Monday, December 10, 2007

House Whine

There ought to be a website called BoreYouTube, reserved for items like this video of the hearings held last week by Congressman Henry Waxman to explore conflicts of interest in the world of executive compensation consulting. Having made it through the opening statements before dozing off, we remain convinced this is a non-scandal -- not because we believe the Towers Perrins of the world are truly objective, but because the term “independent compensation consultant” has long been on Proxyland's oxymoron list.

As we’ve argued here before, the parallel Mr. Waxman draws between independent compensation consultants and independent auditors is rather weak, in the absence of some regime that makes consultants legally accountable to shareholders, the SEC, or anyone else. Also, companies don't have to use compensation consultants, which makes these folks less like auditors and more like hair stylists, hired to make their clients look and feel good. (The hair stylist bit is our attempt to avoid repeating our friend Charles Munger’s comparison of compensation consultants to a different service profession.)

The Waxman Theory – that consultants who perform other lucrative jobs for the CEO won't give objective compensation advice – makes sense, but we believe Mr. Waxman is digging into a side dish while neglecting the main course. Consultants’ conflicts, like mashed potatoes, are easy to munch on, but Waxman should grab his knife and saw into the gristly steak of director independence. (If we had an editor, he or she would surely have axed this lame metaphor, but we’re sticking with it.)

If the directors who make up compensation committees truly had an independent mindset, they would (1) make absolutely clear to consultants that independent directors, not management, are the boss of them (2) insist consultants be paid only from a separate and generous compensation committee budget, and (3) employ a network of secret caddy-informants in case the CEO tries to tee off with anyone from the consulting firm.

Loading proxy statements with disclosure about compensation consultant conflicts would merely assign to investors another watchdog job that directors ought to be doing themselves. And we all have better things to do, like finally getting around to watching the famous “I Feel Pretty” video that shows a lovefest among John Edwards, his hair stylist, and his hair.

1 comment:

David Harper said...

Hi Wendy,

I was a comp consultant for eight years. I agree with all of this. Hair stylists? Exactly. This conflict is implicit but very real. Historically, compensation consultants *really* worked for managers (we'd meet with managers, confer with top HR who reported to Sr. management). The presentation to BOD was, is still in many cases, a sort of afterthought rubber stamp. Waxman is barking up the wrong tree, nothing to do with other services. Most comp consultants are quite conflicted without providing any other services; as hair stylists they want to appease management.

Got to lay this, as you say, at the feet of Comp Committee members. They are the only ones structurally capable of objectivity. But you know, the truth is that Comp Consultants who report to Directors are a recent innovation...