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Wall Street Journal, May 14, 2007 article


The Wall Street Journal  

May 14, 2007


Boards Aim to Avoid Conflicts

Safeguards Are Imposed
On Same Pay Consultant
For Executives, Directors
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]

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.

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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