Bush Spurs Debate Over Loans to Execs
President Bush’s call to curb corporate loans to executives will compel companies to take a much tougher stance toward extending the perk, executive pay experts predicted Wednesday. But the analysts are divided about whether the abuse of such loans goes much beyond the scandals now plaguing corporate America.
Executives’ loans aren’t the serious problem portrayed by the president, some analysts contended, while others said they are. Nonetheless, corporate boards will “probably try to avoid them whenever they can,” said Graef Crystal, a veteran executive-compensation expert. “But there will still be some out there.”
The loans are included in senior managers’ compensation, often at below-market interest rates. They’re being made more often than they were a decade ago, but they’re not a routine element of corporate pay packages, either, analysts said.
During the 1990s, about 412 members of the Fortune 1,000 largest companies made loans to certain executives at various times during the decade, up from 225 in the preceding decade, according to Judy Fischer, managing director of Executive Compensation Advisory Services, an Alexandria, Va., firm that tracks compensation.
Such loans have come under assault because insiders at WorldCom Inc., Enron Corp., Adelphia Communications Inc., Tyco International Ltd. and other scandal-tainted firms received lavish corporate loans even as the companies were suffering financial meltdowns, often amid allegations of corporate fraud.
That’s how the issue became part of Bush’s call Tuesday for corporate reforms.
Although the president’s speech put an appropriately embarrassing light on those cases, overall corporate loans to executives usually are repaid without incident and often serve a useful purpose in attracting talent, some experts said. For example, Westlake Village-based Dole Food Co. last year made a $500,000 interest-free loan to its new president, Lawrence Kern, to help him relocate to Southern California.
Loans also are made to help executives buy stock of their companies, or to exercise stock options--a much more prevalent part of executive compensation and one that’s also under attack for contributing to the wave of corporate scandals this year.
Companies also make loans to help executives cover margin calls, in which they have to put up more of their own money for company stock that they previously bought with mostly borrowed cash.
But such loans aren’t the rule, said M. Evan Lindsay, a senior partner at the executive-search firm Heidrick & Struggles International, adding that he hasn’t included a corporate loan in the pay package given to any of the managers he’s recruited in the last three years.
“It’s not really an integral part of executive compensation in my mind,” Lindsay said.
Executive-pay expert Crystal said, “I don’t think this is a pandemic problem in America. Most of these transactions just go right along and they get paid back.”
But Scott Olsen, who heads the executive-compensation group for management-consulting firm Towers Perrin, said companies shouldn’t make such loans because “I just never have seen a loan program that didn’t end badly.”
“You’ve either got people who are either badly in debt who can’t afford to be, or you end up with the fairly embarrassing situation of [a company] having to forgive loans to people,” Olsen said.
Yet Olsen agreed that the practice of making executive loans is not as prevalent as the recent spate of scandals might suggest. “There’s a bunch of high-profile ones,” he said. “And there are a couple that are really ugly.”
Others expressed reservations about clamping down on the practice.
“I’m always leery of proposals made from the hip,” said Fischer of Executive Compensation Advisory Services. “Many loans are made for [executive] relocation and recruitment reasons, in order for the executive to accept a job. Unfortunately, what always happens in life is you have people who abuse these situations.”
Harry Gruber, chief executive of Kintera Inc., a closely held San Diego company that assists nonprofit groups with Internet marketing, said he makes loans to executives but only to recruit them to areas where housing is expensive.
“I say, ‘I’ll give you this down payment, a forgiveness loan. If you stay four years, it goes away completely.’ So it’s like a golden handcuff for them to stay,” Gruber said. “That’s a very healthy thing. A lot of organizations give them a signing bonus without any handcuffs. But I think a loan in this case makes sense.”
But loans that can lead to scandal, or at least raise eyebrows among investors, often are made by boards that feel pressured to help top executives who have borrowed against their stock holdings and then suddenly face margin calls. It’s a particular problem when an executive has inside information but can’t immediately sell stock because of insider-trading regulations.
“The corporation feels held hostage by the executive,” said Gruber, who said executives should be barred from borrowing against corporate stock holdings.
In other cases, the loans simply make for lousy public relations, adding another layer to the perceived greed of corporate titans and putting more pressure on corporate boards for better oversight. Former Enron CEO Kenneth L. Lay, for example, had a $7.5-million line of credit from the company despite receiving tens of millions of dollars in other compensation.
“The president’s point is a good one,” Crystal said of Bush. “With most of these [loan] transactions, if you expose them to the cold light of day, there’s no reason to loan someone money. If they want a loan, go to the bank.”
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Forgive Me, Forgive Me Not
A number of U.S. companies make loans to executives for many reasons-and sometimes even forgive those loans. But with recent financial scandals, such loans have come under renewed fire. Here are some examples:
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WorldCom
Officer: Ex-CEO Bernard J. Ebbers
Loan: About $400 million
Status: To be paid by 2007
Interest: Just over 2%
Company status: Near bankruptcy
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Global Crossing
Officer: CEO John Legere
Loan: $15 million
Status: $10-million balance forgiven
Interest: 0%
Company status: In bankruptcy
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Adelphia
Officer: Ex-CEO John Rigas & family
Loan: $3.1 billion
Status: Guaranteed by Adelphia
Interest: NA
Company status: In bankruptcy
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E-Trade
Officer: Chairman and CEO Christos Cotsakos
Loan: $15 million
Status: Forgiven
Interest: NA
Company status: Operating
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Kmart
Officer: Ex-CEO Charles C. Conaway
Loan: $5 million
Status: Forgiven
Interest: Paid by company
Company status: In bankruptcy
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Home Depot
Officer: CEO Robert L. Nardelli
Loan: $10 million
Status: Forgives 20% a year
Interest: NA
Company status: Operating
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Compaq
Officer: CEO Michael Capellas
Loan: $5 million
Status: Forgiven
Interest: Market-based interest rate
Company status: Acquired
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Mattel
Officer: Ex-CEO Jill Barad
Loan: $8.5 million
Status: Forgiven
Interest: 0%
Company status: Operating
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Compiled by Times librarian JOHN JACKSON
