April 10, 2006
Like master, like man
The expropriation of shareholder wealth by predatory corporate executives is one of the great scandals of the past quarter-century, and in particular the past decade. "Compensation consultants" play a central role in this marginally legal enterprise. (I say "marginally legal" because corporate executives, as fiduciaries for the shareholders, have a legal duty not to overpay themselves.)
Monday's New York Times takes a close look at the compensation-consulting racket, which (due to an astonishing loophole in SEC regulations) is usually done anonymously. That is, management tells shareholders that the excessive paychecks of the CEO and his cronies were approved by an "independent outside expert," but not who the alleged expert is.
A little snooping by the Times's Gretchen Morgenson reveals that the "independent" compensation-consulting firm which approved a nearly $20 million paycheck for the CEO of Verizon in a year when Verizon saw its credit rating fall, froze pensions for its managers, and had its net income decline by 5% is also Verizon's benefits manager, and has taken in about half a billion dollars from its Verizon account in the past decade. No doubt Verizon management will keep those dollars flowing as long as the consultant makes suitably generous recommendations about senior executive pay.
Quite a cozy little arrangement. And remember, this is the stuff corporate executives don't go to prison for. No wonder the moguls were so willing to hire lobbyists like Abramoff and contribute to politicians like DeLay. Men after their own heart.
As a management consultant (never consulted on executive pay), may I suggest your wording be altered, from: "...firm which approved..." to something more accurate in terms of the typical consultant/client relationship.
In my experience (and according to how I read the article in this Verizon case), a consulting firm provides data and input, advises and presents pros/cons, formulates alternatives (where appropriate), makes recommendations, and "helps" those making decisions.
Might the consulting firm have "recommended" what turned out to be the actual amount and form of the Verizon CEO pay package? Perhaps; even probably. But not necessarily.
In fact, a reason some of my former colleagues left the management consulting field is precisely that they don't often get to "decide" or "approve" anything. You're either content in a background role, enjoying respect for the value of your skill, input and ideas, or you're kind of unhappy as a "powerless" consultant -- and on your way to some other line of work.
Posted by: Terry Ott at April 10, 2006 07:41 AMAn "astonishing" loophole in SEC regulations? Why, given the Government's accomodation to corporate interests, should this be astonishing?
Want to take a bet on how quickly this loophole will be closed?
Posted by: Jay C at April 10, 2006 09:40 AM
Mark, let me congratulate you for recognizing what so many others don't: officers of a corporation owe fiduciary duties to stockholders, and those duties might limit their compensation. I can't tell you the number of lawyers who just don't get this. Now, there's more to any argument about executive compensation, and certainly market forces and the rest are relevant, but we can't forget we're talking about fiduciaries.
Note that "management" doesn't make disclosures regarding the compensation determinations made for the CEO and other senior executives. Those disclosures are made by the compensation committee. Compensation committees typically have a right to choose their own experts, including their own compensation consultants. I imagine that, after this NYTimes story, most will look again at their choice.
Posted by: Thomas at April 10, 2006 10:04 AMYes it's a scandal, but I have relatively little sympathy for the shareholders who rubberstamp these pay rises every AGM. Yes it's unfair on the people who put their pension money in firms like Verizon, but then again people should invest their pension money in funds that take an activist approach.
Posted by: cdammers at April 10, 2006 10:13 AMThere are fiduciaries more at fault here than the executives.
First there are the board members who approve these deals.
Then there are the institutional investors - the mutual funds and pension funds who are supposed to represent their participants' interests but don't.
Then there is an entire set of political and legal structures and rules, including SEC regulations, that makes it extremely difficult to hold any of these people accountable.
I'm surprised that a sophisticated lawyer like you can't figure out the solution to the problem of excessive executive compensation. The problem is caused by the separation of management from ownership, which permits management to pay itself more than a market rate, at the shareholders' expense. The solution is to restore the market for corporate control by repealing all the laws the make hostile takeovers too expensive, difficult or just plain impossible - get rid of the Williams Act, outlaw poison pills and staggered boards, etc., etc. The result: raiders will take over companies with over compensated management, fire all the greedy managers, hire new ones who will work for less, and keep the difference for themselves. The fear of being taken over would probably lead most CEOs to keep their compensation down to levels that wouldn't attract raiders. This solution would solve the problem of excessive executive compensation completely, and I hope you will join me in urging its adoption.
Posted by: DBL at April 12, 2006 09:27 AMI agree that loosening restrictions on takeovers would help, but there are some more radical changes that I would like to see adopted. Probably my favorite is to make it easy for someone to challenge for a board seat. Why shouldn't the shareholders get to choose their representatives instead of having them effectively appointed by management, who the board is supposed to supervise?
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