What Next? Directors’ Mug Shots At The Post Office?
from
March/April 2006
by Julie Connelly
The worst thing about nightmares is that every now and then they
come true. Consider a full-page advertisement that ran in the New York
Times last November 10. All seven board members of Pennsylvania’s
Sovereign Bancorp stared out at the reader under a fat headline that
read, “Long-Term Liabilities.” Just like a wanted poster.
Relational Investors, a San Diego shareholder-activist investment fund run by Ralph Whitworth and David Bachelder, took out the ad—for somewhere between $45,000 and $60,000—to highlight its complaints about governance at Sovereign. Tucked into the ad’s small print was a notice that Relational was launching a proxy fight to elect Whitworth and Bachelder to the Sovereign board. The fund began buying the bank’s shares last May and in early January owned nearly 8%, then worth about $630 million.
Relational claimed that according to its research, Sovereign’s stock had been trading at a 22% price-earnings discount to its peer group for the last 10 years. Sovereign (estimated 2005 revenues: $2.3 billion) fought back with a full-page ad of its own that ran in the November 11 issue of the Wall Street Journal and in a number of local papers in its major markets. Rather than addressing the P/E allegations, this ad stated that the bank’s shares had appreciated by 226% over the same decade, “far exceeding S&P 500 banks, S&P 500, and Dow Jones.”
The Relational advertisement also highlighted the “excessive” amount that Sovereign paid its directors, “skyrocketing” loans to insiders including the chairman of the board’s compensation committee, “escalating” payments for office space that the bank rented from that same comp committee chairman, “platinum parachutes” that entrenched the board for 10 years, and other matters leading to Relational’s conclusion: “We believe these serious conflicts of interest have irreversibly compromised the directors’ independence and credibility.”
A likely reason for this public attack was the announcement by Sovereign in October that it was selling 19.8% of its stock to Banco Santander Central Hispano, a large Spanish bank. Sovereign said the purpose of the sale was to finance its purchase of Independence Community Bank Corp. in New York City, which would help extend Sovereign’s reach along the Eastern Seaboard.
To Relational, the proposed sale, just short of the 20% that would require a shareholder vote, looked like a ploy to get a significant chunk of Sovereign shares into friendly hands. Among the conditions of the still-pending deal with Santander were two related to the board:
(1) Santander must vote its Sovereign shares in favor of Sovereign’s board nominees, and (2) should Santander acquire Sovereign in the future, Sovereign’s directors would remain in office for an additional 10 years. Relational estimated that those 10 years would be worth about $1.5 million to each of the board members.
Are Sovereign’s directors embarrassed? Probably. They’re not responding to requests for interviews. But in an op-ed piece that ran in the Reading Eagle, a Pennsylvania daily, shortly after Relational’s ad appeared, board member Andrew C. Hove Jr., a former acting chairman of the Federal Deposit Insurance Corp., wrote, “I take these potshots personally.” He defended the other directors against “dissidents who just want to make a quick killing in the market.” Bachelder and Whitworth cut their sharks’ teeth in the ’80s, working for onetime raider Boone Pickens at Mesa Petroleum. But any quick killing Relational made would also be available to the bank’s other shareholders, of course.
Some people may be impervious to embarrassment; examples abound. However, it does seem as if Sovereign’s chairman, president, and CEO, Jay S. Sidhu, 54—who also declined to comment on this story—and the board have been quietly acquiescing in a number of governance changes pushed on them over time by Relational and other critics. For example, total compensation for board members has been reined in. It averaged $313,127 a year for the five outside directors who joined before March 24, 2004—more than double the median of annual director compensation at the 25 largest banks and thrifts in the U.S.—and is now $160,000, which still leaves all of them above average. In addition, the company has eliminated a two-tier director-compensation scheme whereby any non-employee director appointed to the board after March 24, 2004, would receive only a $63,000 retainer plus applicable meeting fees. Perhaps Sovereign was ashamed that the only outside director in that lower-paid category was Marian L. Heard, 64, a black woman with a distinguished career in nonprofits. She’ll now get $160,000 like everybody else. Finally, a system that linked director bonuses to earnings targets lower than the company’s publicly announced targets has been deep-sixed.
As for the “insider” business, sometime in August—nobody seemed to find out about it until December—the director with all those skyrocketing loans and escalating rents, real estate developer Cameron C. Troilo Sr., was rotated off the executive-compensation committee and also off the nominating committee, two bodies in which New York Stock Exchange rules require directors to be independent. He was dropped from the ethics and corporate governance committee as well. Sovereign is mum about these changes, but as Mum always said, “If you can’t say anything nice…”
What Troilo owes Sovereign has been reduced too, to $11 million as of last September 30, versus $17 million the year before, says Relational. And his rental income from the bank is flattening. It had risen sharply from $68,544 in 1996 to $699,691 in 2004, according to Relational. Sovereign disclosed in November that while it was leasing more space from Troilo, it expected the “gross rent” it pays him to decline to $666,623 in 2005.
The bank’s directors also dropped their effort to create 10-year sinecures for themselves—but not voluntarily. That was one of the conditions imposed by the New York Stock Exchange for approving the Santander deal. Relational is asking the Securities and Exchange Commission to overturn the NYSE’s approval of the sale nonetheless. And in late December, the fund decided not to content itself with seeking just two seats on Sovereign’s board but to try for a grand slam and get the lot.
