WASHINGTON, D.C. — Treasury secretary nominee John W. Snow said yesterday that he will not accept a severance package he negotiated last year at his company, CSX Corp., potentially worth millions of dollars, the Washington Post reported.
Snow will forgo pay and benefits worth $15 million that could have been awarded by the company’s board, according to a CSX source. Snow, who is chairman and chief executive, will still receive $5 million to $7 million toward the purchase of a life insurance policy because that “was previously earned,” the source said.
Snow’s decision reflects sharply changing notions of what is appropriate in the boardroom since a wave of corporate scandals put a spotlight on alleged excesses in executive pay and weaknesses in corporate governance.
This year, Snow has emerged as a leading spokesman for reform of boardroom practices. Under his leadership, however, CSX has followed some of the very practices inspiring calls for reform.
No one is alleging that CSX, a major railroad company, cooked its books. But aspects of its corporate governance in recent years show how once-common practices are now the subject of concern.
While running CSX, Snow served on five other boards, something some critics said left him stretched thin. As director of a major bank, he helped set compensation for one of CSX’s outside directors. CSX lent executives millions of dollars to buy stock and then forgave the loans when the stock plummeted. The company also rejected a nonbinding policy resolution approved this year by a majority of shareholders.
For example, while Hugh L. McColl Jr., then chief executive of NationsBank Corp., served on the board of CSX in the 1990s, Snow served on the board of NationsBank and was a member of the compensation committee that helped set McColl’s pay, according to CSX reports filed with the Securities and Exchange Commission. McColl resigned from the CSX board in 1998.
While another senior executive of CSX served on the board of Barnett Banks Inc., the chief executive of Barnett Banks served on the CSX board and was a member of the committee that helped set compensation for CSX executives.
Both NationsBank, which became Bank of America Corp., and Barnett Banks did business with CSX. For example, NationsBank helped arrange $4.8 billion in credit for CSX, and NationsBank provided $250 million of it. For the bank, CSX represented a source of revenue and risk.
“We’ve always viewed our corporate governance practices as responsible,” CSX Vice President Robert W. Shinn said yesterday. This year, against a backdrop of scandals and new corporate accountability legislation, “we put renewed focus on implementing an even higher standard of governance practices,” Shinn said. CSX’s outside directors meet regularly without company executives present, he added.
“CSX through the leadership of John Snow has initiated a number of practices that have led us to the cutting edge of good corporate-governance actions,” Shinn said.
Republicans and Democrats on the Senate Finance Committee, which holds Snow’s confirmation hearing, promised yesterday to thoroughly air corporate-governance issues surrounding CSX.
A spokesman for the incoming chairman of the committee, Sen. Charles E. Grassley (R-Iowa), said corporate governance at CSX “will be thoroughly explored.” Jeff Forbes, the incoming Democratic staff director on the committee, said: “These are things we take very seriously. We’re going to give him a fair hearing, but we are not a rubber stamp.”
Charles M. Elson, director of the University of Delaware’s Center for Corporate Governance, said that when company executives serve on each other’s boards “it reduces the effect of oversight.”
“It’s like, if you’re light on me, I’ll be light on you,” he said. But “it is not fair to attack Snow,” Elson said, because there hasn’t been a lot of opposition to such interlocking directorships.
Directors of public companies are supposed to serve as overseers of management. Yet in several high-profile scandals of the past year that have cost investors billions of dollars, directors were shown to have been ineffective, either because of their personal closeness to executives or because they were simply inattentive. Several members of the CSX board juggle commitments to multiple companies. Snow serves on the board of five other companies and a number of nonprofits.
Similarly, one of CSX’s outside directors, Richmond physician Frank S. Royal, practices medicine and, according to CSX’s annual proxy report issued early this year, served on four other company boards. At CSX, Royal served on the compensation committee and chaired the audit committee, which is responsible for overseeing the company’s accounting practices and the work of the outside auditors.
CSX’s Shinn said Royal is “very effective” and shows “no lack of attention to board matters.” A committee of the board “has determined that all of the board members are performing in an effective manner,” Shinn said.
Lynn A. Stout, a law professor at the University of California at Los Angeles, said individuals typically serve on one or two boards. But she said it is “by no means unusual” for someone to serve on five, as Snow did. “It’s very often reflective of the fact that they have desirable expertise,” she said.
“Before Enron, the culture tolerated this quite easily,” Stout said. “That culture has only recently started to change.” But Ann Yerger, director of research for the Council of Institutional Investors, said Snow didn’t practice the kind of good corporate governance at CSX that he seemed to preach in public. Snow leads a Business Roundtable panel on corporate ethics formed this year.
“There’s no way someone who is [a] meaningful CEO can serve on five boards,” she said. “That is hopefully a sign of days gone by.”
One of CSX’s long-standing directors, Robert L. Burrus, is chairman of McGuire Woods LLP, a law firm “that regularly provides legal services to the Company,” according to CSX’s proxy reports. The fees CSX pays McGuire Woods represent less than 5 percent of the law firm’s revenue, Shinn said.
Meanwhile, Snow received millions of dollars in compensation while the performance of CSX stock lagged behind the Dow Jones Transportation Average, an index of transportation stocks.
According to CSX’s latest proxy report, $100 invested in CSX in December 1996 would have fallen to $96 at the end of 2001. Over the same period, $100 invested in the Dow Jones Transportation Average would have risen in value to $126. According to a recent report by the Corporate Library, a public interest group that monitors boardroom issues, Snow’s compensation ranked third in the group’s study of 37 transportation companies.
In the mid-1990s, CSX lent executives millions of dollars to buy company stock. If the shares climbed in value, the executives stood to profit.
Instead the stock plunged, and CSX forgave the loans. As of late 1996, when the program was last renewed, CSX had lent Snow $24.5 million toward the purchase of stock valued at $32.3 million.
CSX’s Shinn said the company’s performance was excellent in earlier years but lagged after it undertook a major merger. “Because of the complicated nature of railroad mergers, the benefits often take several years to be realized,” he said.
At CSX’s annual meeting this year, shareholders approved a resolution calling on the board to give shareholders more say over defenses the company could use to fend off takeovers. The resolution said shareholders should be allowed to vote on any “poison pill” defenses because they can “insulate management at the expense of shareholders.” The vote was nonbinding, and the CSX board chose to reject the shareholders’ advice.