C M Y K ID NAME: NNNE,2004-12-12,BU,001,Bs-4C,E1 YELO MAG CYAN BLK 3 7 15 25 50 75 85 93 97

Sunday, December 12, 2004

NNE

GRETCHEN MORGENSON Are Options The Pinochet Seducing Money Trail Directors, Too? A Dictator’s RYING to extricate company directors from their chief executives’ pockets has been at T the heart of many changes in corporate gov- Mysterious Cash ernance during these dizzying scandal years. In- deed, the most commonly cited cure-all for what ails corporate America is director independence. At Riggs Bank But all the independent directors in the world cannot seem to fix perhaps the biggest problem facing shareholders: egregiously high and ever-ris- By TIMOTHY L. O’BRIEN ing executive pay. Even though members of com- and LARRY ROHTER panies’ compensation committees now must be in- dependent, executive pay just keeps on rocketing. A new study by academics at Baruch College, , Chile part of the City University of New York, offers a EN. MANUEL CONTRERAS is a reli- possible explanation of why this may be. You may gious man. A bas-relief of the Last not be shocked to learn that — once again — it’s G Supper hangs on his dining room about money. wall, not far from a thick, leather-bound Bi- Donal Byard and Ying Li, both assistant profes- ble that rests on a table. As the former head sors of accountancy at Baruch, analyzed stock op- of Gen. ’s secret police in tion grants given to chief executives at United Chile, General Contreras is also a contro- States companies from versial man. A large silver plate, given to 1992 to 2002. The sample him by ’s intelligence services, was large — almost 18,000 sits on a shelf, a few feet from the Bible. Some outside grants — and the study The inscription on the plate reads June confirmed other academic 1976, the same month and year that General directors are research showing that op- Contreras and other South American intelli- tions are very often grant- gence chiefs, according to declassified Unit- compensated ed to executives just be- ed States intelligence documents, autho- entirely in fore good news about the rized assassinations of exiled political dissi- company is disclosed or di- dents in a wide-ranging conspiracy known stock options. rectly after bad news. No as . Although General Con- companies were identified treras denied the existence of such a plan in in the study. a recent interview in his hillside home here, The study also found the plot has been amply documented in the that the practice of bestowing well-timed option United States intelligence records. grants — which the professors called “timing op- General Contreras’s past banking activi- portunism” — has become more prevalent in re- ties have been documented, too. According cent years. Puzzled by this, the professors said they to a declassified 1979 State Department decided to dig further. So they looked at how direc- memo, he opened a “secret bank account” at tors were paid and found that timing opportunism Riggs Bank in Washington in 1966, when he was more pronounced when directors on the com- was a young soldier based in the United pensation committee received a larger proportion States. The State Department report noted of stock options in their pay package. that General Contreras’s balance at Riggs As a result, the professors said, a heavier reli- was as high as $26,000 in the mid-1970’s. In ance on stock options in the pay of independent di- the interview, he said he was sure he never rectors more effectively aligns their interests not kept more than $1,000 at Riggs and that it with the shareholders to whom they have a duty, was common for members of the Chilean but with top management. army who were based in the United States to “Since outside directors frequently receive op- have personal accounts at the bank. tions at the same time as C.E.O.s,” the study noted, But General Contreras was less certain “these directors also benefit from any timing op- about funds Riggs held for his former boss, portunism. We argue that when outside directors General Pinochet, whose accounts are receive a lower proportion of their compensation among those at the center of a sweeping from stock options, they are more likely to limit money-laundering investigation of the bank. C.E.O.s’ timing opportunism.” The sums involved — as much as $8 million, The trouble, at least from a shareholder’s per- according to an assessment by the United spective, is that stock options are growing as a per- States Senate — have left even General Pi- centage of the compensation that outside directors nochet’s staunchest allies wondering about receive for serving on a board. During the first half their origin. of the study’s 10 years, for example, the professors “The problem with Pinochet is that he got found that option grants averaged 16 percent of di- quite a lot,’’ General Contreras said. Army rectors’ pay. During the second half of the period, wages were very low, he said, even for Continued on Page 4 someone as senior as General Pinochet. Does he believe that the general accumu- lated his riches fairly? “I don’t know,” said General Contreras, shaking his head. “I don’t know.” As Chile’s strongman from 1973, when he INSIDE overthrew , an elected ci- vilian president, to 1990, General Pinochet presided over a purge of political opponents and the creation of a police state. But he also laid the foundations for what has become Latin America’s most stable and promising Linda Spillers for (left); Santiago Llanquin/Associated Press Illustration by The New York Times Continued on Page 12

How Consultants Can Retire on Your Pension

OPENERS Only the ant elite need apply. The Goods, by Brendan I. Koerner. 2 S.E.C. Turns a Spotlight on an Industry Rife With Conflicts

NEWS AND ANALYSIS By GRETCHEN MORGENSON Did for-profit colleges learn their and MARY WILLIAMS WALSH lesson? By Eryn Brown. 5 INE years ago, William Keith Phillips, a top stockbroker at Paine Webber, met with the trus- The overly sunny math of N tees of the Chattanooga Pension Fund in Tennes- see to pitch his services as a consultant. He gave them privatized Social Security. an intriguing, if unusual, choice. They could pay for his investment advice directly, as pension funds often do, or Economic View, by Edmund L. they could save money by agreeing to allocate a portion of its trading commissions to cover his fees. Under a Andrews. 6 commission arrangement, Mr. Phillips told the trustees, the fund would be less likely to incur out-of-pocket ex- penses, leaving more money to invest for its 1,600 bene- SUNDAY MONEY ficiaries. Seven and a half years later, Chattanooga’s pension Diversifying may be pointless. trustees discovered just how expensive that money- But invest abroad anyway. saving plan had been. According to an arbitration pro- ceeding they filed against Mr. Phillips, the agreement Portfolios, Etc., by Jonathan cost the fund $20 million in losses, undisclosed commis- sions and fees. And since 2001, Chattanooga has had to Fuerbringer. 8 raise nearly $3.7 million from taxpayers to keep the $180 million fund fiscally sound. The Chattanooga trustees fired Mr. Phillips in 2003 How to send stuff if Santa’s and, last October, filed arbitration proceedings against him, UBS Wealth Management USA, formerly the Paine booked. By Kate Murphy. 11 Webber Group, and his new firm, Morgan Stanley. The case, which is pending, accuses the consultant of, among other things, fraud and breach of fiduciary duty. The OFFICE SPACE commission arrangement was central to the problem because it put Mr. Phillips’s interests ahead of his cli- Landing that job, even after ent’s, the fund said in its complaint. spilling coffee on yourself. Career “The very important and in many ways unique rela- tionship that a pension fund board has with its consult- Christopher Berkey for The New York Times Couch, by Cheryl Dahle. 14 Continued on Page 13 David R. Eichenthal says a former adviser to the pension fund for Chattanooga, Tenn., breached his trust.