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May 31, 1996

Retiring Pension Plans

This year's race to remove pension plans for outside directors

It's strange how fads come and go and how few people remember what had been the norm only a few years ago. That is clearly the case in the current movement toward elimination of retirement benefit plans for outside directors.

From the brouhaha being made by corporate reformers, one would think that pensions for outside directors were a long-entrenched phenomenon. The fact is, however, that for the most part such pensions started becoming popular only in the early 1980s.SpencerStuart, the international executive recruiting firm, has been tracking retirement plans for directors since 1983. At that time, of the 100 corporations it watches, only 18 had director retirement plans in place. By last year, the ratio had completely reversed itself, with 78 companies sporting such plans.

Peter Kinder, president of Kinder, Lydenberg Domini & Co, a Massachusetts-based firm that focuses on corporate governance, agrees that eliminating outside directors' pension plans has become a trend, but he adds that 'the reverse was an anomaly' as well. The movement toward elimination of pensions for outside directors also displays the corporate appetite for trendiness and the propensity of companies in weak positions on other issues to cave in on relatively minor ones, such as elimination of outside-director pension plans. Many corporations that only last year rejected stockholder proposals to do away with such plans are joining this year's parade.

Why? 'In looking at a number of our peer companies, director retirement plans are less common now than in the past,' explains Susan Miller, a spokeswoman for American Express. American Express is among those that have agreed to do away with, or replace, pension plans for outside directors.

Nynex also changed its compensation package for outside directors after it looked at what other corporations were doing, according to David Frail, a spokesman for the New York telephone company. The result was that Nynex eliminated pensions for outside directors, increased their annual retainers by $5,000, but added the requirement that at least half of the retainers be paid in Nynex stock.

Other companies that have backed down under pressure from shareholders' rights groups range from Philip Morris, already under tremendous pressure from anti-cigarette groups, to Westinghouse, which in the face of severe earnings and stock price problems over recent years badly needs to placate its shareholder critics.

In fact, it seems that many of those who have given in are those who are in weak positions vis--vis their shareholders for some other reason. Digital Equipment is another example of a company that has made the change, and it has yet to convince the investment community that its recovery from huge losses of recent years really is firm.

Another case is that of the ailing Cray Research, which accepted the need to change its director compensation before agreeing to be acquired by Silicon Graphics earlier this year. Cray, of course, had been under serious earnings strain and was trying to turn itself around. The last thing it needed was yet another issue - however minor - for shareholders to get upset about.

SNET, Southern New England Telecommunications Corporation, is also a company in a turn-around phase. And it, too, has eliminated pensions for non-employee directors as part of a package that overhauled the way it compensates its board.

Even without the changes, SNET was hardly throwing money at its board. Its directors received just $18,000 in annual retainers, of which at least 25 per cent was payable in common stock. Under the new regime, in addition to eliminating the pension plan, the company has cut directors' retainers to $13,500, which they may elect to receive in common stock.

Corporations in stronger positions, however, have tended not to back down. General Electric, for example, stood its ground firmly. It asked shareholders to vote against the eliminate-pensions-for-outside-directors proposal on the basis that the board should be appropriately compensated for doing a good job. It speaks of the 'superior long-term increases in shareholder value,' and advises stockholders to scan performance graphs earlier in the proxy statement that show that the value of GE shares sharply outperformed the Standard & Poor's and Dow Jones averages for both the latest five-year and 15-year periods.

The basic argument being made by shareholder rights groups is that when the compensation of outside directors is too cushy, the directors tend to forget they are supposed to be working for the company's stockholders and identify too much with management instead.

'While non-employee or outside directors should be entitled to reasonable compensation for their time and expertise, we are of the opinion that additional layers of compensation in the form of retirement benefits, which are 100 per cent of the director's base compensation, have the pernicious effect of compromising their independence and impartiality,' write William and Susan Freeda in their proposal included in GE's proxy statement to eliminate pensions for outside directors.

Lobbying strongly on the same side as the Freedas is Kenneth Steiner, a co-founder of the Investors Rights Association of America, which is based in the New York bedroom community of Great Neck, Long Island.

Steiner was asked why the movement to eliminate retirement benefits for outside company directors was gaining momentum. 'In the last year or so we've somehow developed a broad following among institutions that are voting for our proposals,' he says. 'That's where the power comes from. We're getting votes.'

Steiner reported that he had recently attended the semi-annual meeting of the Council of Institutional Investors where he spoke with 'quite a few' pension fund managers and people from various state funds who indicated to him that they would vote 'for our proposals almost across the board.' And, as Steiner points out: 'They own a tremendous amount of stock.'

Steiner has noted a key change at companies' annual meetings. 'I attended dozens of meetings last year and management vociferously opposed our proposals. This year they're claiming they're making the changes for the benefit of shareholders - that's only because they were about to lose the vote and they wanted to avoid the embarrassment. If you look at last year's proxies, they were making strong statements in opposition just twelve months ago.'

It is fine for the crusaders to claim victories, but some observers believe that the elimination of pensions for directors really doesn't mean terribly much.

And some observers think that cutting back on director compensation may be counter-productive. After all, most directors are wealthy to begin with, and have extremely high-paying jobs at their own companies - with, incidentally, their pension requirements well-catered for. Their compensation as directors of other companies is no doubt a welcome addition to their income stream, but it only represents a small part of their overall earnings.

By paying outside directors handsomely, however, it might be possible to attract different (that is, less well-off) individuals into America's corporate boardrooms. And experts, say from academia, who are intimately familiar with the industry, could be full-time as directors, and would be truly independent from management.

But even some of the shareholder rights campaigners are fairly cynical about what is possible when it comes to creating truly independent boards. One, who asked not to be identified, argues that 'things have not changed very much in 200 years.' He doesn't think conditions will be very different until there is a wholesale restructuring of the corporate form. 'We have a 17th century form trying to exist in the 21st century,' he says. 'The only way to bring about real change is through a radical restructuring that will make companies much more responsive to the public.'

But that's another story. In the meantime, tinkering with director pensions may answer some of the criticisms being voiced by shareholders and other commentators, but it's not likely to make any real impact on director competence, corporate performance or investor returns. Its significance lies, rather, in its being a symptom of the growing demand for directors to be more accountable, both for what they put in and for what they take out.