And we have questions about IDCC's Comp. Plan? (Does the term "egregious" ring a bell?)(From a poster on another board.)
Bubble Lives on at Broadcom, Where Options Still Rain Down
Published: April 18, 2004
JUST when you thought you had seen the most outrageous transfer of shareholder wealth to executives through stock options, along comes a company that tops them all.
The Broadcom Corporation, a maker of integrated circuits for broadband digital data transmission, went public during the bubble in the late 1990's. The bubble has never burst for Broadcom management, judging from the option plan that the company wants shareholders to approve at its meeting on April 29.Your first clue that stock options play a leading role at Broadcom is that its board has a committee devoted to them. Members of the option committee are Alan E. Ross, the company's president and chief executive; Henry Samueli, a company co-founder; and Werner F. Wolfen, president of Capri Investments, an investment advisory firm.
Proving just how serious its work is, the option committee met 25 times in fiscal 2003; the full Broadcom board held 18 meetings in that same time.
Broadcom shareholders are being asked to vote on a company proposal to increase by 12 million the number of shares authorized for grants under its 1998 stock incentive plan. In addition, a "yes" vote will expand the types of stock awards that the company can offer executives and employees, as well as grant the compensation committee the right to reprice underwater options at any time. This objectionable repricing practice removes the risk for executives and employees that outside shareholders incur when their stock falls.
Glass Lewis & Company, an institutional advisory firm in San Francisco, is urging shareholders to vote against the option plan because of its monster price tag. The plan's cost is equal to 12.2 percent of Broadcom's enterprise value, Glass Lewis said, and would dilute existing shareholders' interests by 3.7 percent if put in place.
Had the proposed plan been in place last year, it would have cost shareholders an amount equal to about 75 percent of the company's revenue, the firm said.
Broadcom lost almost $1 billion in 2003. Its retained earnings totaled a negative $6.7 billion at year-end.
Under the terms of the new plan, Broadcom's compensation committee can select from certain performance goals before stock awards are to be vested. Many companies use a few criteria, like sales or earnings growth. But Broadcom gives its compensation committee no fewer than 14 to consider.
The criteria are a mouthful: "return on total shareholder equity; earnings per share; net income, before or after taxes, or operating income; earnings before interest, taxes, depreciation and amortization or operating income before depreciation and amortization; sales or revenue targets; return on assets, capital or investment; cash flow; market share; cost reduction goals; budget comparisons; implementation or completion of projects or processes strategic or critical to our business operations; measures of customer satisfaction; any combination of, or a specified increase in, any of the foregoing; and the formation of joint ventures, research and development collaborations, marketing or customer service collaborations, or the completion of other corporate transactions intended to enhance our revenue or profitability or expand our customer base." The list gives management a lot of wiggle room. Why not a performance hurdle based on the sun rising in the east?
OVER all, Broadcom's executive compensation receives a failing grade from Glass Lewis because the company paid its top five officers more than its peer companies even as it performed worse than they did. Glass Lewis also gives Broadcom demerits for allowing employees to exchange underwater options - those with exercise prices above the current market price - for new, lower-priced versions in 2001 and again in 2003.
The 2003 repricing allowed the exchange of 20 million options, with an average price of $51, for 18 million options at about $35, giving Broadcom insiders a windfall of $250 million by Glass Lewis's figuring. Outside shareholders weren't so lucky.
Glass Lewis is advising shareholders to withhold their votes for Broadcom's four compensation committee members. They are George L. Farinsky, a retired consultant; John E. Major, founder of MTSG, a consulting and investment company; Robert E. Switz, president of ADC Telecommunications; and Mr. Wolfen.
Broadcom directors are among the highest-paid in the country, Glass Lewis reckoned; they receive $450,000 a year in options and cash and an additional 100,000 options granted every four years that would be worth about $2.5 million if awarded today. The average director at companies of similar size received $140,000 a year, the firm said.
There is one bit of restraint in the Broadcom option plan: no participant may receive awards for more than six million shares.
"The company and its insiders have committed nearly every obnoxious act imaginable," Greg Taxin, chief executive of Glass Lewis, said. "They have overpaid the board and executives and enriched employees with an options exchange after trashing the stock. The employee option plan grants equal nearly 75 percent of the revenue of the business, and the board has retained the express right to reprice options in the event that the stock does not go up. The founders retain voting control despite raising - and losing - billions of dollars from the investing public."
Broadcom did not return repeated phone calls requesting comment.
Among the largest shareholders at Broadcom are Alliance Capital Management, with a 13.3 percent stake; Capital Research and Management, which runs the American Funds, with 6.6 percent of the shares outstanding; and Fidelity, with 2.1 percent. It will be interesting to see how these shareholders vote on Broadcom's option plan.
Over the last year, Broadcom's shares have soared, along with those of many technology companies. But that is no reason for shareholders to lie down for this option steamroller. Vote no. And vote often.
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