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FEATURING: DEALS OF THEYEAR; THE 2004 DERIVATIVES LEADERS

JANUARY 2004

TEACHERS’ BET Allison readies his bold lesson plan for TIAA-CREF Plus: BAER MARKET POWER PLAYER Swiss banks are rolling in riches Can Galateri restore Mediobanca’s glow? GROWING PAINS Access doesn’t spell

success for EU states COMCAST CEO BRIAN ROBERTS

Why do John Chambers, AMERICA’S GeorgeDavid, Michael Dell, Richard Kovacevich, Reuben Mark, Henry McKinnell, BEST Lee Raymond, Dennis Reilley and BrianRoberts all click with investors? See inside CEOS for our exclusive rankings COVERBAND STORYTK

INSTITUTIONAL INVESTOR MONTH 2003 HeadTHE univers 55 65/70pt BESTDeck Agaramomd plain 19/21ptsCEOS By lineIN AgaramondA bold 14/21ptMERICA T By Justin Schack Sure, higher earnings and a rising stock price matter most. But in grading CEOs investors also care a lot more than they used to about good governance, as our second annual survey reveals.

ometimes good guys finish first. That’s certainly the case right now with chief executive officers. Investors, having lost billions on En- ron Corp., WorldCom, Adelphia Communications Corp., HealthSouth Corp. and other highfliers that Stanked following executive-suite shenanigans, still demand solid growth. But they also want to be sure that the CEOs they invest with don’t play fast and loose with the rules. That point was driven home dramatically last year at the epicenter of American capitalism: the New York Stock Exchange. The Big Board’s own CEO, Richard Grasso, may not have had his hand in the till like some other corporate malefactors, but he did extend it pretty deep into the exchange’s pockets. Grasso’s nearly $190 million compensation package outraged not only investors but also the CEOs whose companies are listed on the Big Board and who ultimately paid his salary. Grasso’s hypocrisy appeared, moreover, to be as rich as his remuneration: The NYSE had only recently tough- ened its own corporate governance requirements for listed companies. The Big Board boss’s ignominious ouster, which triggered a housecleaning at 11 Wall Street that saw all but two of the exchange’s directors tossed out, was in its way as much a symbol of corporate excess — and investors’ new zero tolerance of it — as the most Lucul- lan of former Tyco International CEO Dennis Kozlowski’s grand bacchanals. “Everybody now believes that there were strong governance risk indicators at the companies that have cratered m Graham hoto credit tk hoto credit over the past 18 months and that they don’t want to be fooled that way again,” says shareholder activist Nell P Ji

INSTITUTIONAL000 INSTITUTIONAL INVESTOR INVESTOR JANUARY 2004 BRIAN ROBERTS Comcast Corp. Age: 44 Year named CEO: 2002* Number of employees: 66,000 2003 stock performance: +39.1 percent Annual compensation: $7.7 million** Stock options: $40.7 million Roberts: “We have nearly all of the family’s wealth in the stock. Shareholder value is the No. 1, ultimate metric that I’ve judged our success by.” One voter: “I think a lot of investors, myself included, had their doubts about Comcast’s acquisition of AT&T Broadband. It was very big and very messy. But he has made it work.”

* Roberts was formally named CEO in 2002 when Comcast created the title. From 1990 until 2002, he was president but performed both functions. ** Includes salary, bonus and other cash and in-kind compensation. BRIAN ROBERTS Comcast Corp.

nlike many CEOs these days, Brian Roberts seems to be enjoying quarter over the year-earlier period. Comcast has halted customer attri- U himself. “I’m having a blast,” reports the mild-mannered head of tion in the AT&T operations and pared its debt load by $5 billion, to Comcast Corp., now the largest cable company in the country. $25 billion, with an additional $2 billion reduction targeted for this year. What gives Roberts, 44, such pleasure is remaking the company his Investors have reason to appreciate all this change: The stock rose 39 father, Ralph, founded four decades ago. The younger Roberts’s biggest percent last year, far outpacing the Standard & Poor’s 500 index. coup: acquiring AT&T Broadband, the cable television and high-speed Like his bow-tied father, now 83 and chairman of Comcast’s execu- Internet business of the struggling long-distance carrier. The $58 billion tive committee, the lanky, buttoned-down Roberts keeps a low profile November 2002 purchase increased Philadelphia-based Comcast’s sub- and emphasizes teamwork. He compares the giant company to “a law scriber total to more than 21 million, giving it enormous influence over tele- firm with a number of partners — I may be the managing partner, but vision programming and the equipment that brings it into American homes. everybody gets a vote.” More than 30 Comcast execs, for example, Roberts gets high marks for integrating the acquisition. Comcast is were privy to the AT&T negotiations and voted on the deal. delivering the efficiencies it promised from the newly acquired AT&T Roberts recently discussed the challenges of being a CEO with systems. Cash flow from operations increased 35 percent in the third Institutional Investor Senior Writer Justin Schack.

Institutional Investor: How hard has it been Shareholder value is the No. 1, ultimate met- new places. If you walk into Circuit City or Best to be a CEO over the past couple of years? ric that I’ve judged our success by. Buy, you see Comcast all over the place — Roberts: With September 11, Sarbanes-Oxley, high-definition TV, high-speed Internet, digital the economy and Enron, certainly everything What qualities do you possess that help you cable, video on demand. We had none of that has changed in corporate America in the past be an effective CEO? three years ago. We are now in 4,500 stores. 24 months. We’re in a new world. In talking I have tried to model myself after some of my with others, I get the sense that many CEOs father’s most successful traits. One of those is Comcast’s governance has been criticized for seem to be less satisfied with their jobs. There fostering a team environment. Comcast is led the family’s voting control, for lack of board are new regulations to comply with, and some by a team of executives, not just one or two in- independence and for your being protected CEOs feel that a lot of executive time gets spent dividuals, and there’s a very collegial style to from being fired under the terms of the AT&T on process and not on managing the business. making decisions. My father is 83 years old deal. How do you defend those policies? I think we’re in a transition period in job defini- and still active as a senior statesman. I’m 44. I think that we’ve done well for all sharehold- tion and job description for boards, stockhold- I’m enthusiastic, energetic. I definitely like be- ers. There are a number of quality companies ers, CEOs and other employees. ing part of the day-to-day action and not just that have multiple voting classes of stock. In being a coach. There are certain projects I take this era it puts more of a premium on having How close are we to regaining investor con- on myself. But over the years my father has an outstanding board and outstanding integri- fidence after all the recent scandals? handed the ball off to other people, including ty. Investors don’t wait for annual meetings. There’s been a perceived and real breach of me, and said, “Run with the ball and let me They vote every day by buying or selling shares. confidence by some in corporate America that coach.” I’m blending what I see as the suc- Structure matters, but I think results, quality has had lasting effects for all. But the market cessful mentoring and coaching skills that he management and stability are what investors in general appears to be recognizing that these has without changing who I am. are looking for today. Also, our family has had are isolated incidents, not necessarily symp- voting control of Comcast since the inception tomatic of a general corporate malaise. And I Is delegating becoming more important now of the company. On three separate occasions think there’s been a tangible reassessment of that the company has become so much larger? 99 percent of institutional investors voted to in- practices in corporate America that has been It’s very hard for any one person to know what’s crease the family’s percentage vote and ulti- healthy. The pendulum needed to swing back, happening with all 75,000 employees. We’ve mately to create a nonvoting class of stock. and it has. If it keeps swinging to the point that had to blend the financial skills that the found- With the AT&T Broadband acquisition, AT&T we stifle innovation, then the swinging needs ing generation brought with new operating ex- asked us to reduce our interest from 86 per- to ease up. I hope that we find the right bal- perience in a number of areas. We recruited cent to 33 percent. We were willing to do that, ance without an overreaction. Steve Burke, our cable president, from ABC and without remuneration, to complete the acquisi- Walt Disney Co. Steve has a tremendous ser- tion. That had never happened in our history. Do you think the pendulum is swinging too far? vice skill set gained from running theme parks Pre-Sarbanes-Oxley, we also agreed to a cor- It’s hard to generalize. For our company, no. and television stations and starting the Disney porate charter provision that the Comcast We’ve always had the majority of our board stores. Our cable marketing head, Dave Wat- board would be majority independent and independent. We’ve always had a fully inde- son, ran our cellular company before we sold it. would include representatives from the AT&T pendent audit committee. A lot of our philoso- Dave Juliano, who headed marketing for our board. And 99 percent of the AT&T and Com- phies are born out of the fact that we have cellular division, became head of high-speed cast shareholders who voted ended up sup- nearly all of the family’s wealth in the stock. Internet. These guys are now taking Comcast to porting the acquisition.

INSTITUTIONAL INVESTOR JANUARY 2004 Minow, chairman of the Corporate Li- — is Comcast Corp.’s Brian Roberts, 44. Above all, Roberts says, his interests are brary, a corporate governance research He, too, has steered his company to great aligned with those of all shareholders be- firm based in Portland, Maine. “People success. Comcast founder Ralph Roberts’s cause the majority of his family’s wealth is recognize that there’s a tie between a fail- son has transformed the 40-year-old com- invested in Comcast stock — and it will re- ure of oversight and a failure of attention pany from just another competitor in the main so for the foreseeable future. Conse- to shareholder value.” crowded cable business to the undisputed quently, he argues, it’s very much in his To find out which chief executives ex- industry leader; it now has 21 million sub- interest to deliver sustained, conservatively cel in these difficult times, Institutional In- scribers and wields immense influence over achieved shareholder value, regardless of vestor asked the people whose money is on both television content and the equipment what structure the company deploys to gov- the line: portfolio managers and securities that delivers it. ern itself. analysts. In all, 1,374 professionals at 405 No less impressive, Roberts has man- “We’ve done well for all shareholders,” investment firms representing about $4.5 aged Comcast’s growth efficiently. His $58 Roberts says emphatically. trillion in equity assets responded, offer- billion acquisition in 2002 of AT&T Perhaps that’s why throughout Com- ing their candidates for the best CEOs in Broadband, the long-distance carrier’s cast’s history an overwhelming majority of America in 2003. Our second annual sur- struggling cable operation, has vastly ex- shareholders have consistently approved vey lists winners in 62 industry sectors. We ceeded investors’ expectations. “Plain and steps giving the Roberts family greater vot- also denoted the leading scorers in nine simple, he’s knocked the cover off the ball ing control than its equity stake. The most broader business groupings. (Profiles of with this deal,” says one dazzled investor in recent change — creating the class-B these CEOs appear on the following our poll. Comcast’s shares surged 39 per- shares that give Roberts one-third voting pages, and a full list of the winners appears cent in 2003. power — actually reduced his family’s on page 43.) Yet Roberts’s success has come despite control below 50 percent for the first time Interviews with the top CEOs reveal governance lapses at Comcast. Corporate in Comcast’s history. that amid all the scandals that have beset watchdogs fault Comcast for having creat- “We have less control today than we companies, good corporate governance is ed so-called supermajority stock to enable did at the outset,” says Roberts. “There are more critical today than ever. The concern Roberts, who personally owns 1 percent a number of quality companies that have is not mere ethical posturing; it directly of the company’s common stock, to exer- multiple voting classes of stock. In this era affects the bottom line. cise an undilutable 33 percent voting it puts more of a premium on having an “Corporate governance is an excellent stake. The CEO has also come under fire outstanding board and outstanding in- indicator of corporate health,” veteran for letting the husband of his cousin serve tegrity. Investors don’t wait for annual Colgate-Palmolive Co. CEO Reuben as a Comcast director. Another black mark meetings. They vote every day by buying Mark said in a recent presentation to his is the arrangement Comcast struck at the or selling shares.” board. time of the AT&T Broadband deal that On a personal note, Roberts confides Still, for all the growing importance of required a supermajority vote by directors that “in talking to others, I get the sense corporate governance, investors and CEOs to oust Roberts or Comcast’s then-chair- that many CEOs seem to be less satisfied remain focused on the bottom line. Strong man (and former AT&T Corp. CEO) C. with their jobs” in the past year or two. performance continues to be what counts Michael Armstrong before 2010. “There are new regulations to comply most in evaluating CEOs. Though institu- GovernanceMetrics International, a with, and some CEOs feel that a lot of ex- tions look at many criteria, growth in earn- New York–based firm that provides gov- ecutive time gets spent on process and not ings and stock price remain of ernance research, awards Comcast just 5.5 on managing the business.” fundamental importance. But investors al- out of 10 points on its governance rating Indeed, many of Roberts’s peers can’t so prize the ability of executives to manage scale; 7 is average for the 1,600 compa- help but express a certain irritation with mergers, communicate with shareholders, nies it covers. Just 18 merit a 10. By con- the ongoing efforts by regulators and leg- take companies in new directions and fos- trast, four of the companies — Colgate, islators to impose good corporate gover- ter teamwork. Exxon Mobil Corp., Pfizer and Praxair — nance on CEOs by fiat, the most notable Investors may admire Mark, 64, for his whose CEOs finished first in the nine of which was the Sarbanes-Oxley market staunch advocacy of good governance — broad business groups in our poll all reform legislation passed by Congress in he notably declined to stand for reelection earned 10s from GMI. Three other “su- late 2002. The law created a new oversight to Citigroup’s board in April, to protest persector” leaders beat the average: Cisco body for the accounting industry and then-CEO Sanford Weill’s apparent lack Systems (8.5), Wells Fargo & Co. (8) and banned personal loans from corporations of a succession plan — but what they real- Dell (7.5). to their executives, among other provi- ly like about Mark is that in two decades Once, a CEO with Roberts’s stellar re- sions. at the helm of Colgate, he has achieved a sults could have shrugged off governance “Sarbanes-Oxley was necessary, a good cumulative return on the company’s stock grievances as easily as crank complaints start,” acknowledges Wells Fargo CEO of more than 2,500 percent. That’s triple at the annual meeting. But it is sympto- Richard Kovacevich, who had the highest the gain of the Standard & Poor’s 500 in- matic of the changing mood — and of score among financial institutions chiefs. dex. Roberts’s sense of obligation to his share- “But to think you can prescribe exactly how This year’s biggest vote-getter among all holders — that he takes pains to defend to accomplish good governance for all busi- CEOs — and, like Mark, a repeat winner his governance record. nesses is an idea that only politicians could

JANUARY 2004 INSTITUTIONAL INVESTOR THE BEST CEOS, Listed here by sector and industry are the 62 executives who scored the highest when we asked portfolio managers and sell-side equity analysts to choose the top-performing CEOs in their domain. Category Name Company Chemicals/Commodity William Stavropoulos Dow Chemical Co. MATERIALS BASIC Chemicals/Specialty Dennis Reilley Praxair Metals & Mining Alain Belda Alcoa Paper & Forest Products Steven Rogel Weyerhaeuser Co. CAPITAL GOODS/

Aerospace & Defense Electronics George David United Technologies Corp. INDUSTRIALS Airfreight & Surface Transportation Michael Eskew United Parcel Service Business & Professional Services Jeffrey Joerres Manpower Electrical Equipment & Multi-Industry H. Lawrence Culp Jr. Danaher Corp. Environmental Services A. Maurice Myers Waste Management Machinery W. James Farrell Illinois Tool Works Packaging Richard Wambold Pactiv Corp.

Airlines James Parker Southwest Airlines Apparel, Footwear & Textiles Paul Charron Liz Claiborne Autos & Auto Parts John Barth Johnson Controls Beverages Steven Reinemund PepsiCo Cosmetics, Household & Personal Care Products Reuben Mark Colgate-Palmolive Co. Food Carlos Gutierrez Kellogg Co. CONSUMER by sector and industry Gaming & Lodging Gary Loveman Harrah’s Entertainment Homebuilders & Building Products Stuart Miller Lennar Corp. Leisure Micky Arison Carnival Corp. Restaurants Orin Smith Starbucks Corp. Retailing/Department Stores & Broadlines H. Lee Scott Jr. Wal-Mart Stores Retailing/Food & Drug Chains David Bernauer Walgreen Co. Retailing/Hardlines Robert Tillman Lowe’s Cos. Retailing/Specialty Stores Lewis Frankfort Coach Tobacco Louis Camilleri Altria Group

Electric Utilities J. Wayne Leonard Entergy Corp. ENERGY Integrated Oil Lee Raymond Exxon Mobil Corp. Natural Gas Murry Gerber Equitable Resources Oil & Gas Exploration & Production G. Steven Farris Apache Corp. Oil Services & Equipment James Day Noble Corp.

Banks/Large-Cap Richard Kovacevich Wells Fargo & Co. INSTITUTIONS

Banks/Midcap John Kanas North Fork Bancorp FINANCIAL Brokers & Asset Managers Richard Fuld Jr. Lehman Brothers Holdings Insurance/Life Daniel Amos Aflac Insurance/Nonlife Maurice Greenberg American International Group Mortgage Finance Franklin Raines Fannie Mae REITs Edward Linde Boston Properties Specialty Finance Kenneth Chenault American Express Co.

Biotechnology Kevin Sharer Amgen HEALTH CARE Health Care Facilities Jack Bovender Jr. HCA Health Care Technology & Distribution Robert Walter Cardinal Health Managed Care William McGuire UnitedHealth Group Medical Supplies & Devices Arthur Collins Jr. Medtronic Pharmaceuticals/Major Henry McKinnell Pfizer Pharmaceuticals/Specialty David Pyott Allergan

Cable & Satellite Brian Roberts Comcast Corp. MEDIA Entertainment Sumner Redstone Viacom Publishing & Advertising Agencies Douglas McCorkindale Gannett Co. Radio & TV Broadcasting L. Lowry Mays Clear Channel Communications

Computer Services & IT Consulting Charles Fote First Data Corp. Electronics Manufacturing Services Timothy Main Jabil Circuit TECHNOLOGY Imaging Technology Paul Curlander Lexmark International Internet Margaret Whitman Ebay IT Hardware Michael Dell Dell Semiconductor Capital Equipment Richard Hill Novellus Systems Semiconductors Craig Barrett Intel Corp. Software Steven Ballmer Microsoft Corp. MUNICATIONS

Data Networking & Wireline Equipment John Chambers Cisco Systems TELECOM- Telecom Equipment/Wireless Irwin Jacobs Qualcomm Telecom Services/Wireless Timothy Donahue Nextel Communications Telecom Services/Wireline Ivan Seidenberg Verizon Communications

INSTITUTIONAL INVESTOR JANUARY 2004 think of. They devoted a lot of time to the says McKinnell. Pfizer has surpassed ex- shouldn’t take hours of questioning on letter of the law that could better have been pectations for revenue growth as well as their part.” spent on the spirit.” for cost savings. For CEOs of every sort of company, The banker, who is a member of the It’s no coincidence that many of our top fostering a culture of cooperation and a audit committees of Cargill’s and Target CEOs had banner years. Repeat winner sense of ownership among workers is criti- Corp.’s boards, says that he becomes “frus- John Chambers of Cisco Systems played a cal. As Exxon Mobil’s Raymond, who trated spending so much time on things big part in an 85 percent run-up in his heads an organization of 92,500 employ- that have more to do with form than sub- company’s shares in 2003 by leading a shift ees, points out: “In a company this size, it’s stance.” Just the same, he philosophically in strategy. United Technologies Corp. through the people around you that you says of the push for governance rules, “If chief George David, another repeater, can get things done.” this is what it takes to restore confidence say that he gave shareholders a 53 percent Lehman Brothers Holdings CEO in the marketplace, we have to deal with return. Wells’s Kovacevich posted a 26 per- Richard Fuld Jr., who was voted tops in it.” cent gain in 2003, but what’s more impres- the Brokers & Asset Managers sector, Praxair’s Dennis Reilley, No. 1 among sive is that the bank has produced a 20 notes that more than 30 percent of the CEOs of Basic Materials companies, esti- percent average annual return over the past firm’s shares are owned by its employees mates that only “about 20 percent of the ten years. — from security guards to securities Sarbanes-Oxley bill represents valuable re- A few top executives, like McKinnell, traders. “My employees think, act and be- form.” The other 80 percent, he says, “is aw- scored points for engineering transforma- have like owners,” the Lehman CEO says. fully bureaucratic and probably a case of tional mergers. One was Exxon Mobil’s “And it’s not just that you may own the regulators wanting the public to think Lee Raymond, who has combined two stock. It’s that the guy next to you also they’re doing more good than they are.” former rivals into one of the world’s most owns the stock, and he’s not about to let CEOs would plainly prefer to police profitable companies. you jump out of line, because that’s going their own precincts. As co-chair of the Investors also applauded CEOs who to hurt him.” Business Roundtable’s corporate gover- were able to change strategic direction to Good corporate governance, says Fuld, nance committee, Pfizer CEO Henry exploit opportunities or stem stagnation. must permeate the organization. “If you (Hank) McKinnell, the winner in the Repeat winner Michael Dell, for example, don’t get it right at the top, you don’t get it Pharmaceuticals category, helped draft a moved briskly into network servers, stor- right at all,” he contends. “You can have all voluntary code of governance best prac- age devices and printers when growth the regulators and all the board members tices. The CEO club recommends, slowed in Dell’s core PC business. Under and all the documentation, but that’s not among other things, that directors Chambers’s direction, Cisco redrew its bat- going to stop the bad guys. But I do believe “maintain an attitude of constructive tle plan. The bursting of the tech stock that this focus today has got more people say- skepticism” toward management and en- bubble wiped out many customers even as ing, ‘When in doubt, do what’s right.’” i sure that a company’s financial state- economic woes caused tech spending to ments are accurate and understandable. fall. Chambers shifted Cisco into produc- The 61-year-old McKinnell, who has tion of equipment for bigger, more stable PICKING THE TOP CEOS spent the past 33 years at Pfizer, runs a com- telecommunications carriers that use In- pany that has long taken good corporate ternet technology to transmit phone calls nstitutional Investor’s top CEOs were se- governance seriously. Pfizer’s compensation along with video and data. lected based on the responses of re- committee contained a majority of inde- Chambers also draws praise for being I search analysts and portfolio managers at pendent directors many years before that willing to deliver bad news. “It is now more more than 400 money management firms was mandated by Sarbanes-Oxley. To pre- important than ever to effectively commu- vent conflicts of interest, the company has nicate with shareholders, customers, part- to the following question: Who do you re- for two decades barred its auditing firm ners and employees,” he says, noting that gard as the best CEO in the sector (or sec- from performing consulting work for Pfizer. recent corporate blowups have put a pre- tors) for which you’re responsible? We Enron had no such policy. mium on candor. asked the same question of every broker- Yet McKinnell, in a pattern found Investors say that Exxon Mobil’s Ray- age firm analyst who received votes in the throughout our CEO rankings, is esteemed mond also deals forthrightly with them. magazine’s annual All-America Research by investors for much more than his stands They cite the company’s annual analyst Team rankings. The voting wrapped up in on governance. Since becoming CEO three day: Raymond and other executives travel late September 2003. years ago, McKinnell has conducted his from company headquarters in Irving, Respondents were asked to name own industry consolidation, getting Rolaids Texas, to the NYSE to face the Street on their first, second and third choices for maker Pfizer to digest first Warner-Lam- its own turf. The session stands out, voters best CEO; the responses were weighted bert and then Pharmacia Corp. He has say, for its blunt give-and-take. transformed Pfizer from a global also-ran Praxair’s Reilley proffers this definition to produce a score for each candidate. We into a long-term contender with three of of a good session with shareholders: “We named a top CEO in each of the 62 indus- the world’s ten top-selling drugs. point out what’s good and bad about our try sectors that we survey for the All- “We’ve undergone more change in the business and financial situation. It’s our America Research Team. past three years than in our previous 150,” job to make it obvious for investors. It

Reprinted with permission from the January 2004 issue of Institutional Investor Magazine. Copyright 2004 by Institutional Investor Magazine. All rights reserved. For more information call (212) 224-3800.