Heads executives win, tails shareholders lose. That is pretty much the line being spun by remuneration consultants and reported by the Financial Review today. The AFR reported that “boards of listed companies are under increasing pressure to restructure remuneration of senior executive.” One of those men paid by executives to determine executive salaries funnily enough came to a similar view — Mercer boss, Paul Riggs, claimed that “the changes in the mark will lead to an increase of activity reviewing plans and some specific directional changes”.

Make no mistake, this is a complete slap in the face to shareholders already suffering from 20-plus percent portfolio losses.

While auditors and independent experts (rightfully) receive an enormous level of criticism for their conflicted roles in advising the companies which pay them, remuneration consultants like Mercer have assiduously managed to avoid any scrutiny of their highly conflicted position. The law provides that listed companies are required to name their auditor in their Annual Report (Reports must also specify amounts paid for non-audit services throughout the year). By contrast, the identity and payments made to remuneration consultants are not provided to shareholders. Shareholders do not know who the remuneration consultants are, how much they are paid or whether these consultants perform any other work for the company.

Despite the clear conflict, no information is provided to shareholders. A remuneration consultant who is hired by a CEO to perform actuarial work, may be compromised when determining the CEO’s pay structure. Renowned academic, Michael Jensen, told the Financial Review earlier this year that:

There’s a huge conflict of interest there…it’s not lost on anybody that if you end up negotiating with the board, from the CEO’s viewpoint a very tough contract, that CEO is probably not going to be very interested in hiring you to do rank and file. It’s the problem that cropped up in accounting with auditors from the consulting firms.

The issue was followed up last month by Michael West, who noted that:

RCs, as they are affectionately known, are lackeys who tell boards what they want to hear. In [the case of Oxiana, and Owen Hegerty’s now infamous golden handshake, it was] Mercers. It is a preposterous notion that someone who is paid a fee to tell someone how much money they are worth will come up with the wrong answer. It is also preposterous that boards can outsource their responsibility to price labour in a market they know better than anyone – their own.

The man who apparently “wrote the book on corporate governance”, Telstra director, Charles Macek, weighed into the debate, telling the AFR today that “boards would be investigating the appropriateness of remunerations packages”. Macek noted that “this is the first year for many many years where shares returns will be negative [and] this is going to be the issue confronting remuneration committees for the next 12 to 18 months.” Of course, the only issue is that executives may actually be facing with diminishing remuneration, clearly, an untenable situation. Shareholders facing diminishing returns however, is an acceptable situation. Macek may have written the book on corporate governance but he sure as hell hasn’t read it.

Australian remuneration committees appear to consist of directors in apparent awe of their executives, such that they were happy to pay millions in good times (courtesy of a rampaging market, which it now appears, had very little to do with actual executive performance) and renegotiate contract based on total shareholder returns in the bad times.

As usual, the man who should have written the book on corporate governance was far more accurate in his appraisal. In his 2005 letter to shareholders, Warren Buffett noted:

Too often, executive compensation in the US is ridiculously out of line with performance. That won’t change, moreover, because the deck is stacked against investors when it comes to the CEO’s pay. The upshot is that a mediocre-or-worse CEO – aided by handpicked VP of human relations and a consultant from the ever accommodating firm of Ratchet, Ratchet and Bingo – all too often gobs money from an ill-designed compensation agreement.

Too often indeed.

Peter Fray

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