Stickman Transparency Police

Stickman Transparency Police

On October 7, 2013 the NASDAQ OMX filed a petition with the SEC requesting they require ISS, Glass Lewis and similar investor advisory firms to open up about their models, methods and potential conflicts of interest. As the influence (and revenue) of these firms has grown, there has been increasing concern about the opacity of how they make their recommendations. It’s a bit ironic that the people who most passionately holler for executive compensation disclosure are firms with little or no disclosure of their own. The point of public company regulation has generally been focused on making it safe for the average investor to make investments. This is the point of registration rules, insider trading restrictions, disclosure and the like. Everything is about providing enough information, in a digestible form, to allow the “every man” to make investments. Opacity does not support this goal.

Publicly traded companies have been increasingly at a disadvantage when deciding how to approach their executive compensation. Following the shareholder advisors' guidelines has contributed to the homogenization of public company executive compensation. These vanilla programs may meet the advisors' requirements but may not meet the needs of the company and their investors. We all know that the rules have done little to slow the rise of pay at the largest companies.

Private companies have a wide remuneration horizon that allows them to pay in ways they best feel match their strategy and goals. They just need to ensure that pay is affordable and allowed within their specific corporate structure. For those private companies that can continue to grow without money from public investors, the prospect of being stripped naked (then told exactly what to wear) by advisory firms is a material deterrent to going public.

Companies must weigh whether going or staying public is worth the trouble. Remember that the money companies get for their IPO is relatively short-term, but the efforts to deal with additional reporting and disclosure is forever. Following the road less traveled is often how these companies became successful. Becoming one of the crowd has little obvious upside to them.

Note: In addition to the effort and lack of control, the cost for executive compensation consulting is far higher for public companies. There is more risk for the consultants. There is more uncertainty in approaches that vary from the norm. There are far more calculations, reports, defenses that must be created. And, the consultants have little more insight into exactly how the shareholder advisors will judge their work. This uncertainty leads to conservative approaches that may do more harm than good. When this is added to already vanilla market data we get a world with tons of work and little differentiation.

While incredibly high executive pay may not be great for investors, the prospect of missing opportunities from growing new companies may be even worse. If the advisory firms’ super secret approach keeps even one great company from being available to the average investor, their policy has failed. Remember the old adage: Transparency in all things, including transparency.

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