Boards Aim to Avoid Conflicts
Safeguards Are Imposed On Same Pay Consultant For Executives,
By Joann S. Lublin
The Wall Street Journal
Monday, May 14, 2007
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.
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
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.
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
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
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