Whose Company Is This?

By John Greenwald

Talk about chutzpah. Did ITT chairman Rand Araskog deserve the 103% raise that jacked his pay up to $11.4 million last year and made him one of America's best-paid executives, even though his company's profits rose just 4%? No way, say furious investors led by the California Public Employees' Retirement System, the largest U.S. pension fund. Calpers, which holds 1.15 million shares of ITT stock, or about 1%, is so steamed over Araskog's raise that it has threatened to vote to oust the company's directors at the annual meeting next week.

An insignificant threat? On the contrary. Institutions like Calpers -- pension funds, insurance companies, money-management firms -- own about 58% of ITT stock and a majority of the shares in dozens of other major U.S. corporations. For decades they have almost always voted for management. If these giants turn activist -- and they are starting to -- they will throw a profound scare into executives and directors, potentially revolutionizing their world.

It's easy to see why shareholders are unhappy with ITT. Explains Calpers chief Dale Hanson: "ITT is not one of the companies that bubble to the top when you think of performance." That's putting it mildly. According to Graef S. Crystal, a professor at the Haas Business School at the University of California, Berkeley, ITT's total return to shareholders during Araskog's 12- year tenure has been in the bottom 30% of America's 406 largest companies. Yet over the same period, he notes, Araskog's compensation has rocketed from a level that was 87 times as great as a blue-collar worker's to one that is more than 600 times as much. Asserting that Araskog "is one of the most overpaid CEOs in the world," Crystal blamed ITT directors for having "wasted the company's assets to a flagrant degree."

ITT replied in a three-page statement that lauded the company's performance since Araskog became chief executive. He "has literally caused ITT to be transformed over the past decade," the document says. Among other things, Araskog made ITT far less unwieldy by selling off more than 200 of its 275 subsidiaries. He also helped raise the value of the company's stock by spending nearly $2 billion to buy back shares. As a result, the statement says, Araskog's compensation "is at a level which is believed appropriate for bringing to ITT the benefits which have come to the corporation under his stewardship."

Could the discontents topple the ITT board, which, like most boards, is used to being re-elected by an overwhelming margin? That seems unlikely this year. But the Calpers-led protest could be picking up support. Neuberger & Berman, a Manhattan firm that manages more ITT stock than any other institution -- 2 million shares -- is not happy. Wrote Neuberger portfolio manager Marvin Schwartz in a letter to Araskog: "One cannot escape noting that ITT stock has been an extremely dismal performer in the marketplace over the past 11-year period." That sorry record, Schwartz declared, "suggests that knowledgeable institutional investors do not think very highly of either the company or its prospects."

The Council of Institutional Investors alerted its members to the ITT situation in a newsletter, adding later, "If, over nearly a decade, a board consistently pays its executives top-of-the-line salaries for bottom-of-the- bucket performance . . . the matter becomes one for shareholders to address." While such ominous sentiments may fail to unseat the ITT board, they seem certain to shake it up.

CHART: NOT AVAILALE

CREDIT: TIME Chart

[TMFONT 1 d #666666 d {Source: Crystal Report on Executive Compensation}]CAPTION: Rand Araskog's total pay package

Earnings per share for ITT

With reporting by David E. Thigpen/New York