Dean Paatsch vs Chris Thomas

The Australian Financial Review
March 2, 2010

Executive pay an easy target for proxy advisers

It is often said that the chief executive's role is the loneliest one in corporate life. The loneliness flows partly from the CEO's ‘meat in the sandwich' position, where he reports to a board of directors, formally appointed by the shareholders to govern the business and to whom he is answerable. In turn, he is expected to play the role of “heroic leader” to those reporting to the CEO position plus those in the greater organisation.

The loneliness is magnified by the reality that he or she is there at the pleasure of the board. The statistics also show that heading a listed company in Australia is a relatively high-risk position and average tenure is decreasing.

Being a CEO is a true 24/7 role, and the buck stops at his or her desk. Given that the company is owned by others, this is arguably well and good. But reporting lines are not the only way in which a CEO is exposed.

The transparency of the CEO's remuneration means that there is very little to hide with respect to either performance or reward. And as long as an executive is receiving more than $1 million a year, there will be continued public debate about remuneration.

This is an issue that simply will not go away. No matter what new and wonderful contrivance is introduced by governments or regulators, there will be a strong sense of inequity and envy, whether justified or not.”

The recession of the early 1990s, and the subsequent highly variable performance of many significant corporations, led to a major evolution in the expectations of boards of directors throughout the world and the way in which they discharge their responsibilities.

Corporate governance standards, such as those mandated by the Australian Securities Exchange, added many rules designed to ensure increased accountability boards to shareholders. As a result, many previously accepted practices became proscribed. The ‘governance advisory' industry was born!

At the same time, the expectation grew that major shareholders, typically managing funds for others, would be more active in expressing their views as shareholders. Thus the role of the proxy advisor emerged.

It is now seen as good practice for the institutions to subscribe to at least one leading international proxy advice firm, if for no other reason than to ensure they are seen to be taking their responsibilities seriously.

However, the subsequent introduction of non-binding votes on senior level remuneration has brought an unintended consequence in that it has raised the profile of proxy advisers in the Australian market and elsewhere.

Opportunistically, such advisers offered to provide advice on remuneration reports despite the fact that then, and arguably now, their level of expertise to do so was highly questionable. As one chairman famously remarked at the time, did those framing the legislation realise they were conferring such influence upon so few! Their expertise is quite narrow and I would argue should remain focussed on the implementation of pure governance maxims, as was their original intent.

It is now customary when an annual report - and therefore a remuneration report - is released that one or other spokesmen for a proxy advisory firm issues an almost immediate criticism related to the structure upon which the remuneration is based. Because for most people the remuneration of CEOs will always be seen as excessive, the high moral ground is apparently immediately grabbed.

The historical reality is that the display of detail on executive remuneration has made it much more complex as new and arguably more sophisticated ways of attempting to link remuneration to performance have been invented. Proxy advisers attempt to fit their ‘one size suits all' template to the remuneration report and surprise, surprise find out it often does not fit.

Boards of directors, like any shareholders, have no incentive to overpay executives. Rather, with the assistance of their independent remuneration advisers, and hopefully with some discussion with key shareholders, they seek to come up with a formula that will attract, motivate and retain outstanding executives.

In carrying out this task they are working in an international or local marketplace which is the key determinant of the level of executive reward. If proxy advisers really want to have an impact, maybe they should facilitate the workings of this marketplace rather than attack those who have to participate in it.

With any CEO appointment, it is ‘who' not ‘how much' that will be the basis of performance. Proxy advisers do not publicly criticise the performance of boards in other key functions such as strategy settings, accounting and audit processes, corporate culture, communications or gender diversity issues.

Why focus on remuneration as they do? Is it because it is apparently understandable given its base in numbers and it gives profile to its critics?

Chris Thomas
Partner Egon Zehnder International
Melbourne Vic

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The Australian Financial Review
March 9, 2010

Doubting Thomas now aware of sizes

Dear Editor

Chris Thomas from search firm Egon Zehnder suggests that proxy advisers level of expertise on executive pay is “highly questionable” (Executive pay an easy target for proxy advisers March 2, 2010). He claims that we apply a “one size fits all template” to our assessment of remuneration reports and opines that institutions subscribe to our service “for no other reason than to ensure they are seen to be taking their responsibilities seriously”.

As a director of the largest Australian proxy adviser, RiskMetrics I called Mr Thomas to ascertain his evidence for these assertions. He confided that he had never read a single piece of analysis prepared by RiskMetrics and could not name one of our institutional clients who feels compelled to buy or act upon our advice. His opinion seemed to be based a number of conversations with company directors whose identity he was not prepared to reveal.

RiskMetrics serves a range of clients that include some of the savviest and most sophisticated investors in Australia. If we did not provide value through our research expertise and analytic capability, we would not have a business.

One hopes that Egon Zehnder's search process for directors and executives involves more rigorous research than Mr Thomas managed on proxy advisers.

Dean Paatsch
Director, RiskMetrics Australia

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The Australian Financial Review
March 10, 2010

Paatsch steps on Egon briar patch

Perhaps reflecting the quality and depth of his research, Dean Paatch, of proxy advisor RiskMetrics Australia, in his letter ("Doubting Thomas now aware of sizes", March 9) has chosen to play the man rather than the ball in his response to my article, " Executive pay an easy target for proxy advisors" (Opinion, March 2).

As he suggests, I did receive a call from him on March 2. Its tone was abusive and Paatch admitted he had not actually read the article when we spoke.

Paatch would better serve the debate on executive pay by addressing the several issues raised in the article rather than making wild accusations about my professionalism.

Chris Thomas
Partner Egon Zehnder International Melbourne Vic
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The Australian Financial Review
March 10, 2010

Dear Editor

Mr Thomas from Egon Zehnder is fortunate that I have a vivid imagination. It helps me to understand why he regards my call asking him whether he had ever read any proxy research as abusive (‘Paatsch steps on Egon briar patch', 10 March, 2010). It was obviously a grave error of mine to expect him to have read just one piece of remuneration analysis produced by the largest proxy adviser in Australia before his clumsy attempt to discredit us.

I do, of course, regret contacting Mr Thomas armed with only an excerpt of his article. Had I delayed my call by the 30 minutes it took to locate the full text, I might have taken him to task on several of the tropes he endeavoured to pass off as informed opinion. My favourite (amongst many) is his suggestion (that) “Boards of directors, like any shareholders, have no incentive to overpay executives. Rather, with the assistance of their independent remuneration advisers, and hopefully with some discussion with key shareholders, they seek to come up with a formula that will attract, motivate and retain outstanding executives”. Thank goodness he pointed that out. Shareholders can go back to sleep on executive pay – it's all apparently under control.

Mr Thomas speculates our interest in remuneration is driven by its ease of comprehension ‘given its base in numbers' and ‘the profile it gives its critics'. His career advice to proxy advisers who want to make an impact is that we should facilitate the workings of the ‘international or local marketplace that is the key determinant of the level of executive reward'.

Thanks ever so much for the counsel Chris, but we intend to keep pointing out those companies we believe have misaligned pay structures and overpaid executives. Our institutional clients expect nothing less from us. Our interest is not driven by profile, but a desire to protect shareholders from transferring their wealth to underperforming executives. Markets are never perfect and dissenting voices like ours are an important part of making them work efficiently.

Dean Paatsch
Director
RiskMetrics Australia
Melbourne VIC

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The Australian Financial Review declined to publish this letter
March 14, 2010

Letter to Editor

It is unfortunate that despite my invitation to Dean Paatsch of RiskMetrics to respond to the 'message' he chooses to continue attacking one of the 'messengers' (Letters "Sticky Paatsch" March 12) . His modus operandi when faced with a challenge is now clear. Personal attack by phone followed by personal attack via an open letter repeated! Based on my more than 30 years with Egon Zehnder International, the last half of which has focussed on advising boards here and internationally, I am happy to be judged by those who know me and whom I have served.

It is curious that despite my now several invitations to enter the debate on questions posed in my original Opinion article (" Executive pay an easy target for proxy advisers" March 2), Paatsch has chosen not to engage at that level. He also chooses to ignore the coincidental comments attributed to David Crawford ("Chairman takes aim at proxies", 26 February) that "they (the proxy advisers) have a very limited time to assess those reports, we don't know the quality of the people they use to assess them, we don't get an opportunity to talk to them." Similarly, comments by Henri Aram ("Crawford ire may jolt proxies action" March 1) appear to have not received a reasoned response from Paatsch despite Aram's comments that "Hopefully Crawford, with his well reasoned concerns, has jolted the authorities into positive action and opened the subject to informed public debate". Not only has the debate not been joined by Paatsch but neither Crawford or Aram have apparently been the target of his vitriol.

On reflection, I wonder if Mr Paatsch is taking a little too literally a comment made last week by one of his US colleagues Patrick McGurn. In noting the tougher SEC rules on CEO pay disclosure ("The Power of Shame This Proxy Season", Bloomberg Business Week, March 8) McGurn observed that "it appears that the mere threat of humiliation does the trick just fine".

Doubtless, the implied army of researchers supporting Mr Paatsch in his work will be disappointed that again he has chosen not to address the issues that I and others raised and that he has passed up on the opportunity to transparently display this resource and how it reaches its conclusions.

Chris Thomas
Partner Egon Zehnder International Melbourne, Vic

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