Should the companies paying for the services of compensation consultants indemnify them? That’s a key question stemming from a spate of recent lawsuits. Cincinnati Bell is the latest target of a shareholder lawsuit accusing directors of breaching their duty to investors following a failed “say-on-pay” vote. Cincinnati Bell shareholder NECA-IBEW Pension Fund in July brought the suit against the communications provider and its executive compensation consultant, Towers Watson, alleging that the board violated the business judgment rule by increasing executive compensation despite a drop in net income from $89.6 million to $28.3 million. Sixty-six percent of investors rejected the company’s compensation plans, which included increasing CEO Jack Cassidy’s pay 71 percent to $8.5 million and CFO Gary J. Wojtaszek’s pay 80 percent to $2.07 million.
Beazer Homes, Hercules Offshore, Umpqua Holdings and Jacobs Engineering also face say-on-pay suits following failed votes. Occidental Petroleum and KeyCorp settled similar litigation. In both the pending and settled suits, the compensation advisors are named as defendants along with the board and compensation committee.
Reacting to the lawsuits, Farient Advisors Executive Chair Robin Ferracone said, “I’m not sure that these results are all that positive.…We’ll continue to provide objective, independent advice. I don’t think the advice will change.”
“What is surprising to me is that some of my clients have told me that their executive compensation consultants have asked the company to indemnify them for their work—and they never will,” said Jack Lederer, principal at Curcio-Webb, where he directs the Executive Compensation Advisory Services Practice. In fact, Lederer believes that these sorts of suits will increase in coming years. “There are three points of influence: the shareholders, the compensation committee and management,” he said. “What [compensation consultants] need to do is make the tension between the three points livable and positive.”