Emails Exchanged between Henry Schacht and LRO President Ken Raschke
From: Ken Raschke [firstname.lastname@example.org]
Sent: Sunday, September 26, 2004
To: Henry Schacht [email@example.com]
I respect the candor in your email to me. I will be equally candid in this response and hope you will read my remarks in the spirit of a healthy exchange of views and our willingness to seek solutions.
I, too, am disappointed that the discussion about the health and well being of both retirees and Lucent needs to be worked through the media. In May of this year, we asked to sit down with Lucent staff in Murray Hill and review many of the issues that are in the Wall Street Journal article and your letter. Lucent refused, without explanation. The written responses from Lucent were incomplete and unsatisfactory. It was also Lucent who severed the communications link of the periodic face-to-face meetings.
Your expressions in your email of being “troubled and disappointed” by the LRO’s public statements do not compare to the anguish that 5,400 management retirees and their 7,400 dependents are feeling over Lucent’s decision to eliminate the spouses’ and children’s medical coverage subsidies. It may be impossible for you and other Lucent executives who are set for life financially, to identify with a Lucent retiree who will have one quarter or more of his/her pension check taken away to cover health care benefits.
Do you seriously expect the LRO to be silent when Lucent’s broken promises so greatly diminish our members’ welfare and the welfare of their loved ones? These members contributed greatly in past years to the corporation’s well-being and now the corporation is making sure for many of them that their well-being will be a continual worry the rest of their lives.
Once again, you have defended the compensation of Lucent’s top executives in the face of actions that significantly diminish the income of thousands of retirees. There are numerous reasons why retirees are justified in their belief that the compensation of the top officers is excessive and unwarranted based on Lucent’s mediocre performance. Suffice it to quote from Forbes, one of the most authoritative news organizations covering American business. On May 6, 2004 they published an article with the headline: “Lucent Throws Pay Party.”
Allow me to quote a few sentences from that article. “Lucent Technologies may be a shadow of its former self, but there is one place where this company still puts world-class numbers on the board, and that’s executive compensation. In two years since becoming chief executive, Patricia Russo has received compensation worth more that $44 million, according to Equilar, a San Mateo, Calif. firm that tracks executive compensation. And since January 2002, when Russo rejoined Murray Hill, N.J.-based Lucent as chief executive, her four top lieutenants—all Lucent lifers—have received ‘cash retention payments’ totaling $10 million to keep them from leaving. Moreover, in fiscal 2003 these four executives—Frank D’Amelio, William O’Shea, Janet Davidson and James Brewington—were paid salaries totaling $2.4 million and bonuses totaling $2.8 million. Plus they were granted 3.75 million options.”
Whatever happened to leadership by example? Rather than being mocked by Forbes, TRUE LEADERS - those really focused on costs and profitability, and humanely concerned about employees and the retirees who built the company you and others now have the opportunity to represent - would set an example by reducing their total compensation to a nominal amount until strong and consistent profitability, based on results and not manipulation, is restored.
Until Lucent executives can demonstrate that their product development, operating and marketing actions are making a real, substantial, and sustained difference in the company’s profitability, retirees and shareholders will continue to be skeptical about whether they are truly earning their compensation.
I would now like to direct our attention to one of Lucent’s statements in the 9/22/04 Wall Street Journal article that we believe is plainly misleading and unsupportable.
“The costs of retiree benefits have soared to $800 million, or about 10% of total revenue, an unsustainable level,” Mr. Price added.
It seems to us, that the clear message that Lucent wants the readers to believe is that this $800 million is coming from Lucent’s cash flows. Addressing this was a specific agenda item for our proposed meeting that went unanswered. So we are left to make our own estimates which are:
only a third of the $800 million is from Lucent cash – and this includes our estimate as to what the lifetime family healthcare for officers, including your own, costs Lucent. The remaining two-thirds either comes from VEBA trust funds transferred from AT&T to Lucent (which Lucent has never contributed to), or directly out of the pockets of retirees.
And what is even more troubling, the principal reason for Lucent supplying any cash to health care at all is the losses in the Lucent pension fund by its fiduciaries. As you know, these cash payments are required by ERISA once transfers from the pension trust “surplus” are stopped. According to Lucent 10-k’s, in 2001, the actual loss on plan assets was $6.8 billion, following in 2002 by an additional $2.5 billion, for a total of $9.3 billion. In 2001, this amounted to over 19% of assets. This loss rate was more than three times larger than comparable pension funds, such as Verizon.
It seems clear to us, these astounding losses are the driving force for sharp cutbacks in three areas, for both retirees and shareholders:
- cancellation of the death benefit, decided in late 2002.
· Pat Russo described this decision as solely driven by the “effort to preserve cash” following “the decline in equity markets.”
- the inability to continue to fund health care through pension transfers, which was first announced in September 2003.
· The principal reason presented in the 8-k of September 8, 2003 was “… the drop in equity markets has reduced plan assets.”
- as much as a $1 billion reduction in earnings to be borne by Lucent shareholders because of the 5-year ERISA requirement.
We’ve expressed our concern that these losses have been related to excessive investments in Private Equity Ventures, approved by the Finance and Audit Committee of the Lucent Board. One analyst has stated:
“In 1999, Lucent’s allocation to private equity funds was 8% - a fairly high percentage for a pension. With roughly $4 billion to invest, the pension … assembled a large portfolio of venture capital and buyout partnerships, and Lucent became a premier port of call for any G.P. group seeking to raise a fund.”
This was during the leadership and tenure of Paul Allaire, as Chairman of the Lucent Finance And Audit Committee, who agreed to be disbarred as part of a settlement of fraud charges at Xerox with the SEC, including auditor mismanagement. To our knowledge, the Lucent Board never investigated whether Paul Allaire’s actions at Lucent had any impact on Lucent’s own books or operations.
As both shareholders and retirees, we asked for assurance that these investments clearly met the “arms length” requirements of a fiduciary. Lucent’s answer of April 2003 was inconsistent with the ERISA standards for “fiduciary duties” and “prohibited transactions.” In addition, the American Institute of Certified Public Accountants offers a training course entitled, “Lucent Technologies: A Case Study of Fraud and Earnings Management” in which aggressive pension accounting is a specific topic.
A consultant to the Lucent Retirees Organization has found that the details of the Trust Owned Life Insurance (TOLI) in the health care management trusts have not been audited. Moreover, these assets have been commingled with other trust assets in the only audit of the health care trust funds. Lucent has refused to provide an accounting of the TOLI, transferred from AT&T for the health benefits of management retirees.
For these reasons, we ask Lucent to:
(1) Publicly retract the misleading statement that “costs of retiree benefits have soared to $800 million.”
(2) Provide shareholders and retirees with the details of the private equity investments for the pension fund, so that there can be an open determination of their “arms length” investments during the tenure of Paul Allaire. This should be an integral part of the independent "second opinion" audit of Pension Funding that we have been requesting for quite some time.
(3) Provide an audited report of the cash flow and loans for the TOLI, from the date of its transfer from AT&T.
(4) Schedule the requested face-to-face meeting with the LRO and its consultants in the near term.
We believe that there should be a common interest between Lucent and the LRO wherein we are open and honest in all matters, so retirees and shareholders will have confidence in our actions and statements. We renew our request herewith to reestablish a face-to-face dialogue with Lucent leaders so that meaningful information can be exchanged.
In closing, I would like to reiterate what I said at our Spring 2003 meeting--- the LRO was conceived prior to any knowledge of any benefit cuts and our sole purpose was to see how some old retirees could help Lucent. I believe that despite our differences, we can still find ways to work together in support of the company. I also believe that a financially strong Lucent is in the very best interests of all of us.
On a personal note: I am stepping down as the LRO head on Jan.1, 2005. My former Western Electric colleague Jim Breslin of Atlanta has agreed to be nominated as LRO President. I plan to remain as an active member of the LRO Board.
The LRO continues to wish Lucent success.
P.S. The LRO didn’t have any input with the writer of the following column. But I think the writer makes some good points that Lucent ought to think about.
The Motley Fool - September 24, 2004
By Rich Smith
Think back to the last time you traded in your car for an upgrade. In the months after the deal was done, how much thought did you give to how the old car was doing? I'll bet not much. I'd wager good money you didn't, say, phone the new owner three months later to make sure he remembered to take the car in for an oil change. The thing about used cars is, once you get rid of one, it becomes somebody else's problem, and you forget about it.
That's fine and dandy when you're talking about used cars. But U.S. industry has developed a troubling habit of late of treating its "used employees" -- retirees -- the same way. The airlines have been the most high-profile offenders in recent weeks, with first United Airlines and then Continental Airlines (NYSE: CAL) deciding to skip their regular pension contributions. But the problem isn't limited to airlines. The Associated Press recently ran a story on telecom equipment maker Lucent (NYSE: LU) and its second round of announced benefits cuts to employees who have already retired.
Take note: This isn't a Bethlehem Steel story (although that would have been bad enough), where prior to being bought out by International Steel Group (NYSE: ISG), the company told retirees who were as little as a few weeks from retirement that their pensions wouldn't be waiting for them. Lucent is actually changing the rules of the game after the game has ended. Having already promised to provide free health insurance for dependents of retired employees, Lucent is reneging on that offer and saying it will no longer pay the insurance premiums for dependents of management employees who retired up to 14 years ago at a final salary of $65,000 or more. This comes on the heels of a similar cut for higher-paid management employees, announced last year.
Say what you want about the airlines and their pension cuts (I think them unconscionable), at least those companies are on the brink of bankruptcy -- and a dying company can't always afford to play fair. Lucent, on the other hand, is finally emerging from several years of unprofitability, and earlier this month received the promise of an $800 million windfall from an IRS tax rebate. That would be enough to pay the axed pension benefits for more than 16,000 retirees' dependents for nearly a decade.
When a company doesn't treat its own employees fairly, despite having the means to do so, investors beware. Not only does that bode ill for how the company might treat outside shareholders; it also puts the company's ability to recruit and retain new talented employees at risk. And that's bad for business.
Despite everyone wishing it were different, the facts remain.
At its reduced size, Lucent cannot afford to continue to subsidize retiree health costs at the current level and remain competitive.
The ultimate subsidy that the company can afford will depend on the success of the company. To ensure the greatest success possible we must pay competitively at all levels.
Executive compensation is set by the Compensation Committee of the Board of Directors. This Committee is made up of independent Directors supported by its own independent, outside consultants. Its process is described at length in the proxy.
As far as health care costs are concerned, the $800mn number is correct. The funds provided by AT&T ran out for management retirees last year and will run out for represented retirees in about two years. All this is spelled out in detail in our public 8Ks, 10Ks and in the material we have sent all management retirees.
As far as the pension fund:
As you know, these payments are the legal responsibility of the corporation and are funded in advance under ERISA guidelines.
These are the facts, Ken. Perhaps an analysis of these facts will help you and your organization.
At our last meeting, you and your colleagues agreed that demeaning and disparaging management was not helpful. We hope you will revisit that thought. These kinds of statements will not change the unpleasant facts that we all wish were otherwise.
----- Original Message -----
Sent: Wednesday, October 13, 2004 10:21 AM
Subject: Response to your 10-5-04 e-mail