Emails Exchanged between Henry Schacht and LRO President Ken Raschke

 

-----Original Message-----
From: Schacht, Henry B (Henry)** CTR ** [mailto:hschacht@lucent.com]
Sent: Wednesday, September 22, 2004 3:12 PM
To: 'kraschke@triad.rr.com'
Subject: Public comments

Dear Ken,

We continue to be troubled and disappointed by your public
statements.  They are contrary to the briefings you have been given and the
publicly available information.  Your latest comment in the Wall Street
Journal today continues the pattern.

The requirement to reduce the health-care subsidy is driven by the
facts we have presented to you many times.  The best chance for us to
maintain as large a subsidy as possible is for the company to be successful.
For the company to be successful we need to pay competitive compensation at
all levels and continue to invest in the company's operations.

You know from the material we have shared with you that:

1.  Our senior management compensation is performance based and is
not "excessive".  If you don't believe us, check the annual survey of chief
executives' compensation published by the Wall Street Journal and the New
York Times.

2.  Management's incentive compensation is determined based on
performance versus plan.  The reductions in subsidies we have previously
announced are in the plan.  Accordingly, management does not benefit from
these.

Further, the progress the company is making makes your use of the
term "unwarranted" puzzling at best.  To imply that the changes are
motivated by compensation issues is misleading, unhelpful and untrue.  The
use of the word "absurd" is demeaning and contrary to your statement that
the LRO would avoid such language.

The positions taken continue to be contrary to the best interests of
those you claim to be representing. 
As has been your practice with previous correspondence, please post
this on your website.

More to come,

Henry

 


 

From:  Ken Raschke  [kraschke@triad.rr.com]

Sent:  Sunday, September 26, 2004

To:  Henry Schacht [hschacht@lucent.com]

Subject: Response

 

Dear Henry,

 

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.

Ken Raschke

 

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.

http://www.fool.com/News/mft/2004/mft04092418.htm

 

The Motley Fool - September 24, 2004

 

OUR TAKE
Lucent Plays Scrooge

 

 

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.

 

 


 

 

-----Original Message-----
From: Schacht, Henry B (Henry)** CTR ** [mailto:hschacht@lucent.com]
Sent: Tuesday, October 05, 2004 5:31 PM
To: 'Ken Raschke'
Subject: Response

 

Ken,

 

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.

 

Some observations:

  • Pat Russo’s 2003 compensation fell about in the middle of the surveys published by the WSJ and NY Times.
  • The retention bonuses you refer to were granted by me in the fall of 2000 with the Board’s full concurrence in order to make sure that we retained our key talent at a very critical time.
  • The results since 2001 have been real and substantial.
  • “Reducing their compensation to a nominal amount” hardly seems a recipe for encouraging the continued top-flight performance required to retain as much of the subsidy as possible.
  • Bonus amounts are established by the Board based on performance vs. plan; reductions in health care subsidy are in the plan and therefore, do not influence bonus amounts.

 

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.

 

Some observations:

  • The fund is professionally managed by a group of experienced fund managers – they make all the individual investment decisions.  Asset allocation is set by the Board.
  • The fund has consistently outperformed its benchmarks and similar funds.  This means it made more in up markets and lost less in down markets.
  • When measured across cycles, it has been consistently positive, although certainly not from peak to valley.
  • Venture Capital (private equity) has been its best performer across 5 and 10 years even when reflecting the down years.
  • The funds are already audited by PWC as required.  The questions you have are about asset allocation, which is set by the Board. 
  • All of the required reports have been filed with the Dept. of Labor and are available publicly.

 

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.

 

Henry

 

 


 

----- Original Message -----

From: RetiredEliShaff@aol.com

To: hschacht@lucent.com

Cc: pfrusso@lucent.com

Sent: Wednesday, October 13, 2004 10:21 AM

Subject: Response to your 10-5-04 e-mail

 

October 13, 2004

Henry

Your October 5th response to my September 26th email was read with great care.  It was disappointing in that you:
--Ignored the LRO's request for a face-to-face meeting
--Dodged the LRO's request for an independent audit of the pension fund, and    
--Omitted any reference to providing an audited report of the cash flow and loans 
   for the TOLI transferred from AT&T.

The LRO still contends that a candid dialogue regarding issues of great significance to retirees would be a much more effective way to discuss our concerns and Lucent's views as opposed to an exchange of e-mails where issues remain unaddressed or incompletely covered. Again, I request such a meeting. We note that Pat Russo has called and had conversations with a number of individual retirees.  Why is she unwilling to sit face-to-face with the leaders of the LRO with thousands of retiree members?

Early in your October 5th email (with regard to retiree health benefits) you stated: "The ultimate subsidy that the company can afford will depend on the success of the company". That is a logical statement, but it is inconsistent with Lucent's past inaction.  By that I mean when you were Chairman during some of Lucent's good years in 1996, 1997 and part of 1998 when Lucent had revenues ranging from $15.86 billion to $30.15 billion and recorded substantial profits.  Based on data from Lucent's 10-K filings in those years, Lucent never contributed any money into the post-retirement health care trust. So, since retirees now recognize that Lucent didn't reserve monies during boom years to meet its obligations in lean years, they are continually worried about health care management.  Knowing also that Lucent has never put a penny of its own cash into the pension trust, they lack confidence in the management of the pension trust as well.

AT&T transferred pension trust and health care trust monies to Lucent for the long-term welfare of retirees. How those monies have been managed, and are being managed, is critical to whether or not retirees continue to receive their pension payments regularly and on schedule. Morally and ethically 235,000 retirees and their dependents have the right to know in depth how these funds have been, and are being, invested for their sole benefit as the company committed to them during all their years of employment.  Receipt of the minimal summary reports mandated by law and the regulatory agencies are insufficient since the details regarding investment decisions and actions by the company are hidden.

An independent audit of the pension fund would most certainly clear the air once and for all.  Indeed it is essential so that retirees can determine whether their sleepless nights and daytime worries as to the true status of the pension trust can stop or must continue. Their concerns are rational, not paranoiac, and are exacerbated by two major factors:

1. Lucent's agreement to pay the $25 million penalty to the SEC for its "lack of cooperation" in the SEC's investigation into violations of the reporting, books, records, and internal control provisions of the federal securities laws.

2. Having PWC as the auditor for both the pension fund and for the corporation. The potential for a conflict of interests by the best of intentioned parties is a cause for concern. On August 27th, the Washington Post published an article stating that initial reviews of the nation's largest accounting firms have turned up numerous rule violations and shoddy recordkeeping practices. PWC was among the Big Four firms cited in the reviews by the Public Accounting Oversight Board for lapses in accounting rules and failures to preserve documents that back up auditors' work.

Let me note here, that, since Lucent has refused to allow an independent audit, the LRO wrote to Samuel A. DiPiazza, PWC Chairman, on July 8th and on August 5th requesting information about PWC's audits. The PWC has not responded to these letters and that causes more retiree worry that something is being hidden.

Further, Lucent did remove $2.1 billion from the so-called surplus in the pension trust to help pay for employee severances during its downsizing in 2001. The LRO maintains this was not a prudent use of pension trust funds.  You mentioned during our November 3rd, 2003 Greensboro, North Carolina conference that Lucent requested IRS approval to do the foregoing. We would appreciate receiving copies of Lucent's request and the IRS approval for the use of pension funds to pay these 'voluntary layoff allowances'.

In correspondence exchanged between the LRO and Pension Benefit Guaranty Corporation (PBGC), Bradley Belt, PBGC Executive Director, has urged us to determine whether the pension plan is fully funded on a "termination basis" -- that is whether the plan would have sufficient assets to guarantee payments of full promised benefits in the event of Lucent's corporate failure. Mr. Belt stated that all companies ought to inform workers and retirees of the true financial health of their pension plan each year, including whether benefits would be fully covered by PBGC pension guarantees.

Please understand that the efforts of the LRO to pursue every legal, moral, and ethical means to get at the details of the pension trust investments will continue unabated and vigorously. And so again, on behalf of worried retirees, I request that Lucent accommodate an independent "second opinion" audit of the pension funding.

Regarding two other subjects in your October 5th email:

1. Executive Compensation - The LRO will continue to disagree regarding Lucent executives' compensation for reasons already provided until the LRO and analysts believe balance with performance is achieved

2. Lucent's claim that its cost for retiree health care is $800 million - A Lucent PR spokesperson - when pressed by a reporter - recently acknowledged that the "$800 million figure includes about $220 million in cash for FY04 and the remainder comes from the VEBA trusts, which are expected to run out in 2007". So the real expenditure of Lucent's cash is actually $220 million, not the $800 million that Lucent wants retirees and the public to believe. Please explain how Lucent can claim credit for the expenditures from the VEBA trust when that trust was transferred from AT&T, and Lucent has never put a penny of its own cash into the VEBA.

In your closing paragraph you pointed out that at our last meeting with you, the LRO leaders agreed that demeaning and disparaging management was not helpful. We do not feel we are acting in that manner. We are simply asking questions and suggesting approaches that will ease retiree concerns and conditions as they apply to commitments the company made to the retirees during their years of hardworking and dedicated employment.  We want to be Lucent's ally, but we can't be silent as long as there are questions with regard to Lucent's motives and actions as they affect the welfare of Lucent retirees.

The LRO wants to help and support Lucent. Successful relationships are much more likely when parties are talking to each other about issues, and when presented information and data are viewed as either reliable or verifiable. We are still hopeful that Lucent will come to value such a relationship with the LRO and the retirees whose interests we must continue to advocate.

Sincerely,

Eli Shaff, LRO Vice President
            for
Ken Raschke, LRO President

Copy to:
Patricia Russo
Members Lucent Board of Directors