Federal-Mogul Co. Stock Decision Unique, But Wise: Observers

August 1, 2001 (PLANSPONSOR.com) - Auto parts maker Federal-Mogul raised a few eyebrows last week when it announced that it was discontinuing its company stock program due to its concerns over its falling stock price and asbestos litigation that could further impact the stock.

The firm’s stock has fallen by nearly 85% during the past year as its expenses from asbestos claims had piled up. The company’s asbestos-related payments totaled $82 million in the second quarter.

The contributions made by Federal-Mogul employees into its common stock fund are now being redirected into a stable value fund. Even though Federal Mogul’s prognosis looks grim, industry insiders say the firm has not made a bad decision.

The Right Thing

“You’ve got an employer facing some difficulty that’s trying to do the right thing,” said Ward Harris, managing director of the Berkeley, California-based McHenry Consulting Group. “If they’re held responsible for trying to do this it’s unfortunate. The key here is that this is a special situation, not all sponsors are in the asbestos industry. Anytime you have an investor investing in a company that deals with materials that have potentially negative effects, you have a risk.”

Diane Lerner, a New York City-based senior consultant in the compensation practice at Watson Wyatt agreed. “Asbestos litigation can be really old, in some cases as much as twenty years old,” she said. “There is a risk involved given that.”


However, Lerner continued that the real issue is how to communicate with employees.

“I think the fact that this is a stock option plan doesn’t make it any different than any other plan, either way there are employee communication issues to address,” she said.
“The challenge is explaining the rationale [of the decision] to employees so that they don’t go into a panic. And, it’s easier to explain this now given the current economy than it was six months ago because many companies are in the same situation.”

Lerner continued that a sponsor with a situation similar to Federal-Mogul has a range of things to consider, such as whether to terminate the stock options program or to keep emphasizing its current strategy.

She added that deciding to keep a plan that is losing value is particularly tricky since a sponsor has to figure out what to do with a plan that is not working. In either scenario Lerner said a sponsor has to deal with explaining its approach to employees, which can be a challenging task.

– Nicole Halsey          editors@plansponsor.com