, senior vice president and general counsel, Fidelity Management and Research Company; Pearl Meyer, president of Pearl Meyer and Partners, a compensation advisory firm; Brian J. Hall, associate professor, Harvard Business School; and Abbie Smith, professor at the University of Chicago Graduate School of Business.

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