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Side Deals

Board Members, Executives and Family Members Can Still Benefit

By David S. Hilzenrath
Washington Post Staff Writer
Monday, August 16, 2004; Page E01

Many of Corporate Washington's executives and board members have side deals with the companies they oversee.

In addition to their regular compensation, some are paid for legal work, consulting, or lobbying. Companies have leased real estate and chartered airplanes from insiders. Some have hired or awarded contracts to family members, according to regulatory filings.

TeleCommunications Systems chief executive Maurice B. Tose is developing an office park where his company has agreed to lease space. (James M. Thresher -- The Washington Post)

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These kinds of deals can sometimes enrich insiders at shareholders' expense and make directors less likely to stand up to management. Self-dealing by insiders was part of the backdrop for accounting manipulations at companies such as Enron and WorldCom.

In other cases, side deals may simply show that management has greater trust in family members or others they know well, including directors, corporate governance analysts said. The deals may reflect the companies' roots as family or entrepreneurial operations.

The accounting scandals of recent years focused new scrutiny on corporate boards, exposing some directors as little more than rubber stamps for management. Reforms were enacted, including a ban on new loans to officers and directors. The new rules were widely viewed as having transformed the culture of America's board rooms.

But disclosures in reports companies file with the Securities and Exchange Commission show that private dealings involving executives, directors and the largest companies in the Washington area continue. Companies defend those practices as legal and say they have taken steps to prevent abuse. Corporate governance experts say deals with insiders can be a warning to investors. And Beth Young, who analyzes corporate governance for the Corporate Library, said the disclosures about so-called "related party transactions" can be a window into the corporate culture.

The side deals reported by Washington area companies vary widely.

TeleCommunication Systems Inc., which provides wireless communications, has tentatively agreed to lease a major portion of an office park in Annapolis being developed by its chairman and chief executive, Maurice B. Tose.

NVR Inc., a homebuilder, last year spent $2 million buying lots from the company of a son-in-law of chief executive Dwight Schar, and it agreed to spend $6 million buying lots from the same company.

Fairchild Corp., a distributor of aircraft parts, disclosed a host of transactions, including various payments to Fairchild chief executive Jeffrey J. Steiner and his son Eric, Fairchild's chief operating officer. (See accompanying story.)

DigitalNet Holdings Inc., a government contractor, last year issued four subcontracts worth $694,000 to a company owned by a son of chairman and chief executive Ken S. Bajaj. The subcontracts were for systems engineering and economic analysis, DigitalNet reported.

Bajaj said he was surprised to learn that DigitalNet had done business with his son's company, and he added that it would not happen again. The deals are legal, Bajaj said, "but, hey, these days I don't even want the perception out there that we are doing business with related parties, period."

Independent Directors and Others

The Securities and Exchange Commission has required that related party transactions be disclosed since the stock market reforms of the 1930s. Before the crash of 1929, undisclosed stock transactions favoring insiders were frequent occurrences, a Senate investigation later found, said Joel Seligman, a legal scholar and financial historian. The disclosures can generally be found in "proxy" reports, which companies send to investors and submit to the SEC in advance of their annual shareholder meetings.

In a report analyzing the accounting fraud and self-dealing at WorldCom and recommending new ethical guidelines for its successor, MCI, court monitor and former SEC Chairman Richard C. Breeden wrote that related party transactions pose "the most serious risk to shareholders." For example, a former chairman of WorldCom's compensation committee accepted a sweetheart deal from the company's then-CEO to use a WorldCom jet, Breeden wrote.

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