Ever wonder if the CEO of your favorite tech company has the board in his pocket? Do the executives receive pay packages that are unethically large? Let's take a look at two technology companies that represent the good, the bad, and the ugly of corporate governance.
The board of directors is meant to represent shareholder interests and to ensure that what goes on benefits shareholders, so who sits on the board is critically important. The directors have the power to determine the pay and incentives given to senior executives, and what type of severance package executives receive, if any. The directors also review financial reports and the assumptions behind the company's accounting. Finally, the board usually can fire the executives.
Intel (INTC -- Nasdaq) is one technology company that, generally speaking, exhibits good corporate governance. Intel's board consists of 11 directors, with only three directors having direct ties to the company. Those three directors are CEO Craig Barrett, president and chief operating officer Paul Otellini, and Andy Grove, former CEO.
Intel's directors meet regularly without the CEO and chief operating officer, which gives them an opportunity to assess how the company and its senior executives are performing. This practice was put in place before the latest round of scandals, though more companies are adopting similar measures. Another positive attribute is that Intel's senior executives don't have employment contracts or severance agreements, so the board of directors can easily fire the CEO and his management team if they're not performing.
The reverse also is true: Senior executives must be given incentives to stay. Intel's board certainly has provided that. The CEO's bonus is partially determined by achieving a certain earnings-per-share level. Surprisingly, that level was achieved in 2001, resulting in a cash bonus even though Intel's business was going through one of the worst downturns in memory. Barrett also received a healthy helping of options during 2001, worth approximately $3.5 million, according to Intel's proxy statement. This is on top of the $92 million worth of options that he already holds. Most senior executives are worth quite a bit to shareholders, but is $92 million really necessary to attract a talented CEO? So, while Intel appears to have reasonably sound governance, there's some room for improvement.
Not all companies are in such a position. Broadcom's corporate governance leaves something to be desired. The two founders of Broadcom (BRCM -- Nasdaq), Henry Nicholas III and Henry Samueli, each own 34.4% of the company, effectively controlling it. No outside shareholder would be able to take over the company or change how it's run without the support of the two founders. The board of directors is small, with five members, and only two are truly independent. All compensation at Broadcom revolves around stock options. The senior executives receive $110,000 in salary, well below industry averages, but get large option grants. The CFO, for instance, received 250,000 options worth $15.8 million. Mind you, this was the same CFO who was behind some aggressive accounting related to acquisitions in 2000 that basically inflated revenue.
Broadcom's share price descended last year amid a downturn in the semiconductor industry and the accounting scandal, which involved offering customers discounts using stock warrants. The board, which was supposed to review the accounting assumptions, decided that members deserved a raise from 80,000 stock options to 100,000 options when a non-employee director joins or is re-elected, and an increase from 12,000 to 15,000 options per year. Then, in May 2001 the board decided to reprice options. With this much of one's total compensation tied to a rising stock price, the incentives are in place to keep the stock price elevated. Might this explain Broadcom's aggressive accounting?
Reading proxy statements provides you with a great picture of whose interests executives and directors are promoting. Don't count on it to always be the shareholders'.