Gretchen Morgenson, stuck inside of Pfizer, with the executive compensation blues again

As promised, I will continue my analysis of the writings of NYT columnist Gretchen Morgenson with a review of today's column. For analysis of previous columns, see here and here and other links below, and, beginning last week, my Gretchen Morgenson archive.

As I said last week, I’ve chosen Ms Morgenson because I find her “to be such a particularly shining example of distortion of business issues by prominent business writers.” Unfortunately, Morgenson has challenged my ability to come up with something original today because she basically repeats a column from last March on Pfizer and its CEO Hank McKinnell. One would think that somebody with a job as important as Morgenson's would try a little harder to find things to write about.  But shirking isn't a problem that seems to concern Morgenson so I won't spend much time on it either.

The storyline this week, as in the previous Pfizer column, is that McKinnell is getting paid a lot. Institutional shareholders are not policing him because they’re getting fees from providing management services to Pfizer. Morgenson's excuse for writing again is that the vote on the board is coming up, and under Pfizer bylaws a director will have to resign if too many shareholders “withhold” their votes from him. I noted at the end of my analysis of the previous Pfizer column how Morgenson had set the stage for this sequel.

All of this is complicated by what Morgenson (excuse me, “corporate governance experts”) call “an imbalance of power between company owners and managers that is prevalent today.” The quote is from John Bogle, Vanguard founder, one of Morgenson’s favorite experts, much relied on in last week's column. Bogle fulminates here that

The management has these unlimited resources to fight back, and the shareholders are pretty much powerless. The thing has gotten so out of hand that words almost fail me. The shareholders should not tolerate it.

The institutional shareholders are “tolerating” it not just because of the management fees, but also because of Pfizer's “assiduous courting of institutional shareholders.” Morgenson singles out Margaret M. Foran, Pfizer’s corporate secretary, who is guilty of being co-board chair of the Council of Institutional Investors and board member of the International Corporate Governance Network. According to Morgenson, Foran “said she is a student of governance issues.” Apparently we have to take Foran's word for it, unlike with Bogle, for whom Morgenson is willing to vouch. Anyway, it’s not clear what Foran is doing wrong here, other than helping Pfizer make its case.

As for the fees, Morgenson says:

Many of Pfizer's biggest institutional stockholders . . . earn considerable fees for providing money management services to the company. These institutions could fear damaging such relationships by voting against the company.

Do they “fear damaging . . . relationships.” What does “considerable” mean in terms of their total earnings? Morgenson doesn’t say. Her pet expert, John Bogle, says the fees create a “clear conflict of interest” for institutions who collectively control corporations. The conflict extends, he says, even to corporations that are not clients, because they’re “potential” clients.

Stanley Ikenberry, Pfizer board member and former president of the U of I, says “the board has reviewed [compensation] issues, discussed them extensively and supports the decisions that have been made."

But what does he know?  Morgenson says “Investors for Director Accountability . . . sees a pervasive problem in [McKinnell’s] pay." And this group should know because we’re told it’s “grassroots.” Turns out, later in the article we learn that this is Frederick E. Rowe Jr., chairman of Greenbrier Partners, head of the Texas Pension Review Board, whose objections to Pfizer were laid out in Morgenson's previous column. 

Allied against Fred Rowe are a who's who of fund management companies that are all subject to the conflicts Morgenson is complaining about. They include Fidelity Management and Research, the main competitor of the firm Bogle founded. By coincidence, the last time Bogle sounded off in a Morgenson column, last week, it was on disclosing pay of mutual fund managers, another bone he has to pick with Fidelity. While Morgenson is assiduous in pointing out potential conflicts, she doesn’t mention this possible influence on Bogle’s thinking.

Morgenson quotes the chairman of the CFA Institute as saying that “multiproduct financial organizations [should] aggressively and proactively deal with these conflicts by actively requiring their asset managers to vote proxies in the interests of their asset management clients and not in their own short-term business interests."

Ok fine.  But Morgenson quotes spokesmen for the funds Morgenson mentioned to the effect that they are committed to resolving any potential conflicts in favor of its investment clients and use outside advisors to determine how they should vote – which sounds like what the CFA is recommending.

Morgenson is also concerned that "[s]ome members of Pfizer's board serve on boards of firms that are among its larger shareholders, raising questions about their allegiances.”  These firms say their directors don’t influence voting decisions by the asset management units. Indeed, this sounds plausible because it’s the sort of day to day management decision one wouldn’t expect the board to be involved in.

And Morgenson points to “shareholder inertia” – small shareholders’ stock will be voted for them by the Pfizer directors unless they give other instructions to their brokers.

Morgenson ends by quoting an adviser in corporate control contests: “All the best governance theories won't make any difference if investors don't bother to watch the people who are supposed to be guarding their property."

What exactly are these “best governance theories” Ms Morgenson’s mouthpiece is referring to? Is the solution here that unengaged shareholders should have more power? Would they use it? Should the institutional shareholders not only insulate their voting decisions from their money management, as they say they’re doing, but also be legally forbidden from combining the two? Should we prohibit people from sitting on boards of both corporations and money management firms? How much harder will this make it to get good directors without obvious conflicts, particularly given liability fears after SOX? Will firms be reduced to using movie stars and grade school administrators?  (Whoops – Eisner already tried that). Must the institutional shareholders insulate themselves from criticism by voting down directors they think are doing a good job? Must directors respond to this threat by canning CEOs or making compensation or other management decisions just to keep the self-styled shareholder activists and newpaper columnists off their backs?

We don't learn any of that, because those kinds of questions don't fit Morgenson's agenda of providing light reading for Sunday brunch.  After the column is used to wrap up the uneaten bagels, nothing will remain but a lingering suspicion that something is wrong with corporate America, a suspicion that can fuel any kind of misguided populist agenda some opportunistic politician might have in mind.

One more thing: at least Pfizer shareholders technically do get a vote on these matters. Unlike at, say, the NY Times, Morgenson’s boss. Funny we haven’t heard anything about that current controversy. Instead we’re treated to, essentially, a repeat of an earlier column about Pfizer. Could there be a conflict of interest here? Stay tuned. . .