Saturday, December 09, 2006

... and Speaking of Absurd Compensation....

Sam Antar, former chief financial officer of Crazy Eddie and a convicted fraudster, brings a keen eye to the always fascinating issue of executive wrongdoing and boardroom ineptitude.

Posting on Herb Greenberg's blog, he has been making perceptive observations on the famously passive board of directors of and its chef executive/conspiracy theorist/journalist-taunter/short-and-analyst-suer/"miscreant"-blamer/Worst CEO-wannabe Patrick Byrne.

In one comment the other day he analyzed Byrne's mastery of the "art of spinning":

1) Always make excuses as long as you can.
2) When you cannot defend your actions attack the messenger (such as financial analysts and short sellers)
3) Distract inquiry from your issues by pointing to tangential issues (attack the naked short sellers rather than discuss your business issues)
4) Show your credibility by pointing to good things you have done or ideas you have in unrelated areas (such as solutions for public schools in Colorado)
5) When you can no longer spin and are exhausted you shut up and offer no guidance to investors

Yesterday, Antar has made some worthwhile observations about the Overstock board of directors.

Byrne likes to portray his company as a victim of a monstrous short-sellers, and has been touring penny stock websites spinning nutty "stock counterfeiting" conspiracy theories. But the real problem (apart from Byrne, of course) seems to lie in the Overstock boardroom.

After expressing admiration -- "as a former criminal in a way I have to admire the way he stays around despite some his outrageous actions. He still gets people to drink the Kool Aid!" -- Antar turned to the Audit Committee of the Overstock board.

Antar observes that "there is a difference between legal and illegal. The really fuzzier area is actions that are legal but may be or may not be unethical. He seems to keep his actions just within legal bounds but in the area of legal/unethical."

Antar notes that Overstock board's Audit Committee members -- Ray Groves, John A. Fisher, Gordon S. Macklin and Allison H. Abraham -- each gets stock options from the company and one has 300,000 shares.

Antar continued:
How can these Audit Committee members (in substance) be independent and have the necessary professional skepticism and objectivity to fulfill their responsibilities as stated above if they have stock options? The auditors cannot own such stock and the so-called independent Audit Committee members who own stock are watching the auditors?

Audit Committee Members who own stock, receive stock options, and any earnings based compensation (in the company Board they serve on) simply cannot in substance be independent.

A valid point, I think. Antar continued:

With the exception of Mr. Groves the others have very nice looking educational backgrounds and resumes but in my opinion are not specifically suited to be effective audit committee members. I do not believe that a degree in economics is the proper educational background for such members. Macklin, Abraham, and Fisher would not give me any fear if I were a criminal today.

I'm not sure that even an independent audit committee would make much of a difference. As I pointed out in Wall Street Versus America, most of the late-trading mutual funds had boards with large majorities of independent directors.

In the months ahead, unless Overstock can reverse its march into oblivion, I am sure that the Overstock board of directors will be an object of much scrutiny.

© 2006 Gary Weiss. All rights reserved.


Wall Street Versus America was published by Penguin USA on April 6.
Click here for its listing and here for more information on the book, from my web site.

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