Speech to IBM stockholders meeting prepared by James Marc Leas, in support of Resolution 4: Stockholder Proposal on Pension and
Retirement Medical, Tulsa, Oklahoma, April 25, 2006

The proponent of this resolution, James Marc Leas, worked as an engineer in IBM's Microelectronics Division for 20 years. IBM patented 33 of his inventions. For the last 9 of those years he worked in IBM's patent law department and became a patent lawyer. He is now in private practice in Vermont. Mike Saville read the speech prepared by Mr. Leas who could not be there because of family matters.

Two years ago in a class action case, a federal judge in Illinois declared that IBM 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. In the past, 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.

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 and destroy that competitive advantage? 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 executive 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 pay boost, and their personal gain was the underlying reason for the illegal action in 1999.

When IBM employees found that Gerstner had made the decision and Palmisano maintained the decision for self serving reasons that had nothing to do with advancing company interest, many talented IBMers, including many inventors, left to join the competition. IBM paid a heavy price to put hundreds of millions of dollars into the pockets of Mr. Gerstner and Mr. Palmisano. Reneging on promised retirement pay is a good part of why IBM missed deadlines and why sales and profits stagnated over these past six years, and why IBM was forced to leave or sell businesses that used to be very profitable.

Confirming employee calculations, the court said that the cash balance plan would "cause reductions in retirement pay of up to 47% for older workers." Many employees calculated their pension losses in the hundreds of thousands of dollars.

Though the court decided for the employees, their attorneys then sold them out with a settlement agreement that provides that the IBM employees on average get a total of only $1,114 each while the attorneys got $88.5 million.

In my opinion the settlement agreement that returns each employee so little, gives class attorneys so much, and lets IBM off the hook, is collusive: the settlement agreement did not end the age discrimination, it ratified the age discrimination. It may have settled the case for the class attorneys but it did not settle the case for the employees who had no say whatsoever.

This case may be over in court but it is not over for employees and shareholders. We still need an honest executive management committed to obeying the law and ending age discrimination by providing all employees with the choice of pension and retirement medical plans. We still need a board that will not let executive management continue to put its own personal interest ahead of company interest.

Employees, retirees, and stockholders, who have the biggest stake in the success of IBM, need to take action because this board will not. Employees and retirees need a democratic union that earns the respect of employees by speaking out against the collusive settlement agreement. Shareholders need to organize to strengthen their ability to stop executives from any more illegal or self-serving acts that put the company at risk.

Thank you very much.
 

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