Reuters Scores a Big Win on its Chesapeake Coverage

Reuters can take a well-earned bow for its coverage of Chesapeake Energy and its CEO, Aubrey McClendon.  The news service has broken several major stories in the past three weeks that brought to light McClendon’s questionable financial dealings, including his borrowings against stakes in the company’s wells and investments in a hedge fund.  The reports forced the board to strip McClendon of his chairmanship and led to an investigation by the SEC.  Chesapeake shares are down nearly 19 percent.

Reuters stood by its initial report about McClendon’s loans as Chesapeake made a strident denial of any impropriety.  The company was forced to backtrack after it issued an embarrassing statement that said the company’s board was not “fully aware” of McClendon’s finances. (See my earlier post on this issue for details.)

Reuters has been relentless, filing about 20 articles on Chesapeake over the past three weeks, including a 2,700-word gusher today on the company’s complex deals with Wall Street banks.  (See the full catalog of the coverage here.)

The multiple scoops and their aftershocks are a vindication for Reuters’ strategy of bulking up and pushing for high impact business news.  For much of the past year, Reuters has been scooping up talent from The Wall Street Journal and elsewhere, even coaxing a few seasoned reporters out of retirement.   A piece in the Huffington Post last September captures the scale of Reuters’ ambitions:

“Reuters’ recent hiring spree — including a handful of Pulitzer Prize-winners – has quickly gotten the media world’s attention. At the same time, Reuters has relaunched its website to better showcase its vast reporting in a more consumer-friendly way, stepped up social media efforts and increased analysis, opinion and enterprise reporting — all elements that may play better on the web than in straight wire copy.

“Reuters isn’t giving up on breaking financial news that paying subscribers want or reporting international wire stories that cash-strapped newspapers, lacking foreign budgets, increasingly need. However, Deputy Editor-in-Chief Paul Ingrassia says the company wants to go beyond breaking news. ‘I think what we’re making a bigger effort to do is not only be first with events,’ Ingrassia said, ‘but very quickly and analytically … report the meaning and impact of those events.'”

The big issue for Reuters is whether it can really make the impact it wants without a major print publication.  As old-fashioned as it sounds in today’s digital age, a print title can complement other media properties.  Look at how Newsweek has helped the Daily Beast and how Bloomberg has taken BusinessWeek to new heights.

Reuters enjoys a strong position among traders, fund mangers, corporate chiefs and policy makers, but that’s a small audience compared to that of, say, the New York Times.   The Reuters website doesn’t even place in the top 50 news sites, according to ComScore data released last fall.

I’d expect Reuters to look for a way to get a bigger payoff for its great journalism.

So don’t be surprised if Forbes becomes a purchase target.   Its private-equity investor Elevation Partners might be open to selling after enduring a horror show of red ink since buying a stake in 2006.


Best Buy’s Executive Exodus

When the CEO exits, other senior executives often follow.  At Best Buy, the resignation last month of CEO Brian Dunn has been followed by the departure of the chief marketing officer (Barry Judge), the chief technology officer (Robert Stephens) and the CFO of the international division (David Demo).

An exodus of senior talent isn’t good news for Best Buy, but the company has made a bad situation worse by hiding the news.  Best Buy was forced to react to either news reports of an official’s departure or a regulatory filing by the executive’s new employer.  To its credit, Best Buy’s statements about the departures in news reports have been pretty good, but reacting to events is never a strong position.  It feeds perceptions that Best Buy is in a crisis and lacks a coherent strategy.

The executive turmoil is unlikely to end until a permanent CEO is named.

Misreporting CEO Pay

This is the season for tallying CEO compensation, and for shaming those who profited while shareholders suffered.

I’m no defender of high CEO pay, but much of the reporting on it is inconsistent at best, and in many cases it’s highly misleading.  The problem arises from combining two things that should be separate: pay granted by the board and stock gains taken by the executive.

Most analyses look at the CEO’s annual compensation award – salary, cash bonus, perqs, and the present value of equity grants that typically vest over several years.  So far, so good.  But then they add on the amount of equity gains that were realized by the CEO.

And that’s where the problem begins.

When you bundle annual pay and equity gains in a single amount and treat it as if the CEO “earned” it in that year, you get a picture of how much pre-tax cash the CEO took home – not a measure whether the CEO’s pay was aligned with shareholder returns.

For that, you really need to look at the annual award alone, separate from any realized stock gains, and focus on whether the compensation was in line with the company’s performance.

Yet many of the compensation and governance experts assess CEO pay by including gains from stock options and restricted shares that were awarded years earlier.

Governance research group GMI just reported its ranking of top-paid CEOs, singling out Herbalife CEO Michael Johnson for the equity gains he harvested.   Of Johnson’s nearly $89 million in 2011 “pay” cited by GMI, $77 million – 87 percent – came from options gains.

A big number makes headlines, but it distorts the picture.  Johnson’s options were awarded years earlier, and their rise in value over time was a benefit enjoyed by all shareholders.  Some reports point that out, but it’s usually buried deep. Here’s what the Guardian said – seven paragraphs into its story:

“…some might say that Johnson deserved the profits he made on exercising his stock options. Most of the options that were exercised in 2011 were awarded between 2003 and 2005, when Herbalife’s shares traded below $10. Since then, the stock price has done well. Total shareholder return, for example, rose by nearly 292% over the last five years. During 2011, it was mostly trading in the $50-plus range.

Realized stock gains simply shouldn’t be included in the annual compensation tally.  It’s only “annual compensation” in the sense that it all occurred in the same year as the rest of the CEO’s pay.

Let’s look at an example, using a couple of fictitious companies:

John Bounty is CEO of Megacorp, which had a bad year and a stock price that fell by 15 percent.  The Megacorp board trimmed Mr. Bounty’s pay, awarding him no cash bonus and stock options valued at just $2 million – a smaller grant than he received in prior years when Megacorp performed well.  Yet despite the sag in the Megacorp shares over the past year, Mr. Bounty still had substantial unrealized gains in the Megacorp shares he’d received in prior years.  So he decided to reap some of those gains, realizing $40 million (pre-tax).

Across town, Vikram Plunkett also presided over a mediocre year at his company, Giantbank, where the shares also fell by 15 percent.  He, too, received no cash bonus but his board awarded him a whopping number of stock options, with an estimated present value of $11 million.  By cutting back on dinners out and private jet travel, Mr. Plunkett figures he can get by on his salary and decides not to realize any of his long-term gains in Giantbank stock.

Now, most governance experts would say the Megacorp board acted responsibly by lowering Mr. Bounty’s annual pay award, while the Giantbank board was careless in doling out a pile of options to Mr. Plunkett after a poor year.

But because Mr. Bounty realized $40 million in stock gains, most reports will say he was “paid” this amount plus his salary and new stock options, and the Megacorp board will be singled out for scorn for “giving” Mr. Bounty a bounty when shareholders saw their wealth tumble.  Meanwhile, Mr. Plunkett, who didn’t take any cash off the table and got a juicy $11 million equity award, will escape notice.

The CEO’s annual salary, bonus and equity award are based on a board-level decision.  But harvesting equity gains is the CEO’s decision, and one that’s often driven by tax and estate-planning needs.  Boards can – and should – impose minimum stock-ownership and holding-period requirements, but the decision to take gains ultimately is up to the CEO.

What matters most is the board’s decision on current-year pay.  And there’s plenty to criticize when it comes to boards making overly generous annual comp awards, including outsized stock and option grants.  But if we’re going to have a reasoned discussion about CEO pay, we should start by communicating the facts clearly.

Herbalife: An Update


Herbalife didn’t get much of a bounce today, a day after investor David Einhorn raised questions about the company’s accounting that sent the shares tumbling.  After rising early in the day, the shares fell another 6 percent, even after the company provided additional information in response to Einhorn’s questions.  (My earlier post discussed the company’s response strategy.)

It looks like investors see too much risk and simply want out, regardless of the what the company says, and Einhorn’s prescient calls on Lehman Brothers and Green Mountain (which announced weaker-than-expected earnings today) make it risky for investors to bet against him.



What to Do When David Einhorn Strikes

Herbalife shares are rebounding a little after a 22% drop yesterday, when questions from investor David Einhorn during the company’s earnings call sent investors fleeing.  Einhorn is known for spotting accounting problems at companies and backing up his skepticism by taking big short positions. His sharp questioning of Lehman Brothers highlighted issues that ultimately brought about the firm’s bankruptcy.

Herbalife did a reasonably good job of responding to the issues Einhorn raised.  First, it addressed them directly on the earnings call where Einhorn spoke.  Later, the company put out a short statement reiterating its views.  It was a little defensive but conveyed the message that the company regarded the issues as unimportant, and that it had a share buyback plan to shore up its shares. Last, it enlisted support from several analysts who follow the company.  Their comments, which were included in many press reports, expressed confidence in Herbalife’s accounting and its management.

Herbalife isn’t out of the woods, though.  Its statement said it would provide additional detail on its response to Einhorn’s questions, but it has not yet done so.  Company insiders also have been selling a lot of shares in recent weeks, a sign perhaps that management believes the shares have peaked, at least for now, or that unpleasant disclosures might be in the offing.  The latter would be very bad news, both for shareholders and for management’s credibility.


Coke and Monster: What was That?

The Coca-Cola Company was compelled to release a short statement yesterday denying that it was “at this time, not in dicussionss” to acquire energy-drink maker Monster Beverage Corp.

Monster shares spiked on a report in the Wall Street Journal that Coke was exploring a deal for the company, only to fall back once Coke issued its statement.

It appears the WSJ wants to claim credit both for breaking the story about a possible deal and for killing it.  Its story is littered with unnamed sources (“persons familiar with the matter”), which are usually either disgruntled investment bankers unhappy about missing a fat payday, or anxious executives who were farther out on the limb than their bosses (or the board) realized.

This episode illustrates that there’s a very thin, almost nonexistent, line between rumor and news, and how quickly a deal can be scuppered if a leak occurs.

The careful wording of Coke’s statement and the updated article in the WSJ, in which it reiterates its earlier reporting, suggests there were serious talks between the companies.  That leaves Coke in the awkward position of needing to respond to shareholder concerns about its acquisition criteria, its strategy for growth and its designs for the energy-drink market, where it has been a laggard.

The next earnings call for Coke could be an interesting one.

At Barclays, Inaction Speaks Louder than Words

The Barclays annual shareholder meeting last week was a loud and lively affair, with howls of protest directed at CEO Bob Diamond and Chairman Marcus Agius over the bank’s pay practices.  Here’s how it was reported by the New York Times:

“The atmosphere at the meeting was hostile from the start, and the speeches were repeatedly interrupted by hecklers. Mr. Diamond was booed as soon as he stepped on the stage to take his seat, and when Mr. Agius said Barclays had “made progress” over the last two years in accepting that “remuneration levels across the industry have to adjust to the new reality,” the audience burst into laughter.”

Shaken by the ordeal, Mr. Agius said poor communication was the root of the problem:

Mr. Agius said Friday that he was sorry that some shareholders felt their views on executive pay had not been taken into consideration. “What we’ve not done well this year — and I admit it and I apologize for it — is handle communication,” he said.

If only that were true.  Mr. Agius has spoken about compensation in a clear and consistent manner.  Here is what he said about it in the 2011 annual report (emphasis added):

Remuneration continues to be the subject of considerable discussion. It remains our policy that we only pay for performance, not failure, and that we only pay the minimum necessary to be competitive. Historically, there has been intense competition for talent, particularly in the investment banking industry. The difficult economic environment and the impact of regulation on the profitability of investment banking lessened this competition in 2011 and, as a consequence, performance related pay across the Group reduced significantly. We recognise that compensation has to adjust to the new reality of lower returns for the sector and we will continue to ensure that our remuneration policies and practices are aligned with the long-term interests of our shareholders.

Those are fine, brave words; they are music to shareholders’ ears.  Except when you realize the pay reduction to which Mr. Agius refers was only in the aggregate and that Mr. Diamond was exempt from it.

A year ago, in the 2010 annual report, Mr. Agius gave shareholders similar assurances about pay restraint (again, emphasis added):

“As Chairman, I am acutely aware of the public disquiet over remuneration in the industry. Barclays is committed to acting responsibly in this area. We are fully compliant with all regulatory requirements and our remuneration systems are designed to reward success, not failure.”

In fact, you can look back at Mr. Agius’s remarks on pay in any year and see strong, purposeful words, carefully crafted and oozing sincerity.  Here’s the 2008 vintage (once again, emphasis added):

“As a Board, we very much regret what has happened to the banking sector in general and to Barclays share price in particular. We fully recognise that banks must review their internal governance systems and remuneration structures to ensure there can be no repeat of the turmoil that has impacted the industry, and the wider economy, over the last 18 months. The Board HR and Remuneration Committee is reviewing compensation policy and structures across the Group to ensure maximum alignment both with the interests of our shareholders and with best practice. The Board is also committed to ensuring that Barclays plays its full part in contributing to the restoration of the health of the global economy and, with that, the reputation of the industry.

Saying the right thing hasn’t been Mr. Agius’s problem.  But effective communication involves actions, not words, and that’s where Agius and the Board have failed.  That is why shareholders – and the public – are so irate.   Despite all of the nice language about “aligning shareholder interests,” pay for Mr. Diamond and other senior executives went up while shareholder returns went down.

No amount of communication can change those facts.

Five years of lovely, meaningless words.  No wonder shareholders are in revolt.