Thursday, November 16, 2006

Pay back for Pay Consultants?

Pay Consultants Seek Shield From Suits Spawned by New U.S. Rule (By Robert Schmidt):
Executive-pay consultants, about to lose their anonymity as the result of a new federal rule, are asking the companies they advise to shield them from lawsuits by shareholders angry over lavish pay packages for corporate executives.

The Securities and Exchange Commission rule will force companies to identify their pay experts in public reports starting next year.

Criticism of executive-pay packages has been fueled by cases such as those of Enron Corp. chief executive officers Kenneth Lay and Jeffrey Skilling, who reaped millions of dollars as their company imploded, and former New York Stock Exchange CEO Richard Grasso, who's being sued by New York Attorney General Eliot Spitzer over a $190 million payout.

Representative Barney Frank, a Massachusetts Democrat who is likely to become chairman of the Financial Services Committee in January, has said he will push legislation to give shareholders a greater say over CEOs' pay.

The consultants' efforts to win legal protection for themselves are "a great disservice to investors," said Lynn Turner, a former chief accountant at the SEC.

About 20 consulting firms work on executive pay, though only a handful are major players....

Consultants are usually hired by a board of directors' compensation committee to provide statistics on similar companies' pay packages and advise on benefits, bonuses and tax issues. The firms say ... that corporate boards, not consultants, decide how much executives will get.

"Our position is we don't want to be sued for work that we did in good faith," said George Paulin, chief executive officer of New York-based consultant Frederic W. Cook & Co. [Now that's a curious standard to interject, and why would a pay consultant even raise it to a litigable target? Was, e.g., the setting of Grasso's compensation package done in good faith?]

Some firms are asking their clients to agree to cap damages at the amount of fees they earn for the job, while others ask companies to indemnify them for legal costs and damages. [Which would have the effect of shielding them from bearing any damage arising from their redition of their services; their only risk is that they will not get paid for having provided services damaging to others.]

The idea for waivers came partly from the biggest accounting firms, which over the past few years have required companies to waive any requirement that auditors pay punitive damages. That practice has also come under fire from shareholders.

Some corporate-governance experts say pay consultants may be seeking a solution to a problem that doesn't exist. Plaintiffs' lawyers say they can't remember a pay consultant ever being the target of a shareholder suit.

Pay advisers "are not considered typically to be deep pockets," said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware in Newark. "Asking for a liability waiver is a little odd, a little over- protective and doesn't put them in a particularly good light."

Peggy Foran, New York-based Pfizer's senior vice president for corporate governance, said the company generally doesn't indemnify its consultants. The move by executive-pay consultants to shield themselves from suits has touched a nerve, she said.

"This really bristles investors," Foran said. "If you ask companies that are sensitive to shareholders, they would all tell you that they'd have to think twice before they signed something."

Officials from four of the biggest pay consulting firms -- Mercer, Towers Perrin, Watson Wyatt Worldwide Inc. and Hewitt Associates Inc. -- wouldn't disclose their policies on waivers. Paul Zeisler, a partner at Mercer, said that revealing the firm's "confidential" engagement contracts might violate antitrust laws....

Have a study of one of Guambat's opi, "Unrepresentative Swill (Part 3)"


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