James Leas Speech to the IBM Stockholders

April 27th 2004

Mr. Palmisano, members of the board, especially Mr. Vest, president of my alma matar.
I was an IBM engineer for twenty years during which IBM patented over 30 of my inventions. For the last 9 years of my career I worked in IBM's patent law department.
I am presently a patent lawyer in private practice in Vermont. On July 31, 2003, in the class action case of Kathy Cooper v. IBM, a federal court in Illinois declared that IBM had violated federal discrimination law. But IBM stockholders were not convicted.
Nor were IBM customers or employees found guilty. Mr. Palmisano, you and your predecessor, Lou Gerstner were responsible for making and maintaining the decisions, and the federal court essentially convicted both of you. The court rejected IBM's excuses that the law changed and that IBM did not know the law.
From IBM's own documents Judge G. Patrick Murphy stated that "IBM was aware of the age discrimination issues that would come with the new cash balance formula."
The court said that indeed the plan's actuaries told IBM of two separate ways that the cash balance formula violated the law.
Thus, from IBM's own documents Judge Murphy concluded that "IBM . . . Proceeded [with the cash balance plan] with open eyes and was fully informed of the consequences of the litigation that was sure to come." Mr. Palmisano, the court found that you and Mr. Gerstner knew you were engaged in
illegal action. While IBM's liability has now been established, the judge has yet to rule on the remedy, which IBM said could cost it $6 billion.
When you and Mr. Gerstner slashed long promised retirement pay and retirement medical in 1999, you created an unprecedented groundswell of protest among tens
of thousands of IBM employees who were outraged that IBM was stealing earned compensation from them when they were old and most in need.
Employees moved into action because IBM broke its often repeated promises that retirement pay and retirement medical insurance were a secure part of their earned compensation. Covered by national media, massive employee meetings around the country that summer led to a Senate hearing chaired by Vermont Senator James Jeffords, stockholder resolutions, union organizing, the class action law suit that employees won, and then a historic vote in the US Congress last September. The national protest campaign quickly had its first success.
Days before the Senate hearing on September 20, 1999, you and Mr. Gerstner partially backed down, allowing about 35,000 additional employees to choose between the pension plans. But even those 35,000 were not satisfied because 60,000 of their colleagues continued to be forced into the cash balance plan that halved their promised retirement pay.
IBM employees protested long and hard, not just for themselves and their coworkers, but to protect the company, its values, its customers, its stockholders, and to protect IBM from following the path forged by other companies whose executives were engaged in illegal action.
IBM employees have a strong interest and a strong desire to help IBM succeed.
They put their heart and soul into their work, and they have a wonderful tradition of helping each other.
But Mr. Gerstner and Mr. Palmisano had a different agenda, a personal agenda, and Gerstner took out more than half a billion dollars for himself even though in his last seven years there was no revenue or profit growth to show for it. It wasn't just employees who revolted in massive numbers.
Within six weeks of the court ruling last July, Congress overwhelmingly passed an amendment introduced by Vermont Congressman Bernie Sanders to prevent federal funds from being used to overturn this ruling, as the Bush administration was then threatening.
You might think that as shareholders we would benefit from slashing retirement pay.
But what if no company money was saved? What if the $70 billion pension trust fund already had a $17 billion surplus at the time? What if the pension trust fund was earning interest faster than it was paying out benefits to retirees, so IBM was paying nothing each year for the pensions of its retirees and the pension trust fund was growing? What if the real purpose of slashing pensions was to use what was then a little known accounting rule treatment of pension money to inflate IBM's profit report with "vapor profit" from the pension fund and boost executive pay?
The vapor profit did not help stockholders because no money could be transferred from the pension fund. It was just an accounting rule gimmick. So only the executives gained, and their personal gain was the underlying reason for the illegal action. Previous IBM executives, to their credit, had done the opposite.
They had established and built this pension trust fund that enabled IBM to provide a very valuable benefit to every IBM employee and retiree at no cost to IBM and at no cost to shareholders. The pension provided enormous competitive advantage in attracting and retaining the most talented employees in the industry, and building loyalty and dedication.
When you and Mr. Gerstner reneged on that promised pension and retirement medical, you blew that competitive advantage, you blew that loyalty, and you blew that trust.
And when IBM employees found that Gerstner had made the decision and Palmisano maintained the decision for totally self serving reasons many talented IBMers, including many inventors left to join the competition. As an in-house IBM patent agent, I personally watched dozens of talented and dedicated
IBM inventors leave IBM to join competitors in 1999, making our competitors more competitive and IBM less. IBM paid a heavy price to help enrich Mr. Gerstner and Mr. Palmisano. Reneging on promised retirement pay is a good part of why IBM missed deadlines and why sales stagnated and profits declined these past four years.To get IBM back on track much work is needed by an honest executive leadership.
For starters, IBM should end age discrimination by providing all employees with the choice of pension and retirement medical plans. It should also permit independent investors to run against the current board members to help restore IBM's dignity and values. Only then can IBM truthfully declare itself to be an equal opportunity employer and restore trust that its promises will at last be kept. Thank you very much.

James Marc Leas was an engineer and patent agent with IBM for twenty years. He can be reached at 802 864-1575, 802 734-8811(cell), jolly39@juno.com, vermontpatentlawyer.com