Our friends at the CFO Blog reported that several major institutional investors, including the New York State Common Retirement Fund, City of New York and Board of Investment for the State of Illinois, have sent similar letters to the chairs of compensation committees for several fortune 500 companies including Citigroup, GE, Hewlett-Packard, Verizon and Wal-Mart over concerns of using compensation consultants in multiple roles. In a joint letter dated October 23, 2006 to Exxon Mobil, the institutional investors express concern over “disclosure practices regarding the compensation committee’s use of compensation consultants.” The institutional investors note that corporate compensation committees rely heavily on compensation consultants in multiple business relationships, including advice on “performance measures and pay incentives for corporate executives.”
The institutions are concerned that a consultant’s recommendation to a compensation committee will be compromised by having multiple business relationships, ultimately jeopardizing “shareholder confidence.” Specifically, with strict requirements by the SEC for “compensation committees to formally sign off on the Compensation Discussion and Analysis (CD&A) portion of the proxy statement,” the institutions demand that compensation consultants be free from any conflict of interest and be able to “provide independent, unbiased advice regarding executive compensation.”
The institutional investors request that Exxon Mobil respond in writing to the following two sets of questions:
Does the consultant employed by the Exxon Mobil Corporation compensation committee provide any other consulting services to the management of the same company? If so, please describe the nature of that work and whether such arrangement is disclosed in the CD&A portion of the proxy statement?
Does the Board of Directors have a policy that prohibits the compensation committee’s consultant from providing other services to management of the same company? If not, would the company adopt such a policy and disclose it in the CD&A portion of the proxy statement?
Moreover, the institutional investors correctly point out that this conflict is analogous to issues raised over an auditor’s independence during the height of numerous corporate accounting scandals in recent years “where an accountant’s role as auditor conflicted with its often far more lucrative role as consultant.”
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