E*Trade faces the music

Cotsakos said he would hand back another 2 million shares of the restricted stock he received last year as well as $3.6 million that the company contributed to his retirement plan. Earlier this month, Cotsakos returned to the company 2 million shares of restricted stock and $6 million from his retirement plan. He is holding on to an additional 667,000 restricted shares received last year.

The latest retirement funds and stock will be handed to E*Trade employees based on their performance. Cotsakos said his announcement was not the result of any wrongdoing by him or the company.

"I didn't (return the stock and funds) because I did anything wrong or because what the compensation committee did was wrong," he said. "I did that because times have changed, and when times change, when you're a leader, you go out and do the right thing at the right time.

"I hope this dispels any doubt that my commitment to E*Trade is anything but unwavering."

Still, some shareholders continued to criticize Cotsakos' compensation from last year, noting that under his original package he made more than Sanford Weill, CEO of financial giant Citigroup.

"I think it's exorbitant," said Rudy Luca, a Redwood City, Calif., resident and longtime E*Trade shareholder. "I believe that he pulled back because he was being ridiculed."

Luca's call during the meeting for Cotsakos and the rest of E*Trade's board to step down was met by a smattering of applause from the more than 150 shareholders present. Cotsakos and Critical Path co-founder David Hayden were re-elected during the meeting.

A year in the hot seat
E*Trade's corporate governance has been in the spotlight since last fall, when the company revealed that it had forgiven a $15 million loan to Cotsakos. That revelation prompted a shareholder lawsuit, filed in California Superior Court in December, which charged the company's board with gross mismanagement and breach of fiduciary duties partly because of the loan forgiveness.

E*Trade has drawn even more criticism in recent months.

The company posted an annual loss last year of $242 million, or 73 cents per share, as the downturn in the market slowed trading and revenues at its core brokerage division. Meanwhile, the company's management structure has drawn scrutiny for having 12 chief officers.

During the meeting, Cotsakos emphasized the company's survival and performance during the market downturn, noting that hundreds of Internet companies had gone out of business and that the stock market had lost $4 trillion in value. Although the company posted a $242 million loss last year, Cotsakos emphasized that the company had posted seven straight quarters of operating profits from ongoing operations, a figure that does not include one-time charges such as those for restructuring or the write-off of goodwill.

"Everyone is looking at a different version of what earnings are," Cotsakos said. "What we're committed to is driving profit from ongoing operations."

Cotsakos' salary has drawn the most complaints from investors. Last month, the company acknowledged that Cotsakos' compensation topped $88 million last year, including salary, bonus, restricted stock grants, the loan forgiveness and the stock options he exercised. Included in that amount was about $18 million that E*Trade gave him to pay the taxes related to the loan forgiveness and other benefits he received.

On Thursday, the online broker said it had renegotiated Cotsakos' salary earlier this month and agreed to a shake-up of its board of directors. As part of a new contract, Cotsakos will no longer draw a base salary.

Cotsakos' salary led some investors to question the makeup of the company's board of directors and its compensation committee, which determines the salary of Cotsakos and other executives. Hayden's role as a board member and the chairman of the compensation committee has drawn an especially critical eye since E*Trade was an early investor in Critical Path and is still one of the company's important customers.

"It seems like they're all scratching each other's backs," said Al Paolucci, a shareholder from Menlo Park, Calif.

Conflict of interest
In a report advising shareholders how to vote in Friday's meeting, Institutional Shareholder Services (ISS), an adviser to major money managers and pension funds, took aim at Hayden.

"ISS believes that David Hayden's involvement with the compensation committee represents a potential conflict of interest," the organization said in its report. "Mr. Hayden's role on the committee may not be aligned with the best interests of shareholders."

On Thursday, E*Trade moved to address this concern and those raised in December's shareholder lawsuit. The company announced that it would appoint a new, fully independent board member, who would replace Hayden as chairman of the compensation committee. Although Hayden would remain on the committee, the company plans to remove Softbank Vice Chairman Ronald Fisher from the compensation committee and replace him with Lester Thurow, a professor of management and economics at the Massachusetts Institute of Technology.

Cotsakos and Hayden, who recently resigned as executive chairman of Critical Path, ran for re-election unopposed. However, candidates are required to submit nominations 120 days before the meeting, which would have been before information about Cotsakos' salary was released.

Meanwhile, outside the Hotel Sofitel in Redwood City, where the shareholder meeting was held, about 20 protesters from an animal-rights group called for E*Trade to stop allowing its customers to trade the stock of Huntingdon Life Sciences, a product development company that operates research facilities in the United States and the United Kingdom.

At times the protesters' electronically amplified complaints could be heard within the halls of the meeting room, but they didn't stop the proceedings. E*Trade noted in a statement that it has never invested in Huntingdon Life Sciences and has never recommended that its customers buy shares in the company.