(Reuters circulated the following report on January 16.)
NEW YORK — Although top executives are no longer allowed to borrow money from their employers under a new U.S. law, few have made any effort to pay down old loans made before the law took effect, a study released on Friday showed.
Union Pacific Corp., the No. 1 U.S. rail group, tops the list of companies with outstanding debts, with Chief Executive Officer Richard Davidson still indebted to his company for $10.97 million, the Corporate Library report said. A company representative could not immediately be reached for comment.
For the 44 companies that disclosed indebtedness, the average company is still owed $4.7 million by officers. That’s down from the $10.9 million owed to the average company before the Sarbanes-Oxley Act halted such lending.
The Sarbanes-Oxley corporate reform act, introduced after the Enron and WorldCom accounting scandals, prevented companies from providing almost all loans amid concern that some CEOs had been using company coffers as their personal piggy banks.
However, it did not order executives to repay loans taken out before the law took effect 18 months ago.
“One would think companies would try to clean up there loans as soon as possible,” said the study’s author, Corporate Library senior research associate Paul Hodgson. In the past investors have tried numerous times to get companies to halt loans to officers.
Corporate loans came to the fore after it was discovered that WorldCom had lent its former CEO Bernard Ebbers $408 million, contributing to that firm’s eventual bankruptcy.
Most loans had been made so officers could buy company shares, or to supply executives with the cash needed to exercise stock options. Companies encourage senior executives to buy their company’s stock and align executive interests with those of investors.
But when stocks sank, the executives were often left with lower valued shares and a big bill to their employer.
Union Pacific, for example, had $39.7 million in loans outstanding to 62 executives in its stock purchase and loan program, the study said.
Hodgson said paying relocation costs made up the second biggest reason for the loans. A relocation loan could sometimes reach $5 million, he said.
The survey also found that firms lent to employees right up until the Sarbanes-Oxley Act was signed.
Cisco Systems, Sun Microsystems, Electronic, Reebok International and Wyeth all made loans to staff just before the law took affect, the report said.