This is worth reading, and realizing what fools Xerox board is:
Subject: FW: Latest Bloomberg article on Xerox...how stupid can a BOD
get. .
Xerox's Costly Divorce Holds Lessons
By Graef Crystal
(Commentary. Graef Crystal is a columnist for Bloomberg News. The opinions
expressed are his own.)
San Diego, Aug. 25 (Bloomberg) -- The ouster in May of Xerox Corp.'s chief
executive, G. Richard Thoman, provides an object lesson for corporate
directors: At the moment they are participating in a marriage ceremony,
they ought to look to the possibility of divorce.
In olden days, when a person was about to get married, the last thing on
his or her mind was the chance of a breakup. But in modern times we have the
prenuptial agreement. Too bad boards are too smitten when they land a new
executive to focus on the corporate version of the ``pre-nup'' -- those
sections of the employment agreement that contain the language concerning
severance.
Had Xerox's board done so when it hired Thoman, the directors might have
saved shareholders at least some of the fortune they bestowed on him when
they later gave him the axe.
Xerox's board hired Thoman as its chief operating officer in June 1997,
with the clear intention of making him CEO within 36 months. It beat that
timetable by more than a year by giving him the top job on April 6, 1999.
Thoman promptly demonstrated that, though he holds a Ph.D. in
international economics, he hadn't mastered one last textbook: ``How to Run
a Company Successfully.'' Between April 6, 1999, and May 11, 2000, when he
was shown the door, the total return on Xerox stock was negative 54.3
percent. That compares with a positive 8.3 percent return on the Standard &
Poor's 500 Index.
Glittering Resume - Xerox's board had every reason to drool at Thoman's
glittering resume.
Besides his first-class education, he had held positions of increasing
responsibility at Exxon Mobil Corp., McKinsey & Co., American Express Co.,
Nabisco International Inc., and International Business Machines Corp.,
where just prior to joining Xerox he was CFO.
Unfortunately, the directors let their excitement get the best of them, and
shareholders paid the price. I calculate the value of Thoman's hiring
bonuses and the various goodies in his severance pay package to be worth a
cool $35 million.
And that doesn't count his continuing medical insurance; nor his free
office and secretarial help for two years; nor the $7.8 million of regular
pay he
earned during his not-quite three years; nor the $7.0 million present value
of his vested stock options at the date of his termination; nor the $7.9
million of gains on option shares he had already exercised.
Add all these figures together, and you obtain a staggering sum of $58
million for Thoman's three years of service.
Long Time on Options
One of the two largest pieces of his severance pay can be found in his 2.2
million remaining stock option shares, of which 1.19 million shares were
not vested on the date he was fired but becamevested because of promises
made
in his original employment agreement.
At first glance, those shares would seem to be worthless, because, except
for two relatively small grants covering 350,000 shares, all were
underwater at the time he was fired. Moreover, even those two above-water
grants were
in the money by a trifling $400,000. Still, Thoman's option shares have as
many as 9.7 years to run past his termination date. Using the Black-Scholes
option pricing model, I calculated the present value of these 1.19 million
option shares was $9.3 million at the time of Thoman's termination.
Sample Option
Deeply underwater option certificates may seem to some as useful material
for wallpapering one's powder room. But take a look at just one of Thoman's
options, this covering 163,480 shares with a strike price of $54.86 a
share, a value more than twice as high as the $25.50 price at which Xerox
traded
the day Thoman was canned.
That particular option, which was granted Dec. 7, 1998, still had 8.8
years to run before its expiration. An analysis of the random scenarios
forming
the heart of the Black-Scholes model shows that if Thoman waits until the
last day of the option's term, the probability that he will make nothing is
83 percent.
But in those 17 percent of scenarios where Thoman finishes in the money,
there are some luscious pearls, including a 16 percent probability of his
making $1 million or more from his option, and an 8 percent probability of
his making $10 million or more. That assumes the overall stock market
reverts to its more historic return level of about 10 percent a year. And
that, friends, covers just one of his nine remaining stock options.
An even larger piece of Thoman's severance involves his pension. Not only
did the Xerox board credit him with some 19 years of extra service towards
his pension, but its members foolishly promised him he would have a
minimum vested pension benefit worth $600,000 a year and commencing at age
55,
which Thoman just happened to be when he was shoved out of the plane and
forced to hit the silk. That pension promise also included a 100 percent
survivor annuity for Thoman's spouse. After All That, a Boost
Now here comes the incomprehensible part: When Thoman was forced out, the
Xerox board, for inexplicable reasons, decided a pension benefit of
$600,000 a year, starting right away, was simply not enough. So they upped
it to $800,000 a year. When I called the company for an explanation,
spokeswoman Christa Carone declined to discuss the specifics of Thoman's
pension but rather contented herself by repeating several times, almost as
if it were a comforting mantra, that ``the major part of what Thoman
received reflects the terms of his offer letter.''
The statement is, unhappily, true, but it doesn't explain why the Xerox
board, after anteing up some $55 million for Thoman's incompetent
services, thought it wouldbe useful to sweeten Thoman's pension by a full
third. The
defense raised by boards everywhere when they fire a CEO and get lambasted
for giving him a huge severance package is: ``Gee, we never thought we'd
have to fire him.
Well, it's high time for the Xerox board and for other boards, too, to
earn their keep. Instead of coming to board meetings with their briefing
books
untouched, they need to read all that fine print in the employment
agreements they are about to approve and ask themselves a simple question:
``If we have to fire the bloke, how will his severance pay look to our
shareholders?''
If they ask that question enough, maybe, just maybe, they will rear back
and yell out a hearty ``No, nein, nyet -- enough already.''
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