Letter to Ed Whitacre

Light Reading Editor in Chief Scott Raynovich hurls a "J'accuse!" at the departing AT&T Chief

May 1, 2007

6 Min Read
Letter to Ed Whitacre

Dear Ed,Ed, I do not know you personally. You've never agreed to an interview. As a journalist, I have enjoyed your swashbuckling acquisition style as well as your cocky spirit and Southern drawl on AT&T Inc. (NYSE: T) conference calls.

But, Holy Mother Bell! What have you done now? It looks as if, in addition to selling upwards of $42 million in stock over the last year, you're ready to check out with a retirement package potentially valued north of $100 million, according to a recent proxy filing. What are you thinking? Better yet, what was your board thinking?

The more controversial elements of your pay package are detailed in Stockholder Proposal C (Item 6 on Proxy Card), a vote introduced by critical shareholders calling for the institution of "pay-for-superior-performance" (a radical notion!).

AT&T's board of directors recommended the rejection of this proposal to change compensation policies. It was defeated 56.2 percent to 43.8 percent.

But the critical shareholders, in filing supporting statements, brought up some great points on the details of your excessive pay package. According to the proxy statement, a study by The Corporate Library notes that "over the five fiscal years through 2005, CEO Edward Whitacre received $85.2 million in compensation, while total shareholder return was negative 40.3%... The Corporate Library accordingly gave AT&T's Board a 'D' for overall effectiveness."

Not a bad point they are making. The biggest bone to pick, though, is with your retirement packages. I quote from the proxy statement:

  • "Whitacre's golden parachute is particularly excessive, in our view, considering it has a platinum lining: annual pension payments of $5,494,000 for life, plus an $18,805,000 lump sum. Last year The Corporate Library singled out AT&T forbestowing on Whitacre the third largest CEO pension payout among large U.S. companies.

Another good point they are making. And that's not all. According to the proxy, you also get:

  • Access to our corporate aircraft, up to 10 hours of usage per month (estimated incremental monthly cost of $20,000)

  • Use of office facilities and support staff (we do not expect to incur any additional incremental cost)

  • Home security (estimated at $6,500 annually)

  • Payment of applicable taxes resulting from these benefits, except for use of the aircraft (estimated at $19,000 annually), and

  • During his life and that of his spouse, health and welfare benefits equal to those which he received while employed. Included in these benefits are those described under "Other Post-Retirement Benefits".

  • Under the contract, after he leaves our Company, Mr. Whitacre will provideconsulting services and advice to us for three years in exchange for an annualfee equal to 50% of his annual salary at retirement ($1,050,000)

  • Club memberships (estimated at $25,000 annually) and

  • Payment of applicable taxes resulting from these benefits (estimated at $15,600 annually).

That's just the retirement package. Your recent compensation and stock sales have been quite extraordinary. In just the past 12 months alone, you have sold $42 million worth of AT&T shares, according to SEC filings.

Ed, I'm looking out for you, buddy. Let me give you some counsel: The club memberships are a bad PR move. Unseemly. So's the home office. I mean, aren't they contradictory? Are you working or retired? Make up your mind.

Here's more advice: You should have sold less stock. $42 million in 12 months looks pretty bad. Given that your legacy is at stake, isn't it important that you distance yourself from the executive greed of the telecom industrial complex that brings to mind folks like Garry Winnick, Rich McGinn, Pat Russo, and yes, Joe Nacchio? (See 2001 Top Ten: Fat Cats, Global Crossing, Lucent Start Trials, GlobalX: The Burst Bubble, and Nacchio Found Guilty.)

To be fair, Joe Nacchio was accused and convicted of insider trading. You have never been involved in such a suit. I merely accuse you of stuffing your pockets at the expense of shareholders.

I have no problem with enormous pay packages if they are equated with rational economic metrics and outsized shareholder returns. Take the Google (Nasdaq: GOOG) boys. They took in billions. But they returned hundreds of billions to shareholders. Yes, they fly on an obscenely large jet, but they created the company out of thin air and the shareholder returns were extraordinary.

Your record of shareholder returns is, to say the least, less exemplary.

Look at the share price of SBC (now AT&T). Yes, it's rebounded nicely since the telecom bomb of 2001-2002. But if you look at the longer-term results during your tenure, they are dismal. In fact, the stock's the same price it was in 1997: It's gone nowhere over the last ten years. If I were a shareholder you'd have shown me no capital appreciation over the course of a decade. ZERO! In fact, with inflation factored in, shareholders probably lost money.

Let's take some other metrics. AT&T's one-year return on equity is a paltry 10 percent. Not that impressive when you think about the fact that you run a quasi-monopoly with a market cap to the tune of $240 billion. To compare: Microsoft Corp. (Nasdaq: MSFT)'s 12-month return on equity is 30 percent. Heck, even some airlines – arguably an even more awful business – have you beat. The return on equity at Continental Airlines, according to Capital IQ , has been 100 percent over the past 12 months.

So far, your metrics aren't that impressive, especially considering you inherited a cashflow machine with access to just about as many resources as one can imagine. If I were assessing myself with these metrics, I wouldn't be all that self-satisfied – certainly not enough to expense my club memberships. My boss would kill me.

Yes, there were the dividends and such. But this is an incumbent telecom operator. Most of the customers were already plugged in. The dividends and cashflow were handed over by the government in the orginal breakup of AT&T. The access lines have always been there, generating nice, steady income, and you guys didn't even build them. And, as I said, they weren't even covering inflation.

What kind of risks and innovation has SBC/AT&T taken recently? It's built a watered-down fiber-to-the-curb network that's dwarfed by many fiber projects worldwide. You are now the largest telecom incumbent operator on the planet, yet you're taking fewer risks than just about anybody. Less risk, higher pay. Not a bad deal if you can get it.

Perhaps the generous compensation package is in appreciation of all the fine lobbying efforts your team has conducted in Washington to preserve the incumbent footprint and defend yourself against innovation. If that is indeed the rationale for your pay package, then you deserve it. AT&T has shown true excellence in lobbying. Your team knows how to preserve the system.

Here's what I really think of this pay package: It's a farce. It's a symbol that the pure arrogance and imperial management style of incumbent telcos is here to say. It's proof that your company is focused more on maintaining the status quo and maximizing executive pay, than on innovation and the creation of shareholder value.

Ed, I'm saddened that we will never meet so that I could ask you these important questions and have you defend your extravagant pay in person. As I said, I haven't really known you. But after reading the proxy, I feel as if I do.

Sincerely,— R. Scott Raynovich, Editor in Chief, Light Reading

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