A BONE TO PICK.

To the Editor:

I have read your magazine and found it a helpful source of information to me as both an executive and director of companies. Consequently, I was shocked and disappointed with the recent best and worst boards article (CE: Oct. 99). Specifically, the portion of the article that criticizes the board of directors of Conseco, of which I am a proud member, is riddled with gross factual inaccuracies, misstatements, and omissions. Unfortunately, the authors did not carefully read either Conseco's proxy statement or annual report to shareholders.

I thought that it would be helpful to take several statements from the article and then respond with the facts:

* Statement: "The composition of the Conseco board is a throwback to the old days and ways of linkage. Of nine directors, three are inside officers, one is a retired officer, one is the retired founder of a recent acquisition, one is a member of Conseco's law firm, one is a venture capitalist, and one is the retired CEO of the company's bank. That makes it hard to staff the audit and compensation committees with independent directors. There are no women or minority directors on the board."

* Reality: The Conseco board has 11 directors, not nine. The only attorney on the board is Dennis Murray. Mr. Murray's law firm does not represent Conseco. indeed, his firm is not a corporate law firm, but rather represents plaintiffs in financial and other litigation. He is a longterm, substantial investor in Conseco. Robert Nickoloff is a board member with venture capital as well as operating experience. However, Mr. Nickoloff has no venture capital relationship with Conseco.

James Massey is a retired bank executive, whose bank, Merchants National, no longer exists, having been absorbed into the National City banking organization. None of these banks has a material relationship with Conseco. Consequently, Conseco has many independent directors and has no problems in staffing committees. Further, Ngaire E. Cuneo, a member of the Conseco board, is a woman.

In light of the foregoing, it becomes clear that the Conseco board is neither a "throwback to the old days" nor a product of "linkage." Rather, it is a board dominated by independent directors.

* Statement: "In addition, although the five-year performance graph for Conseco shows a nasty drop-off in '98, the board rewarded Mr. Hilbert's extraordinary efforts in acquiring Western National Life by granting him a $1.9 million interestfree loan in return for a non-compete agreement."

* Reality: Conseco's 1999 Proxy Statement clearly states that this loan transaction was entered into in February 1988, not 1998. Obviously, the decision to grant this loan over ten years ago had nothing to do with recent results.

* Statement: "Most of the top executives, including the CEO, have a reload provision in their vested stock options..."

* Reality: There are no reload provisions in the stock options. Reload grants have been made by the Compensation Committee on a case-by-case basis after taking into account the benefit to Conseco from accelerating the tax deductions resulting from the accelerated exercise of outstanding stock options.

* 1998 Option Grant. In referring to approximately 2.5 million shares of option grants to Mr. Hilbert in 1998, the article fails to note that a 1.5 million share grant was made in exchange for an amendment to his contract that put new restrictions on his compensation. The remaining grants were made to replace shares surrendered upon his exercise of options on an accelerated basis, which resulted in substantial tax deductions to Conseco.

* Statement: "A board more concerned with executive compensation than with corporate governance...."

* Reality: This statement, and the statements with respect to Mr. Hilbert's compensation in 1997 and 1998, are misleading in that they ignore the essential nature of his compensation. The vast majority relates to stock options and Conseco's stock performance. Most of Mr. Hilbert's compensation consisted of option-related gains, reflecting the increase in Conseco's stock price over a multi-year period since the options were granted. According to The Wall Street Journal, from 1988 to 1998, Conseco generated an average annual total return to shareholders (stock price appreciation plus reinvested dividends) of 47 percent per year, even with the down year in '98. This was the 17th highest return among 1,000 major U.S. companies.

I also find it strange that your article neglected to mention that the bonus and option arrangements received overwhelming majorities when submitted for approval by Conseco's shareholders.

* Statement: "The directors pay themselves well, which is not surprising under the circumstances. Each director receives a cash retainer of $50,000 plus an annual award of up to $30,000 in stock awards ($11,000 in 1998). In addition, each outside director receives 5,000 stock options each year. Not bad for a relatively small insurance company board."

* Reality: It is misleading, and somewhat disingenuous, to criticize by implication a director compensation program which is not only within the range of customary programs but also entirely consistent with one of the "Hallmarks of an Effective Board" advocated in the article.

Further, Conseco is one of the largest publically held insurance companies and the fourth largest diversified consumer finance company in the U.S. With approximately $97 billion of managed assets at September 30, 1999, Conseco is not "small" by any standard.

* While not necessarily agreeing with the checklist advocated in this article, I thought that it might be helpful to compare the Conseco board to the "Hallmarks of an Effective Board." Judged by these standards, the Conseco board compares favorably with the boards of most public companies.

* Board Size. Our board has 11 members, within the 5-15 range suggested.

* Outsider/Insider Ratio. The Conseco board has a majority of outsiders but has three, instead of one or two, insiders. It does not have any former CEO of Conseco on its board.

* Potential Conflicts of Interest. Conseco has no investment bankers, legal counsel, commercial bankers, or consultants doing business with the company on its board, nor are there any interlocking directorates.

* Narrow Special-Interest Groups. Conseco does not have any directors representing blocks of shares, relational investors, or family members.

* Demographic Balance. The Conseco board has a valuable mix of backgrounds, skills, and experiences in the various aspects of the financial services industry, as well as health care, governmental affairs, law, philanthropy, and other areas. Conseco has had a woman as both an executive vice president and a director for a number of years.

* Stock Ownership by Directors. We know of no company in which outside directors have made greater personal investments than Conseco. Conseco also has option and stock purchase plans which have further facilitated ownership of stock by directors.

* Committee Structure. While Conseco does not have a corporate governance or independent director committee, it does have active audit and compensation committees with clear mandates.

In summary, I strongly believe that the characterization of the Conseco board in your article was plainly wrong and believe that a prompt and full correction should be made.

John M. Mutz

Vice Chairman PSI Energy, Inc. Indianapolis, IN

Robert Lear, co-author of "The Best and Worst Boards" responds:

I don't blame Mr. Mutz for complaining about the overall accuracy of the Conseco write-up in our article about the Best/Worst Boards. The chore of reading those dozens of proxy statements must have gotten to me. I am embarrassed by some errors pointed out here by Mr. Mutz. This was poor research and poor reporting on my part, and I am profoundly sorry.

But these points were not the main thrust of our criticism of the Conseco Board. I still contend that the board is "more concerned with executive compensation than with corporate governance." The CEO took down more than $13 million in bonuses in the years 1996, 1997, and 1998. The options program for Mr. Hilbert, in our opinion, was out of line on the high side. An attempt was made to control things somewhat in 1998 by making a re-load provision available to Mr. Hilbert and other executives but this was not a major enough correction, in our opinion. And I still contend that the change of control agreement of the top three executives are most unusual--five times their annual salary and bonus, plus full buy-out of their outstanding options. And, forgive me, but the page after page explanations in the proxy statement of the whole Conseco range of executive compensation and stock option plans is about as complicated as it gets.

Does the board overdo the compensation bit with its 12 Compensation Committee meetings, high payouts, and complicated program? We think so. And to be sure, there is no corporate governance committee.

I still think the directors pay themselves very well. Isn't more than $70,000 in 1998 plus an option grant of 5,000 shares good pay? We think so. And Mr. Mutz objects to my phrase, "a relatively small insurance company," but I still think that is a fair appellation.

We do not write this article every year to harass companies like Conseco. We are interested in seeing all corporations adopt good corporate governance practices and discontinue those practices which we feel are detrimental to good corporate governance. While acknowledging and repenting my reporting errors, would I still choose Conseco as one of our Worst Boards in 1998? Yes.

According to The Wall Street Journal, there are some current events at Conseco. The stock has been battered, profits have fallen, and debt-ratings have been lowered. The dividend has been cut and $500 million has been raised from Thomas H. Lee Co. David Harkins of Thomas Lee Partners will go on the Conseco board. One might suspect that some changes are in order for the executive compensation programs at Conseco.