Wednesday, October 14, 2009

Yahoo!'s Defense of CEO Stock Sales Is Lame

Stock quotes in this article: YHOO , MSFT , ADSK

NEW YORK (TheStreet) -- Yahoo!'s(YHOO Quote) responses to recent criticism of CEO Carol Bartz's stock sales have completely missed the point and appear designed to obfuscate. If she wants to show real leadership, she needs to stop misleading shareholders.

Let's review the recent controversy. Last month, I noted how Yahoo!(YHOO Quote) officers and directors sold $233 million in company stock but purchased only $103,000 worth of shares over the past two years. This was all spelled out in Securities and Exchange Commission filings.

I created a simple spreadsheet tabulating the sales and purchases and published it online. It quickly drew the attention of the media, which primarily focused on how new CEO Carol Bartz has sold almost $2 million in stock in her first five months on the job.

Since then, Bartz denied that she sold anything -- once on CNBC and once at the New York press event at which she launched Yahoo!'s new $100 million marketing campaign.

These sales were not open-market sales but related to the vesting of restricted stock units (RSUs) Bartz received from Yahoo! in 2009 as part of a $10 million "makeup grant" designed to compensate her for options she left on the table when she left her part-time executive chairman role at Autodesk(ADSK Quote) to take the helm at Yahoo! in January.

Bartz's initial tactical response to the criticism about the stock sales seems to have been: "Damn the filings, I'm going to deny, deny, deny." Perhaps she thought that if she denied it forcefully enough, the issue would just go away.

Yahoo!'s public relations team has taken a more nuanced approach. In response to questions from the Guardian and CNBC about the issue, they explained that the sales were due to taxes Bartz owed on the vested stock. Therefore, they suggested, these weren't "real" stock sales and were no cause for alarm for investors.

These responses fail to address the real issue, though. I've never said these are open-market sales, although they certainly qualify as sales (as the SEC filings show). And I have criticized Bartz for not digging into her own pocket to pay the taxes owed on the vested stock instead of selling parts of those stock grants to do so. Obviously, I can understand why more junior employees choose to sell vested stock to pay their taxes, but senior executives like Bartz have the money to easily cover their tax bills. I'm assuming Bartz thinks her actions as CEO can help Yahoo!'s stock go up in the future. In order to show her confidence in her own leadership -- and in Yahoo! stock -- she should pay the taxes herself and keep all of her vested shares.

Last week, I highlighted in a blog post that Bartz sold another $1.3 million at the end of September, again selling some of those third-quarter vested shares that were part of her "makeup grant" in order to pay her taxes.

Yahoo!'s public relations team objected to this latest post from me, calling my assertions on this and Bartz's other sales "inaccurate and misleading." They pointed out Bartz didn't make an open-market sale. I never said she did. They noted that Bartz's "makeup grant" was previously disclosed. That's what I said in my prior criticisms. They stated that the company "currently" withholds a portion of vested stock in order to pay taxes for "all" employees receiving vested stock because it is "practical" and added that "many companies" do the same. As I've said before, if Carol Bartz wanted to pay her taxes on this vested stock so she could keep all the Yahoo! stock possible, would some human relations bureaucrat at the company have told her no?

As a follow-up, Yahoo!'s public relations team was asked to point to the previously disclosed filing showing that Bartz was required by Yahoo! not to pay taxes herself on the vested stock she received from the company as part of her "makeup grant." In response, Yahoo! pointed to the company's 10-K filing made last February and specifically referred to exhibit 10.17(D) in that filing.

The exhibit lays out the specific terms of the employment agreement that Carol Bartz negotiated with the company relating to stock grants she is to receive. Indeed, the exhibit states that Yahoo! will withhold some of the vested stock to pay Bartz's taxes. However, that same section goes on to say that "[i]n the event the Company cannot (under applicable legal, regulatory, listing or other requirements) satisfy such tax withholding obligation in such method", Yahoo! might have to require Bartz to "pay such amount in cash or check."

There's nothing in this exhibit that says Bartz couldn't pay her own tax bill herself on the grant if she wanted to, in order to keep all her vested stock. Indeed, it's interesting that Exhibit 10.2(F) in the same filing, which refers to situations where all employees (not just Bartz) exercise their stock options and owe taxes, says Yahoo! requires them to pay the tax bill. This can be done by selling a portion of their exercised stock options or paying "cash or check" out of their own pocket. This latter option is exactly what I argued Bartz should have done -- from a leadership perspective -- with respect to her "makeup grant."

My comments about Bartz' stock sales and her egregious pay package, which was approved by Yahoo!'s compensation committee in January, have been neither inaccurate nor misleading. From a shareholder's perspective, Bartz shouldn't have sold these shares in order to pay taxes on them. To demonstrate her belief in the long-term value of the shares, she should have paid the tax bill herself.

The group deserving the most blame in this compensation debate is, of course, Yahoo!'s compensation committee, which signed off on Bartz's employment contract. The committee is chaired by Art Kern and has members Ron Burkle and Frank Biondi, Carl Icahn's right-hand man. They should be ashamed of the following aspects of Bartz's employment agreement:

  1. If Bartz sticks around for four years and maxes out her possible annual bonuses and if Yahoo!'s stock price trades for more than $25 for 20 consecutive trading days before February 2016 -- seven years from now -- she will receive a total compensation package for her four years of work of $187 million. Although Yahoo!'s stock was trading around $12 when she took the job at the start of this year, is it really that much of a "stretch goal" for Bartz to get Yahoo!'s stock above $25 for 20 straight trading days in the next seven years? After all, getting the stock back to $25 would bring it to a level that's still 20% less than what Microsoft(MSFT Quote) offered to pay for the whole company 18 months ago. This would be a lot of money for a relatively low hurdle. I'm all for executives making money for performance, but not easy money.
  2. They gave Bartz a $10 million "makeup grant" in cash and stock for options she left on the table at Autodesk when she signed her Yahoo! employment contract in January. However, according to SEC filings, Bartz's remaining Autodesk options were only worth $3.3 million at that time. Why did Yahoo!'s compensation committee triple the size of the "makeup grant"?
  3. When Bartz is getting a potential $187 million for getting Yahoo!'s stock back to $5 less than Microsoft's buyout offer, isn't Bartz being sufficiently "made up" for the Autodesk options she left behind? Does she need a "makeup grant" on top of all her other compensation? Most reasonable executives would conclude that getting $187 million was better than $3.3 million. This "makeup grant" was padding and should never have been given in the first place.
  4. Why did Yahoo! agree to pay the taxes on Bartz's RSUs related to her "makeup grant" that she receives this year? Bartz would have had to pay her taxes out of pocket on her $3.3 million of remaining Autodesk stock options. Why should Bartz now pay taxes for a $10 million grant out of that grant, and not out of her pocket?
  5. Why did Yahoo! agree to pay Bartz "up to $140,000" for the financial advice she received as part of negotiating her employment contract? This was a great perk for her, but not for Yahoo!s shareholders. Yahoo!s public relations team or Bartz have yet to account for this slap in the face to shareholders.

A majority of Yahoo!'s board deserves to be replaced for so poorly negotiating the potential buyout of the company by Microsoft. All of the members of the compensation committee deserve to be replaced for overpaying Bartz's predecessor, Terry Semel, and for approving Bartz's contract.

But let's be clear: Bartz is no babe in the woods. She's been around the block negotiating employment contracts and knew exactly what she was demanding. Her compensation, perks and tax gross-up demands are excessive. She should immediately pay back Yahoo! shareholders the $140,000 for the high-priced advisers she used to negotiate her employment contract. She should also show her shareholders and employees that her heart is in the right place when it comes to this company's future.

To that end, I call on Bartz to spend $25 million of her own aftertax income on open-market Yahoo! stock purchases. She can keep her $187 million for getting the stock back to a 20% discount to the Microsoft offer, but let's see her put some of her money where her mouth is -- and actually at risk.

-- Written by Eric Jackson in Naples, Fla.

At the time of publication, Jackson's fund had a long position in MSFT.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

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