Boards Aim to Avoid
Conflicts
Safeguards Are Imposed
On Same Pay Consultant
For Executives, Directors
By JOANN S. LUBLIN
May 14, 2007; Page B3
Some corporate boards are replacing compensation
consultancies that also work for the company's managers, heeding
complaints that such arrangements can create conflicts of interest.
But other boards take a different approach -- allowing
their consultants to counsel management, under safeguards aimed at
minimizing conflicts. The protections include prior approval of the
work, frequent reviews and fee limits. Consulting firms, too, are
changing internal practices to reduce conflicts.
Shareholder activists worry that consultants who advise
directors about management compensation won't be unbiased, for fear of
jeopardizing more lucrative contracts with those same executives. For
example, Time Warner Inc. said in its most recent proxy statement
that it paid Towers Perrin slightly more than $2 million last year for
advice about retirement plans, health and welfare programs and related
issues. That dwarfed the $263,885 Time Warner directors paid another arm
of Towers Perrin for advice on executive compensation.
![[Norman Augustine]](HC-CS871_August_20051024224237.gif)
New Securities and Exchange Commission rules require
boards to disclose who their compensation consultant is but not the
consultant's other work for the company. Rep. Henry A. Waxman, a
California Democrat who is chairman of the House Committee on Oversight
and Government Reform, last week asked six major compensation
consultancies about services they provide to the nation's 250 biggest
companies, and said he may hold hearings.
Some directors believe compromises are necessary. "In a
perfect world, I would just as soon have a bright line you can't cross,"
said Norman Augustine, a retired Lockheed Martin Corp. chief executive
and chairman of the board compensation committee at ConocoPhillips.
"But I also realize that you can be so perfect that you're not
rational."
Since late 2005, the ConocoPhillips pay panel has
required managers to seek its approval before using Towers Perrin, the
board's compensation consultant. The committee has approved two such
management requests; the fees represented "a tiny fraction of their
total work for the board," Mr. Augustine said. "I don't think anyone
could argue we are getting biased information."
Morgan Stanley directors adopted elements of
both approaches. In April, the board chose Hay Group to replace
Hewitt Associates Inc. as its pay adviser. Hewitt also had counseled
management about pensions. Hay Group has no prior ties with Morgan
Stanley. Directors have pledged to require approval for management work
of more than $25,000 by the board's new adviser.
SERVING TWO MASTERS?
More boards are putting
in place procedures to minimize possible conflicts of interest
involving outside pay advisers that also work for management.
Home Depot:
Limits fees for advising management
Morgan Stanley*,
ConocoPhillips, Motorola: Board pay panel must approve
management assignments
Time Warner:
Frequent review of possible conflicts
Citigroup:
Employs additional adviser with no company ties
*When fees exceed
$25,000
Source: WSJ research
At Time Warner, directors have been regularly reviewing
Towers Perrin's work for management since 2002. Among other things,
directors check that John England, a Towers Perrin managing principal
who is their consultant, isn't involved in other projects and doesn't
work directly for Time Warner executives. "The committee wants to make
sure that the advice and guidance it gets from Mr. England is in no way
influenced by the company's [broader] relationship," a Time Warner
spokesman said.
Towers Perrin took extra steps to separate Mr. England
from other Time Warner assignments. He doesn't manage Towers Perrin's
corporate relationship with Time Warner, and his pay isn't affected "by
growth in Towers Perrin fees from the company," the proxy said. Those
are common practices adopted several years ago to help clients deal with
"perceived conflicts of interest," said Paula Todd, a Towers Perrin
managing principal.
Rival firms are adopting similar changes to segregate
board pay advisers from corporate projects. On Oct. 1, Hewitt plans to
shift its North American executive-compensation practice into an
autonomous unit; consultants will be rewarded solely on that unit's
performance, said Maurissa Kanter, a spokeswoman for the Lincolnshire,
Ill., firm. She said the change is intended to better serve clients,
though she said it also "strengthens our visible independence."
At Home Depot Inc., another Towers Perrin
client, directors last year limited the fees on management work by other
Towers Perrin units to 2% of the parent company's annual revenue, or
about $3 million a year based on last year's results. A person close to
the situation said the change was designed to "avoid the perception of
conflict." Home Depot paid a Towers Perrin subsidiary "significantly
less" than the cap for actuarial services last year, its proxy said. A
Home Depot spokesman said the fees are "constantly monitored."
Taking a different approach, Citigroup Inc.
obtains a second opinion. Directors tapped independent pay consultant
Yale Tauber last year as a check on Mercer Human Resource Consulting,
which also advises management. Board members believe the arrangement
adds "another layer of protection," said Mr. Tauber, a former Mercer
consultant. Mercer declined to comment.
The new safeguards don't pacify critics, however.
"There are enough compensation consultants to go around that there
doesn't need to be even the hint of a conflict of interest," said Paul
Hodgson of Corporate Library, a Portland, Maine, research group.
Write to Joann S. Lublin at
joann.lublin@wsj.com1
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