Boardroom 'Swamp' Tires Tenet Holders - TheStreet

Boardroom 'Swamp' Tires Tenet Holders

Some investors think the board's performance doesn't measure up to its lavish pay and perks.
Author:
Publish date:

Not long ago,

Tenet

(THC) - Get Report

shareholders re-elected a director who resembles the very CEO they had just cast aside with such glee.

Despite warnings from a vocal group of dissidents, institutional investors last summer elected Van Honeycutt to another three-year term on Tenet's board. Honeycutt -- viewed by some as an "imperial CEO" in his own right -- won the lucrative seat despite serving on three important board committees accused of failing shareholders miserably.

Best known as the top gun at

Computer Sciences

(CSC)

, Honeycutt pulls extra duty as a member of Tenet's audit, compensation and corporate governance committees. He joined Tenet's board the same year the company adopted an unsustainable growth strategy that relied on aggressive Medicare billings that were never questioned, or apparently even detected, by the company's audit committee.

He also serves on the compensation committee that voted to grant ousted CEO Jeffrey Barbakow millions of stock options -- cashed in with impeccable timing for $111 million -- as well as rocketing bonuses and a multimillion-dollar golden parachute. In addition, he works for the very corporate governance committee that's designed to protect shareholders from executive abuses.

Even so, Honeycutt and another "holdover" director -- ethics committee chairman Lawrence Biondi -- won their re-election bids during a contentious shareholder meeting last July. Both incumbents prevailed despite warnings from the same Tenet Shareholder Committee that predicted imminent disaster in a failed proxy fight a few years back.

"Why should two board members who ... failed to react when we pointed out the problems three years ago now be continued for another term?" challenged M. Lee Pearce, the Florida physician who chairs the shareholder committee. "Tenet desperately needs a majority of strong, independent board members to lead this company out of the swamp -- not holdover directors who, at a minimum, were present during the creation of the swamp."

Neither Tenet nor Honeycutt returned phone messages left Friday morning. Tenet shares slipped 7 cents on Friday to end the week at $15.03.

Green Christmas

Honeycutt officially joined Tenet's board during the Christmas season of 1999. The position, offering a nice retainer and even nicer stock options, turned into quite a holiday bonus. Last year alone, Honeycutt picked up more than $450,000 in director fees and option transactions for his service on Tenet's board.

But his board seat seems like a mere stocking stuffer when compared to his lucrative job as CEO of Computer Sciences.

By now, Honeycutt has spent more than a quarter of a century at the outsourcing empire he currently leads. In 1975, he joined the company as a 30-year-old regional marketing manager. Less than a decade later, he was a division president on his way to becoming a full-blown corporate officer and the company's first-ever president and operating chief.

To some insiders, Honeycutt's rise to the top is almost legendary.

"He was openly ambitious," former Computer Sciences executive Melvyn Bergstein told

Newsday

in 1998. "He wanted to be at the top, and he was pretty energetic about clearing away the competition."

Still, Honeycutt had to patiently wait for William Hoover to retire before he could fully claim the throne. Hoover, who became CEO three years before Honeycutt joined the company, finally stepped down in 1995. Honeycutt moved in as his obvious successor.

Then -- just three short years later -- an aggressive software giant tried to steal Honeycutt's empire in the biggest hostile takeover the industry had ever seen.

Computer Associates

(CA) - Get Report

, then known for buying much smaller companies so it could jack up charges to their customers, first came along with a "friendly" bid for Computer Sciences in early 1998. CA, desperate for top-notch outsourcing talent during a severe shortage at the time, insisted the buyout would create a "world-class information technology solutions provider with unparalleled depth in both software and services." In typical fashion, CA offered a nice premium -- which it later sweetened -- in an effort to seal the deal.

But Computer Sciences never budged. The company insisted the combination would be a bad one, since its customers valued independent consultants with no ties to certain platforms, and rejected the offer within days.

"It is widely recognized that CSC and CA have dramatically different cultures, and it is clear that many of the very assets you are trying to buy -- our people -- will decline to join your company," Computer Sciences announced. "We respectfully suggest that you withdraw your offer immediately and move on."

To be fair, many analysts agreed that the two companies would probably clash. But at least one, who spoke out as the deal turned hostile, felt otherwise.

"CA's offer is overgenerous," UBS analyst Moshe Katri told the

Sunday Times

. "It makes a lot of sense for investors. ... I don't think

Computer Sciences management is exercising its fiduciary duty to its shareholders by rejecting this offer."

Just weeks later, with the fight growing nastier, CA backed down and let its offer expire. That bid, totaling $9.8 billion at its peak, is 20% higher than Computer Sciences' market value today.

Staying Power

Five years later, Honeycutt is still surrounded by many of the same directors who voted -- in a unanimous decision -- to fight CA off at all costs.

Two are company insiders. Hoover, who preceded Honeycutt as chairman and CEO, continues to sit on the board at the age of 73. And CFO Leon Level -- a critical player in the fight against CA -- commands a seat at the boardroom table as well.

Members of Computer Sciences' generous compensation committee have also stuck around. Irving Bailey, the former CEO of

Providian

(PVN)

, has spent more than a decade on the Computer Sciences board. So has James Mellor, who joined the board just a year after his own firm --

General Dynamics

(GD) - Get Report

-- granted Computer Sciences a big contract. The final committee member, William Rutledge, came along a year before the CA battle took place.

The committee chairman, in particular, knows how good it feels to be on the receiving end of boardroom generosity. As a top executive of General Dynamics, Mellor regularly cashed in options -- sometimes clearing millions -- that were granted to boost his salary. In 1998, his final year at the helm, he walked away with $11.1 million, most of it from stock gains. Mellor has since gone on to become chairman of

Usec

(USU)

, a former government-owned uranium agency that has floundered under his leadership. In addition to collecting $65,000 in director's fees, Mellor picks up an extra $300,000 annually for serving as a consultant to the struggling uranium company.

Usec employees, who are also shareholders of the company, have loudly complained.

"Numerous problems and rising debt plague the company," striking workers said in a press release earlier this year. Meanwhile, "top officers have rewarded themselves with hefty stock options and bonuses while ignoring the plight of workers."

Rutledge, a fellow member of the Computer Sciences compensation committee, governs an embattled company as well. He is a director at

AmerisourceBergen

(ABC) - Get Report

, a major drug wholesaler facing a federal probe for possibly violating the law by reselling medications. Rutledge got rich, however, as the chairman of Teledyne following the company's 1996 merger with Allegheny Ludlum.

Less than a year after the merger, Rutledge abruptly resigned as president of the combined company because he didn't want to relocate from California, where his family still lived, to the new hometown headquarters of Pittsburgh. For his final two months on the job, he collected $20.4 million -- most of it from options transactions and severance pay -- as his replacement went on to earn about a tenth that for the remainder of the year.

Rutledge joined the Computer Sciences board shortly after resigning from that executive post.

Two-Way Generosity

To be sure, a board seat at Computer Sciences certainly pays.

For their service to the company, directors pick up an annual retainer of $55,000 -- plus $2,000 for every meeting -- and $75,000 worth of stock options. But they give as well as they receive. Although they raised Honeycutt's salary just 2.5% to $1.2 million last year, they nearly doubled his pay by awarding him 400,000 stock options valued at $1.89 million.

They were even more generous the previous year. Because the company's stock had plummeted, they lowered the strike price on 2.35 million stock options -- or 17% of those outstanding -- from at least $70 a share to $46.90 a share. They breezily justified the now-taboo practice in the company's latest proxy.

"The compensation committee believed that this exchange program was necessary in order to retain and motivate the employees holding these options," the 2002 filing states.

As further insurance, the board voted to extend Honeycutt's contract all the way to 2010. It had, by then, also approved the purchase of a luxury Gulfstream jet -- flown by the likes of Arnold Schwarzenegger and Tiger Woods -- that retails for an estimated $40 million.

Meanwhile, Honeycutt has been a consistent seller of both Computer Sciences and Tenet shares. In the last two years alone, he has cleared more than $3.5 million on Computer Sciences stock and -- after nearly three decades at the company -- owns fewer than 7,000 shares outright.

But his stake in Tenet, beyond a few thousand shares credited to him by the company, is actually nonexistent.

"As a Tenet board member since 1999, Honeycutt has never purchased a single share of Tenet stock," one Honeycutt critic stated. "Perhaps he is frugal beyond belief, but I see a pattern of someone who is not willing to be accountable for his decisions."