Jimmy Leas writes: Here is the text of the speech I delivered at the IBM stockholder's meeting yesterday [April 26 then] in support of the resolution I submitted. It got 13.2% of the vote.
Jimmy

Federal Court Says IBM on wrong side of law
Speech to IBM stockholders meeting by James Marc Leas, in support of Resolution 4: Stockholder Proposal on Pension and Retirement Medical Charleston, SC April 26, 2005

Mr. Palmisano, members of the board, especially Mr. Charles Vest, who just retired as president of my alma mater. For twenty years I worked as an engineer in IBM's Microelectronics Division. IBM patented 32 of my inventions. For the last 9 of those years I worked in IBM's patent law department as a patent agent, and I became a patent lawyer. I am now in private practice in Vermont.

Two years ago in a class action case of 150,000 IBM employees v. IBM, a federal judge in Illinois declared that the IBM corporation had violated federal age discrimination law concerning pension changes IBM implemented in 1995 and 1999.

From IBM's own documents Judge G. Patrick Murphy concluded that "IBM was aware of the age discrimination issues that would come with the new cash balance formula." He said that indeed IBM's actuaries had told IBM of two separate ways that the cash balance formula violated the law. Thus, from IBM's own documents Judge Murphy concluded that "IBM . . . proceeded [with the cash balance plan] with open eyes and was fully informed of the consequences of the litigation that was sure to come."

Mr. Palmisano, the federal court thus found that you and your predecessor, Lou Gerstner knowingly engaged in illegal action. Last year, Mr. Palmisano, you brushed it off saying it was merely a civil case and not a criminal conviction. True, you will not be going to jail. But you did not dispute that the court found IBM had knowingly violated a federal statute.

Illegal acts put the entire company at risk. Think Enron. Is there a single IBM stockholder who wants to read that IBM is knowingly engaging in illegal acts? The purpose of this resolution is to ensure that IBM ends its illegal age discrimination.

In explaining its recommendation to vote against this resolution the Board of Directors stated that IBM drives executive performance with monetary incentives. Most of Mr. Palmisano's pay is at risk. But these executives failed to meet the challenge by leading the company to substantially higher revenue and profit. The average annual growth rate of revenue these past 5 years has been only 1.2%. For profit only 1.1% Anemic, pathetic. But they got their awards anyway. How? In part by putting the company at risk by engaging in the illegal acts found by the federal court.

Mr. Palmisano, when you and Mr. Gerstner slashed long promised retirement pay and retirement medical in 1999, you created an unprecedented groundswell of protest among tens of thousands of IBM employees who knew instinctively that your actions were illegal and immoral. They were not just angry that you were stealing earned compensation from them when they were old and most in need. They were
not just angry because you broke promises made to them over decades that retirement pay and retirement medical insurance were a secure part of their earned compensation, that retirement pay was safely held in an separate pension trust fund, and that this fund would be used for the exclusive benefit of retirees. They were also angry because by breaking trust with employees you were putting the whole IBM company at risk.

Fellow shareholders, you might think that at least stockholders would benefit from slashing retirement pay because the money is saved. But what if no company money was saved? The separate $70 billion pension trust fund had a $17 billion surplus in 1999. The pension trust fund was earning interest faster than it was paying out benefits to retirees, so not only was IBM paying nothing each year for pensions but the pension trust fund was actually growing. The pension trust fund provided enormous competitive advantage in attracting and retaining the most talented employees in the industry, and building loyalty and dedication at no cost or little cost to IBM.

So why did Gerstner and Palmisano slash pensions? Here is why: they used what was then a little known accounting rule treatment of pension money to inflate IBM's profit report with "vapor profit" from the pension fund and get the incentive pay that was tied to that profit report. No money could actually be transferred from the pension fund. It was just an accounting rule treatment that just boosted the report of profit. The biggest boost was in 2001, when vapor profit added $1.45 billion to IBM's report of profit. Analysts discounted the vapor profit so stockholders did not gain. But the executives got their at risk pay, and their personal gain was the underlying reason for the illegal action in 1999. When they knowingly broke the federal law, Gerstner and Palmisano demonstrated that what is at risk is not executive pay. When they violated the law they showed that they will put the company at risk to make sure they get that pay.

When you and Mr. Gerstner reneged on the promised and earned pension and retirement medical, you blew the competitive advantage provided by a $70 billion pension trust fund, you blew the fierce loyalty, and you blew the trust of IBM employees. And when IBM employees found that Gerstner had made the decision and Palmisano maintained the decision for self serving reasons many talented IBMers, including many inventors left to join the competition. IBM paid a heavy price to put Mr. Gerstner and Mr. Palmisano's pay at risk.

Reneging on promised retirement pay is a good part of why IBM missed deadlines and why sales and profits stagnated these past five years, and why IBM was forced to leave or sell businesses that used to be very profitable. Executive pay was never at risk. Despite anemic growth and illegal acts they kept their jobs and got their incentive pay. Only the company was at risk.

Can IBM get back on track? I think so. An honest executive leadership would be a start. An end to age discrimination by providing all employees with the choice of pension and retirement medical plans would help a lot. But IBM is saddled with an executive management that proudly continues to put forth its own personal interest as its key value, as shown by its responses in the proxy booklet.

Employees, retirees, and stockholders, who have the biggest stake in the success of IBM, need to take action. Certainly employees and retirees need an organization, such as a union, that, among other things, can restrain executives from any more illegal acts that put the company at risk and that can encourage executives to build shareholder value the right way, by building sales and profits. Thank you very much.

James Marc Leas was an engineer with IBM for twenty years. He is a member of the governing council of local 1701, CWA, the Alliance @ IBM. He can be reached at 802 864-1575, 802 734-8811
(cell), jolly39@juno.com 
 

AMIPP does not know what reply, if any, was made by the Board but if AMIPP could it would give the reply here.

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