New IBM Shareholder resolution
From: jkrueger@andrewscg.com
Date: Wed, 4 Oct 2000 15:19:24 -0500

*** Please feel free to forward ***

I mailed the following stockholder proposal to IBM last week. I am still awaiting information on exactly what people need to do if they want to sign on as co-sponsors; I will let you know when that information is available. The resolution and information for co-sponsoring it will be posted on www.allianceibm.org as soon as we hear back from IBM.

You may wonder why the resolution is mostly focused on executive compensation, rather than on retiree COLAs, which was my initial intent. The SEC has very strict guidelines that are used to distinguish between ordinary business, which should be left for the board of directors and company management to deal with, and extraordinary business, which shareholders can take an interest in. Generally, worker compensation and benefits are classified as ordinary business, as are retiree benefits. But executive compensation is viewed as something that shareholders can and should monitor. I am now convinced that IBM's main motivation in denying COLAs to retirees is the fact that they have been successfully boosting their earnings/share with vapor profits from the surplus money in the pension fund. The fact that IBM's top executives have their bonuses directly tied to earnings per share, which is then tied to pension fund surpluses, makes it even less likely that they will ever be voluntarily pay out any of the pension fund surplus (currently valued at 17 billion dollars) with retirees in the form of a COLA. Hopefully, this resolution will be viewed by the SEC as extraordinary business, which would mean they will force IBM to include it on the next proxy. I'm sure IBM will not include it voluntarily without the SEC enforcement!

If you have comments on the resolution, please forward them to me. I will be sending out a press release later this week, in an attempt to start raising media awareness.

Janet Krueger
IEBAC (IBM Employee Benefits Action Coalition)

Stockholder Proposal on Executive Compensation, Transparent Profit Reporting, and Vapor Profit

Shareholders request that the IBM Board adopt the following policy.
Resolved:

• Future executive incentive compensation be determined by profit from real company operations not including accounting rule profit from pension fund surplus.
• IBM provide transparent financial reporting of profit from real company operations.

IBM's 2000 annual report showed IBM's $73 billion irrevocable pension trust fund has a surplus that soared from $8 billion in 1998 to $17 billion in 1999. IBM has not had to contribute to the pension fund since 1995.

An accounting rule, FAS 87, requires IBM to boost the profit report with part of the pension fund surplus--even though the money belongs to the pension trust fund and cannot be transferred to the company. IBM boosted its 1999 profit report by $762 million or 11% with FAS 87. 31% of IBM's year-over-year growth in pretax profit (excluding one-time events) and 42% of after tax-profit came from this accounting rule profit. This is vapor profit: it is money the company can report but cannot touch.

Business Week (4/24/00) said IBM was "padding the profits" with pension fund money. In a cover story, "Earnings Hocus-Pocus at IBM," Fortune Magazine (6/26/00) described pension fund earnings and said IBM's "bag of accounting tricks won't satisfy" and "investors will get tired of the illusion of growth and demand the real thing." The New York Times (6/4/00) said "obfuscation is the name of the game" for IBM.

This pension fund vapor profit is counted along with profit from real operations in reports to stockholders and in determining "long term performance incentive" compensation for executives. With the help of $762 million vapor profit and other manipulations a profit target was reached and five top executives took $15 million cash plus $8 million in stock-equivalent as incentive pay, according to the year 2000 proxy booklet.

Stockholders are at risk that the market eventually discounts FAS 87 accounting rule profit and then discounts IBM's stock price. Stockholders lose when real company money is paid out to executives based in part on vapor profit the company never gets. Everyone loses when top executives spend time on self-serving manipulations instead of focusing on building real company operations.

IBM could be using this pension fund surplus as intended by the trust--to provide for retirees. Inflation has eaten over 33% of retirement pay since the last adjustment in 1989. But IBM is choosing not to use the vast pension fund surplus to adjust for inflation; IBM executives have a self-serving purpose contrary to the interest of retirees, stockholders, and the IBM company.

Proponents believe executives should not get incentive pay based on FAS 87 profit; stockholders should receive transparent reports of profit from real company operations; and part of pension fund surplus is better used to adjust retiree pay for inflation instead of being hoarded to boost the report of profit based on FAS 87 and to boost executive compensation.