Sprint Filings

At left: Ever wonder what happens at Sprint's annual Board meetings? A board member prepares to wrestle in a vat of jelly while shareholders cheer him on.





In keeping with my theme of not really doing any investigative work and merely pointing out information already contained in Sprint's 2009 proxy, I would now like to say a few words about the Board of Directors. Those words are "they suck." And, if you don't believe me, well that was the opinion of the independent research firm The Corporate Library (TCL). While they did not state their opinion as eloquently as I did, they did rate the B.O.D. as a "D" overall. Now, unless you are George W. Bush, that is nothing to be proud of. So, what did TCL say about the B.O.D?

• "D" overall (reiterated just so it sinks in)
  
• "High Governance Risk Assessment"
• "Very High Concern" in Executive pay

Some other governance issues were identified as well (note, I'm not sure they are directly attributed to TCL but they are mentioned in the proxy). Specifically, for shareholders, there is:

• No right to cumulative voting
• No right to act by written consent
• No right to call a special meeting
• No right to vote on executive pay

And, to me, this quote from the proxy summarizes up the overall concerns:

• "Our management should have the leadership initiative to adopt the above Board accountability items instead of leaving it to shareholders to take the initiative in proposing such improvements."

Now, maybe you're thinking, "Well, sure they've made mistakes. They're only human. Sprint did not do well so of course the Board would be rated low. It's not like the Board is the problem. Let he who is without sin, cast the first stone!" Well, TCL disagrees with you and casts away:

• Irvine Hockaday was designated a “Problem Director” due to his involvement with the proposed Sprint merger with WorldCom that led to the acceleration of $1.7 billion in stock options even though the merger ultimately failed
• Irvine Hockaday and Janet Hill were designated “Accelerated Vesting” directors due to their accelerating stock option vesting to avoid recognizing the related cost.

And, as it turns out, 6 of the current 11 members (and 1 former member) of the Board coincidentally also served on other boards that were also rated "D" by TCL. Of the 5 who didn't, 1 is Dan Hesse who, I would imagine, will not and cannot serve on another board while CEO. Of the remaining 4, 3 have been on Sprint's board for less than a year. Excluding Hesse, the only member of the board who has served more than a year and did not serve on another "D" rated board is James Hance - who is the retired Vice Chairman of Bank of America. And we all know how well they are doing (thanks to taxpayer money).

So, who are the other folks that also helped screw up other companies? Well, leading the way, was one Mr. Irvine Hockaday who served on 3 other boards that received a "D" (4 total - Sprint, Ford, Estee Lauder, and Crown Media). "Funny" enough, he only served on a total of 4 boards. Well done Mr. Hockaday! You are a fortress of ineptitude. With the loss of shareholder value in those companies, you've probably screwed over more retirees than Medicaid. Luckily for Sprint, Mr. Hockaday is retiring from the Board to pursue his dream of eating live puppies in front of school children (addendum: see end of post). After all, he's not getting any younger and why wait to crush the hopes and dreams of adults when you can do it to kids?

Hot on Irvine's heels, is one Mr. Rodney O'Neal who served on 2 other boards that received a "D" (Sprint, Goodyear, and Delphi). Well done, Rodney! You have some work to do to catch Irvine but I have faith that you too can become as terrible at this as he is. Shoot for the stars and when you don't make it, blame it on the little guy. Not to be excluded from the party of incompetence, 5 other Sprint board members (of which, 4 are still on the board) served on other "D" rated boards - Gordon Bethune (Honeywell), Ralph Whitworth (no longer at Sprint; Sovereign Bancorp), Janet Hill (Wendy's/Arby's), Robert Bennett (Liberty Media), and Larry Glasscock (WellPoint).

In my next post, I'll take a closer look at the compensation provided to the board. But, in the meantime, I will be hard at work figuring out how I too can become a rich, old white guy so I can serve on the board. Wish me luck.

author's note: I do not know if Irvine Hockaday eats live puppies. Presumably he does not. Besides, they are better cooked.

Recently, I received a comment and some emails stating, effectively, my "populist drivel" was "nonsense" and "stupid." That is borderline libel and I take great offense to that. Everyone knows I am nothing close to popular and my writing is not drivel but more like poppycock. But, it did get me thinking (for a change) and I would like clarify a couple things about my posts:

1. I do not believe in the vague, Utopian, and socialistic nature of "fairness" as it concerns salaries. It's quite simple, an employee gets paid a certain amount of money because, in theory, he/she is worth more than that amount in value to the company (incidentally, that's why minimum wage laws actually raise unemployment as marginal workers who don't provide more value than the minimum wage will not get hired. Look at that; I not only entertain but I also educate. You're welcome). An employee produces a good (or service) and, in return, the company provides compensation for his or her production. It should be a win-win situation. But, that is not to say that there cannot be errors in the process. And the results say that Sprint has erred a lot. As proof, look no further than the hiring of (and golden parachute given to) Gary Forsee. So while I may rant against some executives and their pay, so long as they did not commit fraud, they really did nothing wrong. A quote I saw somewhere (fortune cookie?) said it best - "Do not judge so that you will not be judged." But...Sprint is a public company that, ultimately, answers to its shareholders. And they are doing a terrible job. So, that means I will not blindly accept the given results and agree with the Board's actions. Do I want to have my cake and eat it too? Hell yes I do. What good is the cake if you just have to look at it? You think America became great (and fat) just by looking at the cake?
2. I fully encourage everyone to do their own research and come to their own conclusions on anything and everything. Feel free to disagree with me and, in fact, if you have valid points I fully encourage it. I always like to hear dissenting opinions, no matter how wrong they might be. But, if you do disagree, at least attack my arguments (or lack thereof) and not me personally. Or, if you do, at least make it somewhat clever or entertaining. From now on, stupid personal attacks on me is going to be like playing "Marco Polo" with Helen Keller - I won't hear it, I won't see it, and I won't respond to it.
   

In my next few posts, I'll be checking in on the Board (and how they were rated by an independent research firm) and, hopefully, delving into the financial health of the company via the 10-k and Sprint's first quarter results.

Statistics and numbers. Numbers and statistics. No matter how you type it, everyone knows you can manipulate virtually any number or statistic to say whatever it is you want it to say. Numbers are not to be trusted (don't even get me started on 2,587). As for statistics, did you know that 24% of all statistics are false? If you didn't, you should now since I just made that up.

I say all that with the intention of showing you a chart I stumbled upon in the 2009 SEC filing that shows the amount of stock bought by employees in the Employee Stock Purchase Plan (page 70). Now, I don't know if much can really be read into the chart but it is interesting to me. And since this is my blog and no one reads this stuff anyways, it doesn't really matter if I post it. So here it goes...

Obviously, Sprint's stock took a worse beating than Rihanna this past year. I think the depth and breadth of the beating surprised everyone. In fact, I can't believe she took Chris Brown back! But, back to Sprint's stock; it makes sense to buy stock if you believe if it is going to go up in price. In no other situation (other than covering a short sale), would you buy stock that you thought would depreciate unless - and this is a huge caveat - you are f*cking retarded. But, I assume the best in people so I doubt this is the case. So, what did non-executive employees buy via the ESPP? And what did executives buy via the ESPP? Let's go to the scorecard:

All executive officers (8 people) - 2,672 shares
All employees (excluding officers) - 8,676,427 shares

Now here it is in monetary terms at a weighted price of $4.16 per share (as listed in the proxy):

All executive officers (8 people) - $ 15,943
All employees (excluding officers) - $ 36,109,316

To help you comprehend the difference, that's about my yearly salary versus 77 minutes of losses by AIG in the 4th qtr. You can guess which value is which.

Now, obviously, the number of employees (excluding officers) greatly exceeds the top 8 people in the company. And the top officers in the company are already tied heavily in stock as part of their compensation mainly through stock options and grants/awards. But, none of the top 5 current executives (Hesse, Brust, Cowan, Elfman, Johnson) nor any of the top 4 ex-executives (Saleh, Arendt, Kennedy, Angelino) purchased stock via the ESPP. If they thought the stock price would go up in 2008, would they have bought stock? Is the fact that they didn't indicative that they believed the stock would go down? Why is there such a discrepancy in the "bullishness" of the stock between executives and non-executives? I, like usual, don't have any idea.

So I'll leave it up to you, my dear astute readers, to answer those questions for yourself. By the way, here's the actual chart:

If you were to google "Robert H. Brust & frugal" (go ahead, I'll wait), you'll get 533 results. None of the results, however, actually talk about Bob Brust being frugal. That is a good thing because his contract is anything but thrifty. Of course, there is nothing wrong with that as "Bob Brust is an experienced, respected financial leader with the right skills to lead Sprint's financial team." Straight from Dan Hesse's mouth to your eyes. Not only that but I hear he plays a pretty mean round of golf.

Of course, when you bill yourself as an economically sound, penny-pinching spendthrift who is making tough financial decisions you might want to - oh, I don't know - follow your own advice. Unless, of course, you want to look like a hypocrite. And maybe that's his plan. Either way, let's take a look...

Mr. Brust, according to a Bloomberg News article from Dec 2008, intended to save "about $40 million by closing cafeterias, buying fewer office supplies and putting printers in storage." He even took pens from a hotel to bring back to Sprint campus as (presumably) a metaphor of cost-cutting measures. Obviously, he means business. So much so he said, and I quote, “The message is, we really have to be serious about this, because we are in an economic event that nobody understands.” Of course, it doesn't speak well of your Chief Financial Officer if he doesn't understand the financial crises but I digress. Anyways, in light of Sprint's struggles that is absolutely the right thing to do. Come in and lay down the law. Rule with an iron fist. Lead the charge against waste! I imagine that, even right now, he's stooped over his desk laboriously reviewing TPS reports, mumbling incoherently, and furiously scribbling on the reports in red ink. Anything in the name of savings!

So, it comes as a bit of surprise that Mr. Brust took $601,338 worth of flights in 2008 for "non-business use of our corporate jet and use of chartered jets." Not only that but "family members of Mr. Brust occasionally accompanied him on our corporate aircraft at no...incremental cost to us" (Sprint). Now, I'm not a pilot but last I checked, additional passengers on a plane do indeed raise the costs of a flight especially when the flights are chartered. But, even if I concede that point, that is still some chutzpah; over 600k worth of personal benefits in one hand while taking 2 cent pens for Sprint's benefit in the other.

Of course, one could make the argument that, while maybe not ideal behavior, there is nothing wrong with it. Nothing wrong with it from a moral standpoint. Of course, you could also argue that strangling a hooker is really a form of community service. And, actually, I contend that it is as hookers are not really people but soulless devils spawned from hell. But, umm, where was I? Oh, some may say my characterization of Mr. Brust as a hypocrite is unjust and unfair. And that's why I will now debate myself on the topic in my Point vs. Other Point segment.

• Point: "Mr. Brust fairly and honestly negotiated that perk into his benefits. Sprint came to him on hands and knees begging for his help. His expertise avoided a financial calamity. Without this perk, maybe Sprint does not get Mr. Brust and everyone is worse off for it."
• Other Point: "I think Sprint did more than beg while they were on their knees asking for his help. But, to your point, maybe they did avoid financial ruin by hiring Mr. Brust. Maybe it was a brilliant strategic move by leadership and the Board. Yet something still doesn't quite seem right to me.."
• Point: "And what's that? That you cannot give credit to the Board for approving such an outstanding hiring?"
  
• Other Point: "No, the fact that such a move was even necessary in the first place. When all is said and done, Sprint paid out tens of millions to the previous CFO's, Paul Saleh and William Arendt. Why would Sprint be in such financial dire straits unless they performed particularly poorly? Is it not duplicitous that, a CFO who makes millions of dollars of cutbacks, is okay with spending 600k of Sprint's money for personal, non-business use flights? Bob, if you are going to ask people to make financial sacrifices then you, as the financial leader of the company, should also make sacrifices. In doing so, maybe you actually have a chance not only at good PR - which is priceless right now - but to also inspire the down-trodden masses that work at Sprint. In the long run, the gain from such a move would greatly outweigh any short-term pain you may experience. That is the essence of true leadership."

The best part of that segment is, much like Bob Brust, I win no matter what happens.

A few days ago, when I touched upon Sprint's payments to former Executives, I promised to look at how the objectives of compensation and retention do not necessarily match the results. And I almost always sometimes keep my promises. So let's take a look, shall we?

One factor in compensation, eloquently titled "Retention Programs," is listed in the 2009 proxy. Here's the money quote (not to be confused with money shot; I hear that's slightly different...) from page 38: (bold is my emphasis)

The Compensation Committee periodically evaluates whether we are at risk of losing the services of any of our named executive officers and other key personnel who we believe are critical to the success of our business. To ensure that we retain the employment of our named executive officers and other key personnel who we believe may be at particular risk of voluntarily terminating employment, the Compensation Committee from time to time awards cash bonuses, RSUs or stock options to further our retention objectives and promote a commonality of interests with shareholders.

So, the goal of the retention program is to provide some type of bonus to "named executive officers and other key personnel who we believe may be at particular risk of voluntarily terminating employment" because, doing so, promotes "a commonality of interests with shareholders." Beautiful! Well stated too, I might add. These people are key personnel in the company, they are in high demand, they have amazing skills that cause other companies to viciously seek out their services, and losing them would just be disastrous to the shareholders. That makes perfect sense to me. Yet, let's keep reading (again, page 38 and bolding is mine):

During 2008, the Compensation Committee awarded Mr. Arendt 20,824 RSUs that were scheduled to vest on June 9, 2009. This award vested upon Mr. Arendt’s involuntary termination without cause on November 14, 2008 and is included in the Grants of Plan-Based Awards table. During 2008, the Compensation Committee also awarded Mr. Kennedy 29,462 RSUs that were scheduled to vest on June 9, 2009. This award vested upon Mr. Kennedy’s involuntary termination without cause on December 19, 2008, and is included in the Grants of Plan-Based Awards table.

Uh huh. So, umm, let me see if I understand this. Mr. Arendt was awarded 20,824 Restrictued Stock Units (essentially shares of stock, in this case) because he was at high-risk for voluntarily leaving Sprint. Yet, during the same year he received those RSUs, he is involuntary terminated. But he still gets to keep his bonus. A bonus in which the sole intent was to keep him from leaving! Not only that but his RSUs vest (i.e. they are convertible to common stock) on the day he was fired! Hahaha! Brilliant! Sprint paid out, if the stock were held through today, roughly a $90,000 bonus ($4.29 share x 20,824 shares) to an executive whom they terminated because they were afraid he voluntarily leave! You know, leave at a cost of $0 to Sprint and Sprint shareholders.

Mr. Kennedy's situation, of course, is no better. He received 29,462 RSUs (that's over $125,000 in today's prices if you're keeping track) as a retention bonus and then was subsequently terminated in December 2008. Tell me again how this lines up to shareholder value?

If I were one of these gentlemen and received such a payment, I'd be happier than Michael Jackson on Boy Scout Day at Disney World. Alas, I am not. So at this point, in order to dull the pain, I need to go take some Zoloft (for my depression), wash it down with some Valium (for my anxiety), and pop some OxyContin (they taste like candy).

As such, here are the official 2008 salaries of the named executives in the title of this post. Their "official" salaries are based on what the options were worth on the day each was involuntarily terminated. As of today, the stock price (of the RSUs that were granted) has gone down in Mr. Angelino's case but up for Mr. Kennedy and Mr. Arendt. As I mentioned in a prior post, if the stock had not tanked then their overall pay would have been significantly higher. That can be viewed in this table. Note, all tables shown come directly from the proxy.

• Mr. Angelino, former President of Sales and Distribution. Terminated on January 25, 2008 - $3,535,498

• Mr. Arendt, former Acting Chief Financial Officer. Terminated on November 14, 2008 - $1,742,366
  

• Mr. Kennedy, former General Counsel and Corporate Secretary. Terminated December 19, 2008 - $2,627,179

Page 63 of Sprint's 2009 proxy filing, under the header of Mr. Saleh, states "On January 25, 2008, we terminated Paul N. Saleh’s, our former Chief Financial Officer, employment without cause. The following table and narrative describe the payments Mr. Saleh is entitled to receive due to his termination." (See table taken directly from the proxy. Click to enlarge)



Is $7,606,225 a fair severance for someone was "terminated without cause" (get used to seeing those words) 25 calendars into 2008? Over $7 million dollars for someone who was with Sprint (Nextel, at that time) since September 2001? I contend that in Sprint's current financial and operational situation that such a payment is, shall we say, more than fair especially considering his compensation was over $6 million a year in both 2006 and 2007 . Of course, my opinion in this matter (or virtually any matter) does not matter. But, I would like to highlight a few things regarded Mr. Saleh's package:

• If not for the change in the stock price in '08 (it went down faster than a Las Vegas call girl...not that I, um, would know), some accounting mumbo-jumbo, and various vesting periods for prior stock awards, his total compensation for the 2008 year would have been $13,645,385 (page 42 of the proxy) .
  
• He received a $250,000 one-time payment on March 15th, 2008 in recognition of his service as interim Chief Executive Officer. This payment came almost two months after he was terminated.
• He can possibly receive a Short Term Incentive (STI) payment through the beginning of 2010. Not a bad deal if you can get it.
• He gets continued participation in the medical and welfare plans for a period of two years

Ultimately, unless you are his accountant, there is no way to find out Mr. Saleh's exact total compensation as his stock awards and options are variable and dependent on Sprint's stock price. His stock options have different vesting periods, probably different strike prices, and he may or may not have sold some or all of them.

Lest you think Sprint did not get anything out of providing this package, au contraire! In exchange for his severance, Mr. Saleh did actually have to meet a couple conditions.

1. He executed a release in favor of Sprint and entered into a lifelong confidentiality agreement (take that, Verizon!).
2. He entered into a "non-competition" and "non-solicitation provisions" for a period of 24 months after his termination.

Whew! Sprint really took it to him during those negotiations. Just so you don't get the wrong idea, I don't begrudge Mr. Saleh for taking what he can get (earned?) from his employer; in fact, I am quite jealous. After all, he's probably laying on a golden beach somewhere sipping Mai Tai's and I'm stuck here blogging about him. Well done, Mr. Saleh, well done.

Among the 56 Sherlock Holmes stories written by Sir Arthur Conan Doyle one in particular, Silver Blaze, has caught my attention. In the story, a prize race horse is stolen in the night and the lack of the dog barking the night the horse was stolen led Holmes to deduce that the culprit was not a stranger but someone that the dog knew and knew well.

How is this relevant to Sprint? Simple. The lack of information regarding Kathy Walker's severance in the latest proxy filing is, by its very absence, quite telling. So, what does it tell us? To me, it says that Sprint is trying to hide her full severance package. Let me explain...

What is a proxy filing (SEC form 14A)?
A proxy statement is a document which is intended to provide security holders (i.e. shareholders) with the information necessary to enable them to vote in an informed manner on matters intended to be acted upon at meetings, whether the traditional annual meeting or a special meeting. Typically, a security holder is also provided with a "proxy" to authorize designated persons to vote his or her securities in the event the holder does not attend the meeting. It also, legally, must contain information about top officers and their compensation. That is why you see information regarding Dan Hesse's, Bob Brust's, and Steve Elfman's compensation, among others.

So, why isn't Kathy Walker included?
As best as I can tell, Ms. Walker, who was Chief Information and Network Officer is more than qualified to be labeled as an Executive Officer. And, in fact, she was labeled as such on Sprint's 2008 proxy filing. So, why the change from 2008 to 2009? At this time, I can't say for absolute certainty why she was not included. But, what can I say is this: Sprint's 2009 proxy filing was filed on March 30, 2009. Ms. Walker's "termination without cause" was announced on January 23rd, 2009. However, her termination was not effective until March 31st.

So, 1 day after the proxy filing was, officially, Ms. Walker's last day worked. Is this not highly coincidental? If she had been terminated on the day of the announcement, would Sprint have been legally required to include her severance package? I'm not a lawyer (but I did stay a Holiday Inn Express once) but I believe (but am not positive) Sprint would've had to have included her severance package.

Oh, and there is one other slightly curious fact. According to SEC filings, about one month before her termination, Ms. Walker agreed into an amended contract with Sprint. You can view the announcement here. Why would the Board change her contract if her she were to possibly be terminated soon? What were the changes to her contract? I haven't been able to find that information.

Either way, the fact that Ms. Walker is missing from the proxy filing is telling by its very omission. We already have the data for 9 current and former Executives in the 2009 filing so why exclude her? Shareholders have the right to review this data and it's time Sprint made it publicly available.

It has been said that "a fish rots from the head" and nowhere is this more evident than at Sprint. That subject, namely the Board of Directors, will be explored fully in another post. Yet one symptom of this failure will be explored now; namely, Sprint's payments to former Executives. You may ask, "how is this a failure? They were paid to do a job and did it just like you and I." Yet, their job, ultimately, was to enhance shareholder value; these former Executives, along with the Board, have decimated shareholder value. To reinforce that failure by providing large payouts upon involuntary termination is ludicrous. But, I am getting slightly ahead of myself. Let's take a look...

What, exactly, makes up Executive Pay?

This information, from page 30 in Sprint’s latest proxy filing, should be quite simple. Please note this does not include any other forms of compensation such as 401k matching, health benefits, etc. There are 3 main components for Executive pay (I quote from the proxy filing where applicable) :

1. Base Salary - fixed pay in the form of cash
2. Short Term Incentive (STI) - based on near-term objectives and paid in cash
3. Long Term Incentive (LTI) – “Non-qualified stock options and time-based RSUs, as well as performance-based RSUs granted under the ENTI.”

Items #1 and #2 really are straight-forward. However, let’s take a closer look at the LTI. The ENTI referenced above stands for “Enhanced Near-Term Incentive“. What does that mean? Let’s have the proxy filing explain:

“To further the focus of senior management on these critical objectives, the Compensation Committee allocated one half of each participant’s 2008 LTIC plan targeted opportunity, which we refer to as the ENTI, to be in the form of dollar denominated performance units, or Performance Units, payable in RSU awards, based on our actual performance in the second, third and fourth quarters of 2008 using the same performance objectives as the second, third and fourth quarter 2008 STIC plan. The 50% portion of each 2008 LTIC plan participant’s targeted objective to be made in the form of Performance Units were equally allocated to each of the second, third and fourth quarters of 2008 under the ENTI.”

In other words, 50% of the long-term incentive plan was shifted into a shorter-term incentive plan (called the ENTI) that was to be payable in Restricted Stock Units. So, what is a RSU? Quite simply, it is a grant of company stock although no stock is issued at that time. After the recipient of a unit satisfies the vesting requirement, the company distributes shares or the cash equivalent of the number of shares used to value the unit.

So, to make this perfectly clear, the ENTI shifted long-term stock options and RSUs into short-term RSUs that vest 6 months after they were granted. These RSUs were granted based on the STI’s objectives at the end of each the 2^nd, 3^rd, and 4^th quarters of 2008. The ENTI was, essentially, a STI on top of the STI but only for Executives.

If the LTI is supposed to be a long-term incentive designed to align executive values with shareholder values, why was part of the LTI changed to the shorter-term ENTI and then implemented? There was already a short term incentive plan!

The rest of the LTI for 2008 (the other 50% of the LTI plan) included stock options that will vest “in equal amounts on February 11, 2009, February 11, 2010 and February 11, 2011 and have an exercise price equal to the closing price of a share of our common stock on the date of the grant.”

Now that that ugliness is out of the way, let’s look at the pay received by some of the illustrious former executives at Sprint.

So, what did they make?

This, like everything else, isn’t quite as simple as it appears. A picture, though, is worth a thousand words.

(click the picture to enlarge)

To be completely fair, this table overstates their pay due to the simple fact that the stock price collapsed and the total value listed in the table was the total value at the time the options and stock were granted. Of course, their decisions directly attributed to this decline in the stock price so it is more than reasonable their pay would also decline. However, by the same token, if the stock price had gone up in 2008, they would’ve made more than that what’s listed in their respective total columns.

Either way, don’t cry too much for them as here is what they took home at the end of December 2008 (based on what their options were worth on the date they were terminated; these figures come directly from Sprint's proxy filing).

• Mr. Saleh, former Chief Financial Officer and interim Chief Executive Officer - $7,606,225
• Mr. Arendt, former Acting Chief Financial Officer - $1,742,366
• Mr. Kennedy, former General Counsel and Corporate Secretary - $2,627,179
• Mr. Angelino, former President of Sales and Distribution - $3,535,498

That is over $15.5 million in severance for 4 people. In the next few days I will detail out their pay and comment on how the stated objectives of Executive Compensation do not match the results. Stay tuned...