Not a Surprise: Corporate Insiders and Designers of Excessive Pay Plans Love the Proposed SEC Rule

The full-on avalanche of corporate insider-funded efforts to suppress shareholder votes and access to independent research continues. It’s all about killing the messenger. If they can’t convince shareholders on the merits, they will tilt the playing field so sharply it’s just about perpendicular. We’ll be reporting on some of the most appalling examples.

Longtime apologist — no, enthusiast — for excessive CEO pay Steven N. Kaplan and David F. Larker like the idea of regulating proxy advisors. They describe the “problem” like this:

(1) proxy advisory firms lack transparency; (2) institutional investors are influenced by the proxy advisory firms; (3) corporations are influenced by proxy advisory guidelines—in some cases, hiring the proxy advisors as consultants in an effort to improve ratings; and (4) proxy advisory firm recommendations may not be in the best interests of shareholders.

We are confident enough of the free market to believe that the decision about the value of proxy advisors is better made by the sophisticated financial professionals who voluntarily choose to purchase the analysis and recommendations — and who follow those recommendations when they agree and don’t follow them when they disagree. It is hypocritical of those who purport to believe in the free market to argue on behalf of a nanny state regulation like this proposals. The same goes for corporations who want to understand investor priorities and retain consulting services from experts. We would also rather leave the determination of what is in the best interests of shareholders to the shareholders themselves, and not academics who are funded by corporate insiders.

For example, CEO compensation consultant Frank Glassner did not like a critical tweet from VEA Vice Chair Nell Minow about this column. His non-substantive response:

Nell – – Like a gadfly Rumplestiltskin, have you been asleep the past 15 years? Look at the hundreds of ISS decisions that have been “bad calls”, and the deep research that David Larcker and the Stanford team have completed on this as well as other their other outstanding work.

We’re confident that investors and independent research paid for by investors are better at determining what are “bad calls” than those paid by corporate insiders to come up with ever-bigger pay plans. As she pointed out in her response, around 5 percent of CEO comp plans get a substantial “no” vote (which is advisory anyway). If the bottom 5 percent do not qet no votes, what number would the designers of those plans like to see?

Kaplan and Larker whine about boards having to spend time responding to critical analyses of CEO pay packages.

We are not sure that Robert Jackson, Luigi Zingales, and others appreciate the large amount of time that boards spend responding to the proxy advisory firms that might be better spent on other governance matters. Having served on several public company boards, we have seen a number of instances in which boards were rationally influenced by proxy advisory guidelines in ways that did not increase shareholder value, but did utilize valuable resources.

This is literally why we pay them the big bucks. This is exactly what board members are supposed to spend time on. Otherwise, they are in a closed loop of information provided by the very people who are paid by the very people getting the ridiculous pay packages. As for what does or doesn’t increase shareholder value or what makes good use of valuable resources, again, we prefer to leave that decision to investors and providers of independent research.

It is particularly disappointing to see academics fail to do basic research and fact-checking. They write:

In a normal market, companies with a poor service record are driven from the market. Proxy advisory firms, however, appear to be insulated from these forces. The dominance of ISS and Glass Lewis—despite evidence that their recommendations are inaccurate and potentially value-destroying to shareholders—suggests that a market failure has occurred.

In fact, this is a normal market and that is exactly what happened. There is a third firm which meets the stringent standards of registration as a ratings agency. There was a rival firm with an excellent product that failed because it was funded by corporate insiders and thus was not able to persuade the market of its objectivity. Other competitors were either bought or beat. We recommend the professors look into this; it would make an excellent case study for business students. Or, as there are no barriers to entry, Kaplan and Larker are welcome to open up their own proxy advisory firm and see if they can persuade sophisticated financial professionals that their “calls” on CEO pay are the right ones.


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