Post by dkennedy on Mar 14, 2005 7:32:38 GMT -5
EchoStar Board, Faced With Audit Probe, Ranks Low on Governance
March 14 (Bloomberg) -- EchoStar Communications Corp., whose audit committee is investigating Chairman and Chief Executive Officer Charles Ergen's role in the company's accounting, has one of the worst corporate-governance ratings in the U.S.
The country's No. 2 satellite-television operator is ranked lower than at least 2,925 of the 3,000 companies in the Russell 3000 index, according to Institutional Shareholder Services, which advises investors on proxy voting. Chief among ISS's concerns: Five of the board's eight members are EchoStar insiders and Ergen, 52, controls 91 percent of the shareholder votes through a separate class of super-voting stock.
With a board that includes his wife Cantey, 49, and friend and EchoStar executive James DeFranco, 52, Ergen doesn't have to answer to a majority of independent directors. Under his watch, EchoStar may have improperly booked transactions with suppliers and made suspect consulting payments to a personal friend, people familiar with the internal probe said.
"When you have a board like EchoStar's that is dominated by insiders, it is going to acquiesce to the wishes of the CEO,'' said C. Warren Neel, executive director of the University of Tennessee's Corporate Governance Center. "What you end up sacrificing is oversight and tone at the top.''
Neel said he knows Ergen, who graduated in 1974 with a business and accounting degree from the University of Tennessee. Ergen also has a master's in business from Wake Forest University in Winston-Salem, North Carolina.
Steve Caulk, a spokesman for Englewood, Colorado-based EchoStar, declined to comment on the company's corporate governance. Ergen and his wife didn't return calls seeking comment. DeFranco declined to comment through Caulk.
Exempt From Rules
GovernanceMetricsInternational, a New York-based private consultant that rates the governance of 1,750 U.S. companies, gave EchoStar its lowest rating. The score of 1 out of a possible 10 placed EchoStar in the bottom 70 companies in the survey.
GMI cited the lack of an independent board and Ergen's voting control. "The CEO essentially controls all major business decisions,'' the GMI evaluation said.
EchoStar is exempt from the Nasdaq Stock Market's requirement that publicly traded companies have a majority of independent directors because Ergen controls more than 50 percent of the voting rights.
The company also doesn't have to have a nominating committee for selecting new directors. Instead, the board determines who gets picked to be a director and how long he or she serves, according to EchoStar's 2004 proxy.
Ergen's Control
"Charlie controls the company -- he controls 90 percent of the votes -- so I'm not sure you can have an independent board,'' said William Jacobs, an analyst at Chicago-based Harris Associates LP, EchoStar's sixth-largest shareholder. "If Charlie is who we think he is, then we have no concern. If he isn't, then we have significant concerns.''
Boards dominated by insiders and dual-class share structures figured in some of the biggest corporate scandals in recent years.
Adelphia Communications Corp., based in Greenwood Village, Colorado, declared bankruptcy in 2002 after the founding Rigas family was accused of looting the cable-TV company. In November, the SEC sued Hollinger International Inc. founder Conrad Black, claiming he helped loot the newspaper company of $85 million.
Those are worst-case scenarios, and there's no indication that anything similar has occurred at EchoStar.
"The problem with closely held companies is that when they fall, they fall hard,'' said Ric Marshall, chief analyst for the Corporate Library, a corporate-governance research firm in Portland, Maine. "There is no transparency, no oversight, so when problems surface they're always a surprise.''
Wealth Creation
At the same time, Ergen has built EchoStar from nothing, rewarding shareholders who stuck with him and paying himself less than CEOs of many similarly sized U.S. companies. EchoStar shares have gained more than 15-fold in the past decade.
One reason investors are drawn to EchoStar is because Ergen's personal wealth is so closely linked to the company's fortunes, said Scott Benesch, an analyst in New York at U.S. Trust Co., which held 516,990 EchoStar shares as of December. Forbes magazine ranked Ergen 55th on this year's list of the world's richest people and estimated his personal fortune at $7.2 billion, most of which is EchoStar stock.
"It's a combination of Ergen being tied to the equity and my faith that he is truly focused on driving the value of the firm,'' Benesch said. "In Charlie Ergen's case, this is personal. His company is like his own child.''
Ergen owns about $7 billion of EchoStar stock, including all 238 million Class B shares, which carry 10 votes each, according to EchoStar's 2004 proxy. Outside investors own 216 million of the Class A shares, or 89 percent. The Class A shares each carry one vote.
Longtime Associates
The five insiders on EchoStar's board are Ergen; Cantey Ergen; Executive Vice President DeFranco; General Counsel David Moskowitz, 46; and former Chief Operating Officer Michael Dugan, 56, according to the company's 2004 proxy filing with the SEC.
Ergen's relationships with his wife Cantey and DeFranco date back at least a quarter-century. The trio founded EchoStar in 1980, with Ergen getting the company started by selling satellite dishes out of the back of his truck in rural Colorado.
Moskowitz has been a director since 1998 and Dugan rejoined the board last year. Moskowitz didn't return a message left at his office. Dugan didn't return calls made to two phone numbers listed under his name.
"There has to be an independent board that is truly focused on the preservation of capital,'' said Benesch. "The bigger the ownership by an individual or group of people, the more they'll have sway.''
Audit Committee
There are no insiders on EchoStar's three-member audit committee. Raymond Friedlob, 60, who heads the committee, is a partner at the law firm McKenna Long & Aldridge LLP in Denver and has been a director since 1995. Friedlob didn't reply to telephone and e-mail requests for interviews.
Michael Schroeder, 55, founder of Consumer Satellite Systems Inc., joined the EchoStar board in November 2003. Steven Goodbarn, a 47-year-old accountant and former chief financial officer of Janus Capital Corp., has served since December 2002. He's now president of Secure64 Software Corp.
No phone number could be found for Schroeder. Goodbarn didn't return a call seeking comment.
KPMG LLP uncovered evidence of potentially illegal conduct while auditing the company's 2004 accounts, prompting EchoStar's audit committee to begin poring over the company's books, the people familiar with the matter said. The U.S. Securities and Exchange Commission also has opened an inquiry into Ergen's role in EchoStar's accounting, said two of the people, who declined to be identified.
Friedlob retained outside counsel to review KPMG's concerns over EchoStar's accounts, the people said.
To contact the reporters on this story:
Chitra Somayaji in New York at csomayaji@bloomberg.net; Mark Jaffe mjaffe3@bloomberg.net
To contact the editor responsible for this story:
Emma Moody at emoody@bloomberg.net.
Last Updated: March 14, 2005 02:05 EST
March 14 (Bloomberg) -- EchoStar Communications Corp., whose audit committee is investigating Chairman and Chief Executive Officer Charles Ergen's role in the company's accounting, has one of the worst corporate-governance ratings in the U.S.
The country's No. 2 satellite-television operator is ranked lower than at least 2,925 of the 3,000 companies in the Russell 3000 index, according to Institutional Shareholder Services, which advises investors on proxy voting. Chief among ISS's concerns: Five of the board's eight members are EchoStar insiders and Ergen, 52, controls 91 percent of the shareholder votes through a separate class of super-voting stock.
With a board that includes his wife Cantey, 49, and friend and EchoStar executive James DeFranco, 52, Ergen doesn't have to answer to a majority of independent directors. Under his watch, EchoStar may have improperly booked transactions with suppliers and made suspect consulting payments to a personal friend, people familiar with the internal probe said.
"When you have a board like EchoStar's that is dominated by insiders, it is going to acquiesce to the wishes of the CEO,'' said C. Warren Neel, executive director of the University of Tennessee's Corporate Governance Center. "What you end up sacrificing is oversight and tone at the top.''
Neel said he knows Ergen, who graduated in 1974 with a business and accounting degree from the University of Tennessee. Ergen also has a master's in business from Wake Forest University in Winston-Salem, North Carolina.
Steve Caulk, a spokesman for Englewood, Colorado-based EchoStar, declined to comment on the company's corporate governance. Ergen and his wife didn't return calls seeking comment. DeFranco declined to comment through Caulk.
Exempt From Rules
GovernanceMetricsInternational, a New York-based private consultant that rates the governance of 1,750 U.S. companies, gave EchoStar its lowest rating. The score of 1 out of a possible 10 placed EchoStar in the bottom 70 companies in the survey.
GMI cited the lack of an independent board and Ergen's voting control. "The CEO essentially controls all major business decisions,'' the GMI evaluation said.
EchoStar is exempt from the Nasdaq Stock Market's requirement that publicly traded companies have a majority of independent directors because Ergen controls more than 50 percent of the voting rights.
The company also doesn't have to have a nominating committee for selecting new directors. Instead, the board determines who gets picked to be a director and how long he or she serves, according to EchoStar's 2004 proxy.
Ergen's Control
"Charlie controls the company -- he controls 90 percent of the votes -- so I'm not sure you can have an independent board,'' said William Jacobs, an analyst at Chicago-based Harris Associates LP, EchoStar's sixth-largest shareholder. "If Charlie is who we think he is, then we have no concern. If he isn't, then we have significant concerns.''
Boards dominated by insiders and dual-class share structures figured in some of the biggest corporate scandals in recent years.
Adelphia Communications Corp., based in Greenwood Village, Colorado, declared bankruptcy in 2002 after the founding Rigas family was accused of looting the cable-TV company. In November, the SEC sued Hollinger International Inc. founder Conrad Black, claiming he helped loot the newspaper company of $85 million.
Those are worst-case scenarios, and there's no indication that anything similar has occurred at EchoStar.
"The problem with closely held companies is that when they fall, they fall hard,'' said Ric Marshall, chief analyst for the Corporate Library, a corporate-governance research firm in Portland, Maine. "There is no transparency, no oversight, so when problems surface they're always a surprise.''
Wealth Creation
At the same time, Ergen has built EchoStar from nothing, rewarding shareholders who stuck with him and paying himself less than CEOs of many similarly sized U.S. companies. EchoStar shares have gained more than 15-fold in the past decade.
One reason investors are drawn to EchoStar is because Ergen's personal wealth is so closely linked to the company's fortunes, said Scott Benesch, an analyst in New York at U.S. Trust Co., which held 516,990 EchoStar shares as of December. Forbes magazine ranked Ergen 55th on this year's list of the world's richest people and estimated his personal fortune at $7.2 billion, most of which is EchoStar stock.
"It's a combination of Ergen being tied to the equity and my faith that he is truly focused on driving the value of the firm,'' Benesch said. "In Charlie Ergen's case, this is personal. His company is like his own child.''
Ergen owns about $7 billion of EchoStar stock, including all 238 million Class B shares, which carry 10 votes each, according to EchoStar's 2004 proxy. Outside investors own 216 million of the Class A shares, or 89 percent. The Class A shares each carry one vote.
Longtime Associates
The five insiders on EchoStar's board are Ergen; Cantey Ergen; Executive Vice President DeFranco; General Counsel David Moskowitz, 46; and former Chief Operating Officer Michael Dugan, 56, according to the company's 2004 proxy filing with the SEC.
Ergen's relationships with his wife Cantey and DeFranco date back at least a quarter-century. The trio founded EchoStar in 1980, with Ergen getting the company started by selling satellite dishes out of the back of his truck in rural Colorado.
Moskowitz has been a director since 1998 and Dugan rejoined the board last year. Moskowitz didn't return a message left at his office. Dugan didn't return calls made to two phone numbers listed under his name.
"There has to be an independent board that is truly focused on the preservation of capital,'' said Benesch. "The bigger the ownership by an individual or group of people, the more they'll have sway.''
Audit Committee
There are no insiders on EchoStar's three-member audit committee. Raymond Friedlob, 60, who heads the committee, is a partner at the law firm McKenna Long & Aldridge LLP in Denver and has been a director since 1995. Friedlob didn't reply to telephone and e-mail requests for interviews.
Michael Schroeder, 55, founder of Consumer Satellite Systems Inc., joined the EchoStar board in November 2003. Steven Goodbarn, a 47-year-old accountant and former chief financial officer of Janus Capital Corp., has served since December 2002. He's now president of Secure64 Software Corp.
No phone number could be found for Schroeder. Goodbarn didn't return a call seeking comment.
KPMG LLP uncovered evidence of potentially illegal conduct while auditing the company's 2004 accounts, prompting EchoStar's audit committee to begin poring over the company's books, the people familiar with the matter said. The U.S. Securities and Exchange Commission also has opened an inquiry into Ergen's role in EchoStar's accounting, said two of the people, who declined to be identified.
Friedlob retained outside counsel to review KPMG's concerns over EchoStar's accounts, the people said.
To contact the reporters on this story:
Chitra Somayaji in New York at csomayaji@bloomberg.net; Mark Jaffe mjaffe3@bloomberg.net
To contact the editor responsible for this story:
Emma Moody at emoody@bloomberg.net.
Last Updated: March 14, 2005 02:05 EST