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Selected Works
(Boring the Dickens Out of You)
by WealthEffect Staff


A Tale of Two Cities
  Great Expectations  
  Nicholas Nickelby  

Let's first examine the proxy statements of two technology companies: Cisco Systems and Network Associates. The Cisco Board of Directors is comprised of some of the most impressive tech personalities you could hope to meet. There are three inside directors and eight outside directors — of the eight, all own more than $2 million in stock and five have holdings that exceed $10 million. Further, the CEO, John Chambers, is not the chairman of the board. This clearly is a talented, motivated, independent board of directors.

As for executive compensation at Cisco, the top five execs received $9.5 million in direct payments over three years plus options valued at more than $80 million (not a misprint). This compares with three-year pretax income of $6.7 billion. Effectively, the compensation of the top five execs represented less than 2% of income.

At Network Associates, on the other hand, top five compensation, estimated at $100 million, represented about 16% of pretax income. That's with the most generous possible accounting. Based on actual reported pretax income, top five comp represented over 30%. Moreover, the board here is comprised of only four people: the CEO who is also the chairman, the former CEO of a company that Network acquired, and two consultants (one of whom did run a computer peripherals company for 2 ½ years). Neither of the outside directors owns more than $1 million in stock, even though the options given to directors are extraordinarily generous.

[Please note: Since this article was originally written, a third outside director was added to the board. More important, on December 26, 2000, the company announced that William Larsen, chairman and chief executive, would be leaving Network Associates and its board of directors. The company also indicated that 4th quarter results would be disappointing.]


Now, let's consider the proxy statement of Coca-Cola, our case study throughout these discussions. Doug Ivester serves as both the chairman of the board and the CEO. Ivester and his four most senior subordinates received 3-year compensation of $77 million. This comp package, while generous in an absolute sense, was minimal relative to Coke's pretax income of $15.8 billion in the 1996-1998 period.

Some might argue that Ivester's compensation of $20 million in 1998, his first full year as CEO, was excessive in view of the performance of the company and its stock. The lion's share of that income, however, was earned through restricted stock that had been awarded years earlier. In addition, Coke's results suffered from an unusually difficult operating environment, not from a lack of vision and execution at the top. As the environment improves, shareholders can expect a great future.

In addition to Doug Ivester, the board of directors is entirely represented by outside directors. Six of these eleven directors own more $2 million in stock; one of these, Warren Buffett, controls shares worth more than $13 billion.

Please note: As of February 17, 2000, the new chairman and chief exec of Coca-Cola is Douglas Daft, who has worked for the company since 1969 — his compensation package for 2000 has not yet been released.]


Buffett also directly owns some $35 billion of stock in his own company, Berkshire Hathaway, which under his leadership has risen in price from $15/share in 1965 to its current price of $73,000/share (also not a misprint). Along the way, Buffett has also set the standard for how managers should treat shareholders.

Like the intrepid Nicholas Nickelby (yes, we're stretching here), Buffett has tried to highlight fairness, both in his writings and in his actions. Amazingly, he and his partner, Charles Munger, are each paid only $100,000 a year and they have never received any bonuses, long-term incentive pay-outs, restricted stock awards, or stock options. They both became billionaires by buying shares in the public markets, as any other person could have.

And their most recent Proxy Statement is all of six pages long.

Suggestion: Go to RORE