Wednesday, April 26, 2006

Let Me Count the Fees

Psychiatric Solutions Inc., a company in the mental health business, has a Freudian slip in its proxy. The stock options chart refers to "Executed" rather than "Executive" officers. Off with their heads.

That's not why I'm posting about PSI, though. I was struck by the disclosure in its "Related Transactions" section that affiliates of Citigroup, which owns more than 5% of PSI's stock, earned about $15 million in fees from deals for the company last year.

Neither the deals nor the fees seem noteworthy, but PSI's decision to mention them is. Companies are supposed to disclose transactions with shareholders owning more than 5% of their voting stock, but only if the transactions are "material." Judges have explored the nuances of the word "material" the way Shakespeare dissected love, and they've left corporations a lot of wiggle room. PSI could surely have convinced itself that $15 million isn't "material" when earned by a financial conglomerate in the ordinary course of business. Instead they chose to disclose it, and for this I commend them. See, I can be nice sometimes.

Speaking of niceness, this post dovetails nicely with my last post, which was about how nice institutional investors have been to corporate managers, even those who award themselves absurd compensation packages while running their businesses into the ground. More disclosure like PSI's might help, by highlighting relationships between big institutions and the companies they invest in. But the SEC's new proposed rules on this stuff still leave materiality in the eye of the beholder (or, as Shakespeare put it on a bad day, "by judgment of the eye"). So don't look to the regulators to expose the secret love affairs between companies and their large institutional shareholders.