You might imagine that corporate directors are on red alert after seeing CEO Jeffrey Skilling slip out just weeks before Enron's implosion, or ImClone Systems' (IMCL
) Sam Waksal get caught trying to dump company stock illegally. Some surely are paying closer attention. Just don't count Capital One Financial's (COF
) directors among them.
If you aren't familiar with Capital One, it's a huge issuer of MasterCards and Visas and a true whiz kid. Since its 1994 debut as a spin-off, accounts have swelled tenfold, to over 47 million. It grew via technology -- its core strategy relies on intensive use of customer data to tailor products and prices -- and liberal stock options. Led by CEO Richard Fairbank and President Nigel Morris, everybody prospered -- until last July, that is, when Capital One disclosed banking regulators' demands for tighter controls. The stock sank 40% in a day.
Capital One investors now have fresh trouble: Chief Financial Officer David Willey quit on Mar. 3 after learning the Securities & Exchange Commission is set to accuse him of having illegally sold stock before last summer's plunge. Willey's attorney told me he's talking with the SEC. Willey plans to fight and, for all I know, he has a cogent defense. Yet what's more broadly troubling here is Capital One's own unaccountable behavior. To see what I mean, consider these elements in the Capital One saga:
-- Anybody awake? Willey sold shares worth $3.2 million 10 weeks before last July's stock-crushing disclosure. These weren't hidden trades: He reported them to the SEC. Now, if his trading was questionable, why did Capital One keep him as its No. 3 executive? Or, if the trades were unobjectionable to Capital One, then why is Willey now persona non grata? The company notes Willey's troubles are his own and it's cooperating with the SEC. It also has assigned Willey to the ranks of the disappeared, removing from its Web site an announcement of his 2001 promotion to CFO.
-- No, or slow, disclosure. Capital One first got word from the SEC of a formal probe way back on Aug. 22. Yet it made no announcement. A spokeswoman told me Capital One deemed the probe not important enough to alert shareholders. But the bad implications were plain by Feb. 18, when the company learned the SEC was ready to accuse Willey. It quietly told its creditors first and waited until 13 days had passed before disclosing it broadly. Capital One's "disclosures...were handled appropriately," it says. "No investor was disadvantaged."
-- Who needs a CFO? Rarely do big public companies go more than a quarter or two without a CFO. Yet Capital One did. Willey's predecessor quit in December, 1998. Capital One asked Willey, who was then its treasurer, to handle the CFO's duties, while hiring Spencer Stuart to start a search. Willey finally got the title in January, 2001. Little more than a year later, the company says, Willey wanted out.
-- Cash is king. A heavy user of stock-based pay to keep execs on board, one of many such Capital One bonus plans is called "EntrepreneurGrants." Through it, Willey and others agreed in October, 2001, to forgo up to half of their expected cash bonuses in 2002, 2003, and 2004 for options. Months later, Willey was looking to quit and dumping stock. Most employees' options are currently way out of the money. How will Capital One now keep its execs, and at what cost?
If Capital One can reconcile all of this, it's not saying how. Nor did three directors -- consultant W. Ronald Dietz, America Online founder James Kimsey, and real estate developer Stanley Westreich -- return my calls. In a year, the stock is down by half. Will someone please nudge these guys?
Copyright 2003, by The McGraw-Hill Companies Inc. All rights reserved.
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