Lucent Shareholders File Three Proxy Proposals
SHAREHOLDER PROPOSAL TO ENHANCE AUDITOR INDEPENDENCE
RESOLVED, that the shareholders of Lucent Technologies request the Board of Directors and its Audit Committee to amend the Company’s audit services pre-approval policy such that the public accounting firm retained to audit the Company’s financial statements will perform only “audit” and “audit-related” work, and not perform services generating “tax fees” or “all other fees,” as categorized under Securities and Exchange Commission (SEC) rules, including pension and benefit plan consulting and compliance services.
Auditor independence has been an issue of widespread concern since accounting scandals and earnings management abuses wiped away billions in shareholder equity at Enron, Lucent, Cendant and Qwest. Both Congress and the SEC have taken important steps to protect the integrity of the audit process – but we also believe more needs to be done, at Lucent in particular.
Last May, in a final judgment related to accounting fraud, the SEC imposed a $25 million fine on the Company, the largest fine the agency had ever imposed. Last year courts approved $517 million to plaintiffs suing Lucent for financial improprieties, the second largest securities class action settlement ever, according to Directorship (“Aggressive Accounting Behavior Comes with a Price,” May 2004). The American Institute of Certified Public Accountants (AICPA) actually offered a training course entitled “Lucent Technologies: A Study in Fraud and Earnings Management.”
Last year Lucent’s Audit Committee adopted a policy barring the Company’s auditor from performing nine categories of non-audit services, as required by the Sarbanes-Oxley Act. The Audit Committee also exercised its discretion to pre-approve other non-audit services, including non-U.S. income tax compliance and pension plan consulting and compliance services.
This resolution requests that the Audit Committee go further than the law requires and separate the audit of the Company’s books from tax- and consulting-related services. We specifically include pension and benefit trust services because of the unusually large impact the pension trust – which manages assets valued at more than double Lucent’s market capitalization – has on Lucent’s finances. For example, an article on earnings management abuse in the CPA Journal notes that “Lucent manipulated its pension reserves and significantly inflated earnings by changing its accounting policies” (“Abusive Earnings Management and Early Warning Signs,” 2002).
The dramatic impact of pension accounting credits on Lucent’s reported earnings is well documented. For example, last March the Wall Street Journal explained that “the benefit plans – thanks to accounting rules – have fed Lucent hundreds of millions of dollars of income. And through a separate accounting maneuver, the cuts that Lucent made in the benefit plans last fall will contribute hundreds of millions of dollars more in income over future years.”
In May, Forbes reported that “[t]his year Lucent is expected to report a net profit, but there’s a catch: The profit is being delivered by an accounting credit from a pension fund surplus, without which Lucent would post a net loss of several hundred million dollars.”
We believe limiting the auditor to audit-related services would increase market confidence in Lucent’s financial reporting.
We urge your VOTE FOR this proposal.
Resolved, that the shareholders of Lucent Technologies, Inc. request that our Board of Directors adopt a policy whereby at least 75% of future equity compensation (e.g., stock options and restricted stock) awarded to senior executives shall be performance-based, and the performance criteria adopted by the Board disclosed to shareholders.
“Performance-based” equity compensation is defined here as:
(a) Indexed stock options, the exercise price of which is linked to an industry index;
(b) Premium-priced stock options, the exercise price of which is above the market price on the grant date; or
(c) Performance-vesting options or restricted stock, which vest only when the market price of the stock exceeds a specific target for a substantial period (e.g., 120 days).
We believe that a greater reliance on performance-based equity grants is particularly warranted at Lucent at this time. As Forbes opined, in an article headlined “Lucent Throws A Pay Party” (May 6, 2004), the compensation of Lucent’s senior executives appear to be completely disconnected from returns to shareholders.
For example, Forbes reported that during her first two years as CEO, Patricia Russo received compensation valued at over $40 million (including 7.9 million standard options) – yet Lucent’s share price dropped 40% during those two years, shedding $10 billion in market value. During the five-year period through fiscal 2003, Lucent’s stock declined 92%.
In fiscal 2003, Lucent reported a net loss of $1.2 billion on sales of $8.5 billion. The Board’s response? It awarded the top five senior executives 9.3 million standard stock options in 2003 – at an exercise price equal to the market price.
The Forbes article noted that while Lucent was expected to report a net profit in fiscal 2004, “there’s a catch: The profit is being delivered by an accounting credit from a pension fund surplus, without which Lucent would post a net loss of several hundred million dollars.”
As long-term shareholders, we support compensation policies for senior executives that provide challenging performance objectives that motivate executives to achieve long-term shareholder value. We believe that Lucent is the classic case of a company that awards an unnecessarily large quantity of standard stock options that can yield windfalls for executives who are merely lucky enough to hold them during a bull market. Moreover, because Lucent’s Board does not seek shareholder approval for stock-based incentive plans for senior executives, the Company loses the tax deductibility of executive compensation exceeding $1 million.
Many leading investors and experts, including Warren Buffett and Alan Greenspan, criticize standard options as inappropriately rewarding mediocre performance. Mr. Buffett has characterized standard stock options as “really a royalty on the passage of time” and has spoken in favor of indexed options.
In contrast, peer-indexed options reward executives for outperforming their direct competitors and discourage re-pricing. Premium-priced options reward executives who enhance overall shareholder value. Performance-vesting equity grants tie compensation more closely to key measures of shareholder value, such as share appreciation and net operating income, thereby encouraging executives to set and meet performance targets.
Please VOTE FOR this proposal.
Require Shareowner Approval of Future Golden Parachutes
RESOLVED, pursuant to Article VIII, Section 8.1 of the Bylaws of Lucent Technologies Inc., the shareholders hereby amend the Bylaws to add the following Section 6.7 to Article VI:
“Shareholder Approval of Certain Executive Severance Agreements—The Board of Directors shall seek shareholder ratification of severance agreements with senior executive officers that provide benefits with a total present value exceeding 2.99 times the sum of the executive's base salary plus target bonus. ‘Benefits’ include the present value, as of the effective date, of all post-termination payments (in cash or in kind) not earned or vested prior to termination, including any lump sum payments, fringe benefits, perquisites, consulting fees, or the accelerated vesting of equity grants. If the Board determines it is not practicable to obtain shareholder approval in advance, the Board may seek approval after the material terms have been agreed upon. This section shall take effect upon adoption and apply only to agreements adopted, extended or modified after that date.”
Supporting Statement: At last year’s Annual Meeting shareholders approved an advisory version of this proposal, with support from 65% of shares voted. Subsequently, Lucent announced a policy agreeing to seek shareholder approval for certain future severance agreements.
We believe the Company’s policy falls short of the standard endorsed by shareholders. First, Lucent explicitly reserved the right to modify the policy at any time. More critically, by counting only the multiple of salary and bonus toward the 2.99 threshold for shareholder approval, it reflects only a portion of the true cost of golden parachutes. This resolution ensures that the total cost – including perks, “consulting” payments and the vesting of contingent equity grants – determines whether shareholders vote on the agreement.
Lucent’s severance agreements are unjustifiably costly in our view. Even if there is no change in control, CEO Russo’s severance package has a present value well in excess of $10 million. If Russo resigns “with good reason,” or is terminated “without cause,” she is eligible for a $6 million lump sum payment (two years salary plus target bonus), continued benefit coverage, a minimum annual pension payment of $740,000 for life, plus the immediate vesting of 550,000 restricted shares and of options on an additional 1.22 million shares.
In the event of a change in control, Russo can resign and receive even more generous compensation (including “gross-up payments” to offset IRS excise taxes). We are concerned the cost of golden parachutes will reduce the value ultimately received by shareholders. Moreover, we believe golden parachutes tend to reward the very underperformance that can precipitate a change in control and are unnecessary given Lucent’s high levels of executive compensation.
We believe the ratification process will provide valuable feedback. Indeed, the knowledge that shareholders will be scrutinizing and voting on these agreements may encourage restraint and strengthen the hand of the Board’s compensation committee.
We also believe these multi-million dollar parachutes are inappropriate at a time Lucent is cutting the health benefits of other retirees with decades of loyal service.
Please VOTE FOR this resolution.