Robert Denham, Munger Tolles Partner, on Executive Pay: Change It - 21 Sep 2009

September 21, 2009 2:46 PM

Munger Tolles Partner on Executive Pay: Change It

Posted by Zach Lowe

Last winter, Munger, Tolles & Olson partner Robert Denham got a call asking
him to cochair a committee conducting a report on executive
compensation at public companies--many of which are his firm's clients.
After thinking it over for a few days, Denham accepted the project,
helping the The Conference Board, a nonprofit that issues advice to businesses, compile recommendations on the topic. 

Some corporations have already made these changes--60
percent of the Fortune 100 now have clawback policies, for instance, up
from 18 percent two years ago. But for others, the Conference Board's
recommendations will mean major changes. We asked Denham, former
chairman and CEO of securities brokerage Salomon Inc., why companies
should take the report's advice.

How did you get involved with this report? 

I was involved with the Conference Board in the 1990s, when I was
chair of Salomon. I had a historical connection with them, so they
reached out to me. 

Were you concerned about heading a task force that might produce a report that could potentially criticize Munger clients?

I thought about it for a day or two and talked to some colleagues to
make sure I wasn't doing something that didn't make sense. Any time I
take on anything outside my practice, I talk to my colleagues to check
if what I'm doing is against the best interests of the firm. The firm
has been very good about allowing me to do things outside of my law
practice. 

Were you worried about upsetting the firm's corporate clients?

I didn't have a concern that clients were going to be bothered by
the report. I was more concerned about whether it was something capable
of making a difference and whether it would be a good use of my time.
Most companies understand the need to get compensation right. 

The report has an underlying tone of tough love--that some
of the recommendations might not make companies happy, but that it's in
their best interest. Why should companies take the report's advice?

I've been concerned for a long time about the criticism that has
developed over compensation issues. We've seen executive compensation
grow at a much faster rate than the general economy, causing a lot of
public concern that this is pay not for performance, but pay for
failure. It's created a risk that corporations might lose the ability
to use compensation as it ought to be used--as a way to drive business
performance. 

What do you mean? Who would take that ability away?

It could be the government, it could be shareholders. Anytime you
have government regulation, it tends toward one-size-fits-all
solutions. It's hard to do that with compensation because if it's used
to drive strategy, it's going to have to vary. You have more than
12,000 public companies, and they are all very different. If you can't
use compensation in a way that fits the particular circumstances of a
business, you've lost an incredibly valuable tool.

So the message seems to be: Make these changes before the
government steps in and makes them for you. But what about
shareholders? Their votes are nonbinding, right? 

Yes, but a vote against is quite a statement by shareholders and something that companies and their boards would like to avoid. 

The report recommends that compensation committees try to
separate the impact of an executive's skill on a company's performance
from sheer luck. Factoring out luck is tricky in economics. How would
companies do that?

It can be hard to tease those apart. But there are ways to do it.
You can compare the performance of a company with other similarly
situated companies. If the CEO of Company X is consistently getting
better returns than the CEO of another company that's a strong
suggestion they are doing something right.

The report recommends scrapping perks like personal travel,
retirement packages that credit executives with more years than they
actually worked, and including the value of equity in determining
postretirement benefits for top executives but not for lower-level
executives. Isn't curbing some of these practices just common sense?

The unifying principle of these frequently criticized practices is
that they are not tied to performance. We are calling for companies to
concentrate on aligning compensation with performance, so it follows
that you want to avoid having significant elements of compensation that
don't connect with performance.

Did you receive performance-based compensation for your work on the report? 

[Laughs] No. I didn't get paid. It's something I did because I'm interested in it.