Expert Perspective by Grahall’s Robert Cirkiel and Garry Rogers
In September, The Conference Board released its six month study by the Task Force on Executive Compensation. “The task force’s report and recommendations set forth Guiding Principles, which, it believes, if appropriately implemented, can restore corporate credibility with shareholders and other stakeholders and trust in executive compensation pay processes and oversight.” Those principles are:
1) Pay for the right things and paying for performance
2) Pay the “right” total compensation
3) Avoid controversial pay practices
4) Credible board oversight of executive compensation
5) Transparent communications and increased dialogue
These are certainly admirable goals for the Board, and we are pleased to say are part of Grahall’s approach to every executive compensation assignment.
Of particular interest to us was Principle #4: Credible Board Oversight. Here, the Conference Board addresses the appropriate use of compensation consultants, and reinforces the need for these external advisors to be truly independent. It also addresses the concerns about conflict of interest by stating that the Compensation Committee should pre-approve any other work performed by the compensation consultant or its affiliates … including
“a review of the scope of the work to be undertaken and the fees involved. The compensation committee should monitor the engagement to ensure it does not adversely impact the consultant’s independence. If additional work is undertaken, the company should disclose the amount of fees paid to the consultant both for executive compensation work for the committee and for other work done by the consulting firm and its affiliates.”
Grahall’s Robert Cirkiel and Garry Rogers commented on The Conference Board’s view of assuring independence between the Company and its compensation consultant.
Mr. Cirkiel shares that his orientation is towards greater transparency, so he would prefer to see such principles used as guidelines and not ultimately established as rules. Cirkiel says: “Projecting out, these principles might bifurcate the compensation consulting industry. Management’s compensation interests could be served by a multi-service firm under the premise that they are “trusted advisors.” The Compensation Committee, on the other hand, could use a different firm, one that does not provide other services to the company. Perhaps consulting firms will declare themselves affirmatively and universally as consultants to either management or to the Board.”
In Mr. Cirkiel’s view, with each side armed with its own expert, executive compensation deliberations could begin to resemble collective bargaining sessions. Management’s consultant will work to justify higher pay and the Board’s consultant will work to knock it down. The Board will need to be focused on pay in the context of business strategy, and management will not be constrained by this. At the end of the day, the consulting industry may very well embrace and promote this “bargaining/adversarial” model, because it theoretically doubles the size of its potential market. Cirkiel points out that when Sarbanes–Oxley was passed, the accounting firms cried all the way to the bank.
Mr. Rogers elaborates on Mr. Cirkiel’s position, reflecting further on the issues of conflict of interest with some additional thoughts. He states: “companies could avoid disclosing the cost of ‘other’ projects either by hiring a second consultant (as Cirkiel suggests), or maybe by hiring no consultant at all!” He continues, “It seems potentially perverse that a Board might avoid certain disclosure obligations and criticism by not hiring a compensation consultant. This was the case with Chesapeake Energy’s Board granted CEO McClendon a pay package worth some $100 million in a year when the stock price and profits fell over 50%. There was plenty of criticism around that decision.”
Rogers believes Boards faced with the “adversarial” model, may attempt to reduce overall expenditures and maintain control, and might ‘lend’ their compensation consultants to management or take the position that the consultant is not technically conflicted. He points out that these proceedings differ from court, because there is no independent decision maker – in the end, the Board has both the final authority to determine the structure and size of the compensation program and takes the heat for those decisions in a very public forum. In addition, Mr. Rogers feels the Board won’t be pleased about paying an outside consultant to provide management with ammunition to extract higher pay.”