I had to remove the link to the AAUP website, because their letter is no longer visible. Since I don't have permission to reprint the letter, let me just quote that they wrote on December 8, 2003 to Ronald L. Thompson, as Chairman of the TIAA Nominating and Personnel Committee:
... to protest the Company's provision of extraordinary pay and benefits in setting up a contract with its new Chief Executive Officer. ...
Mr. Thompson and Steven Ross (now, a "former" Trustee ...) replied on December 23, 2003. It's unfair to summarize their reply, because it was a long, detailed rebuttal. Here's one paragraph:
... We appreciate the consternation surrounding Herb Allison's pay package particularly in light of difficult economic times that are now the reality of academia. We also understand the suspicion with which executives and their compensations are viewed by some participants in light of the greed that seems to characterize some of the corporate scandals that appear in the press with too frequent regularity. We have personally heard expressions of the outrage to which you refer and we share their dismay as faculty salaries seem to lag pay for the increases for football coaches. Perhaps because we understand and accept the legitimacy of those feelings, we believe we have done our participants a great service by attracting Herb Allison to be the CEO of TIAA-CREF. ...
Because the AAUP solicited comments, I sent them the letter below in reply.
AAUP
March 4, 2004
Dear ........:
I haven't taught since 1981, when I was an Assistant Professor at Amherst and at Emerson. But because I spoke at the 2003 CREF meeting, I sent a shorter message on this topic to ........ last December. She was kind enough to tell me about the AAUP's inquiry letter. A fellow gadfly (!) brought your response to my attention last week. Thank you for soliciting further comments.
First of all, since I attended the December 15, 2003 Annual Meeting of CREF, I can tell you that your letter was not publicized or discussed. However, Mr. Thompson was given the floor to discuss, at length, many of the issues you raised. Although I did not come to the meeting to discuss executive compensation, I rose when he omitted any discussion of the "Golden Parachute". He gave a full response, which is echoed in the posted reply to your letter.
Because I was impressed with Mr. Thompson's speech, my immediate reaction to his (joint) letter to you is that he didn't draft it! The reference to "football coaches" is uncharacteristically condescending. And I regret that the signatures do not mention their new authority and responsibilities as Presiding Trustees.
While it does not negate the Trustees' commitment to "compete" for talent, I have to note that Mr. Allison has entered the "insurance business" at a propitious time. Some of the "peer group" insurers listed in the Employment Agreement have recently converted from mutual organizations to publicly owned companies. Under the banners of "capital access" and "competition", they now engaged in distributing fists-full of equity and options that were previously unavailable. That has raised the bar for competition!
My summary of the full meeting can be found at http://home.att.net/~crefwatch/mtg2003.htm . As you may know, the next meeting has been moved forward (in my view, with only stealthy notice) to June of 2004. Rumor has it that it will be held in one of the harder-to-reach cities where CREF has a facility, perhaps Charlotte, NC.
I also urge anyone interested in the future of their retirement investments to read Mr. Allison's remarks at the meeting, available on http://www.tiaa-cref.org/newsroom/index.html . Although I have strong reservations about what Business Week called "Merrilization", he has in fact earned a reputation as a cost-cutter. That's something CREF needs. I might add that despite your "belief that it has attempted to avoid such excesses", there is some evidence that the *previous* CREF President may not have prevented or foreseen the problems Allison is now facing, despite pay approaching Mr. Allison's level.
I note particularly Mr. Thompson's statement:
"We respectfully disagree that the trust our participants place in us is a function of our eschewing the 'excesses in competition.' Rather, it is our belief that our participants trust us because we place their interests first; we have no owners or stockholders whose economic interests we serve-only those of our participants."
In the context of your letter of inquiry (and based on my interpretation of Mr. Thompson's statements at the 2003 Meeting), this suggests that CREF *will* use salaries to compete for executive talent. But, particularly because your request for publicity about your letter was *not* implemented at the 2003 meeting, please focus on the final clause. In fact, I submitted an advisory proposal for a vote in the 2004 Proxy Statement, asking that "... the primary fiduciary duty of the CREF Board of Trustees ought to be first and foremost to the participants." (See also http://home.att.net/~crefwatch/prop2004.htm .)
Now, I'm not a lawyer, and I've never submitted a proposal to any corporate meeting before. But CREF's Counsel has written a 7-page, 13-footnote letter to the SEC in opposition to including my proposal. I'm sure some of their objections have merit, in the context of SEC regulation precedents. But there does seem to be some limit on CREF's embrace of the interests of the participants, doesn't there?
As I indicated above, the Board's support for their compensation plan is solid. The only hope you have for changing Mr. Allison's compensation would be a proxy proposal, which will require legal assistance to get on the ballot, if it can be done at all, and that not until 2005. (Unless one of the 10 proposals submitted last month is on that topic, and is not excluded from the ballot by CREF.) See, for example, http://www.sec.gov/interps/legal/cfslb14a.htm . Even if the contract could be broken, it is possible that some Trustees would resign over the rebuke.
My main reason for replying to you is that I don't believe that executive compensation is the best means to monitor TIAA-CREF's vigilance towards the academic community's best interests. Your position is certainly morally correct. I abhor the current level of executive salaries, including Directors of Athletics. But frankly, that horse is out of the barn. We need to watch our own long-term financial interests, in the age when, as Warren Buffet put it, all CEO's are somehow, "above average."
There are two areas I've noticed that are much more expensive for us than compensation issues. They both fall into the category of mutual fund expenses. That tends to make most people's eyes glaze over. But since most people don't really know "how" they pay for the legitimate expenses of their mutual funds, it's important. Most investors don't understand that they never see a "bill" for mutual fund expenses. Because CREF had been the lowest-cost annuity provider for 20 or more years, I for one, hadn't been paying enough attention. It was also the competitive area (referring to Mr. Thompson's reply) in which CREF has been, until now, unassailable!
The two topics are expense ratios, and expense waivers for Institutional and Retail categories of funds. Not to risk boring you with the finest details, I'll refer you to my web site, http://crefwatch.home.att.net/ .
How does this relate to executive compensation? In 2003, the difference between an expense ratio of 0.52% and one of 0.32% is $174,000,000 in fees for the CREF Stock Fund alone. Since that's extra money "we" all paid, it makes $8,000,000 look like a bargain. Do keep in mind that there *have been* recent years when the CREF Stock fund had the same assets as 2003, but an expense ratio near 0.32%. This is not uncharted territory.
Expense ratios, for the uninitiated, are how one compares expenses between different mutual funds and annuities. From the 1980's until 2000, the expense ratio of the CREF Stock Fund varied between 0.30% and 0.34%. It's gone steadily upward since 1999, and reached 0.52% in 2003. That's a 60% increase! A similar product from Vanguard (but 100% indexed, unlike the CREF Stock Fund) cost 0.50% in 2003. And, Vanguard *includes* an expensive insurance product that guarantees that (unlike all our CREF 403(b) funds) the expense ratio will not vary! (Needless to say, I am not a licensed advisor, and I am not recommending the purchase of, or predicting the performance of any particular products ...)
You may have read that Elliot Spitzer has criticized some fund groups (but not TIAA-CREF) for charging lower expenses and/or waiving parts of the expenses for some of their products, while charging regular retail customers (that is to say, "schmos") higher rates for very similar funds. While it's a simplified view of a complex situation, the fact is that non-profit subsidiaries of our non-profit companies (TIAA and CREF) have waived about *half* of the operating costs of their new, non-403(b) products. Furthermore, the investment advisory charges (which, unlike administration, cannot be argued to be more expensive for a variable annuity than for a retail mutual fund) are only about half the cost of the CREF Stock Fund's investment advisory fees. And unlike the CREF Stock Fund, they are not subject to increase (or decrease) to reflect actual costs in each calendar quarter.
I know this is dense stuff. But every investment columnist, in financial papers and in tabloids alike, will tell you that expenses *matter*. And the longer you hold an investment, the more they matter. I've held my TIAA-CREF certificates for almost 30 years, and I'm only 52! To be fair, CREF has given truthful explanations for some of these matters. But I'm not satisfied with acknowledging that the assets of the CREF Stock Fund fell 50% in value while the operating expenses remained roughly level! We already know what happens when enrollment at a college falls 50%.
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Timothy H. Buchman
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