The 10K Run
The sweetheart deals hiding in corporate annual reports.
American investors are about to be buried in paper. Annual report season is officially underway and this year is shaping up to be a contest of big, bigger, biggest. Georgia-Pacific, which is luckily in the paper business, filed a 390-page annual report with the Securities and Exchange Commission last month. Citigroup's annual report for 2003, filed with the SEC on March 1, weighed in at 295 pages, nearly 30 percent larger than its 2002 report.
The encyclopedic reports are corporate America's showy response to the recent spate of business scandals. Their girth declares: Look how honest we are! But what's amazing in the new round of reports is that they often reveal the seamy, self-dealing, overpaying practices that created the scandals to begin with.
The annual SEC filings, known as 10Ks, don't have the pictures of smiling executives and fancy graphics found in the glossy annual reports that were traditionally sent to shareholders. Many companies, to their credit, have now abandoned the glossy reports and mail their shareholders the 10Ks instead.
Those 10Ks generally go right in the garbage, for obvious reasons. The 10Ks contain page after page of small, black type, and often the most alarming material is buried in the even smaller type of the footnotes. In Georgia-Pacific's case, the footnotes run to a whopping 60 pages of 8.5-point type. That's enough to scare off—and perhaps blind—many professional investors, let alone someone who isn't being paid to read one of these things.
But before you chuck your 10Ks in the trash, give them a quick read. You'll get a sense of whether your company really has learned its lesson from the past few years. If you own shares in Stanley Works' shareholders, check out the retirement deal of Former CEO John M. Trani, who attracted controversy two years ago when he proposed moving the Connecticut-based company to Bermuda to avoid taxes. Trani resigned on Jan. 1 and began collecting $243,750 a month under his retirement agreement. After two years, the fee drops to a meager $113,742 a month. In retirement, Trani is earning four times as much as the CEO who replaced him, John Lundgren. *
Gannett's 10K suggests the nation's largest newspaper company needs a better payroll manager. It plans to pay former Chief Financial Officer Larry Miller $600,000 a year under a consulting contract signed last year when Miller retired. That's $40,000 more than Miller made when he was working full time for the company, and now he only has to work half time. Under the contract, Gannett will also continue to pay for Miller's car and his membership at a local country club.
There's entertaining reading for Walt Disney Co. stockholders, too. In its recent proxy statement, Disney disclosed that it spent $444,752 to cover the legal bills of two dissident former board members, Roy Disney and Stanley Gold. The pair have been actively campaigning for Disney shareholders to dump Chairman and CEO Michael Eisner. You can just imagine Eisner grinding his teeth when he signs that check. And shareholders of Halliburton will learn from a late January filing that the company now considers its former CEO, Vice President Dick Cheney, a "risk factor." That's Wall Street lingo for a potential liability: Cheney's connection, Halliburton says, may lose the company contracts in "the Middle East or elsewhere "
Not only are these the sorts of details that never would have been mentioned in one of those glossy annual reports, they probably never would have made it into the 10K before, either, not even in the last footnote. By letting it all hang out, corporate executives are trying to prove that they're different from indicted former WorldCom CEO Bernie Ebbers and indicted former Enron CEO Jeff Skilling.
Now it's your job to see if they really are different. Instead of getting intimidated and dumping these reports in the trash, you should pull out your reading glasses and settle in for a nice evening with the fine print. The sooner you know what they're doing in the footnotes, the sooner you know whether they deserve your money.
Correction, March 19, 2004: The article originally criticized an apparent consulting agreement between A. Kirk Lanterman and the cruise line Carnival Corp. The article made two errors. It wrongly claimed that Lanterman had resigned as CEO of Carnival subsidiary Holland America last November. In fact, Lanterman is still chairman and CEO of Holland America. The article also stated that, according to the Carnival 10K, Lanterman would earn $167,000 a month to provide five hours a month of consulting services during his first 15 years of retirement. The article and its headline criticized that deal as a $33,000-per-hour consulting contract. The article mischaracterized the arrangement. Although the 10K refers to it as a consulting contract, other Carnival filings and a Carnival spokesman say the $167,000 monthly retirement check represents deferred compensation. (As CEO, Lanterman has set aside some of his annual bonus for retirement.) It is not, the spokesman says, a payment for consulting services. (Return to corrected item.)
Michelle Leder writes a daily blog at www.footnoted.org that looks at SEC filings and is the author of Financial Fine Print: Uncovering a Company's True Value.