Ever wanted to do something, but didn't quite want to be lumbered with the responsibility for it, should it go wrong? In most parts of life, that's a tough problem to have.
In business, the answer is encapsulated in a two-word legal phrase: plausible deniability. And achieving it is simple — just hire a consultant!
But lest you think I'm bashing all consultants (and before the consultants reading this send the angry email they're already composing in their heads), let me be more specific.
The consultants that provide such a service — though they'd describe it differently — are the advisors to corporate Australia, that, for a good fee, will opine on whether a company has the right directors, how much its managers should be paid and how shareholders should vote on the resolutions being put to a company's AGM.
It's this last group that Harvey Norman's Gerry Harvey took aim at, this week. Tell 'em, Gerry: "[they are] a sore on corporate Australia". "The problem is these proxy advisers are not qualified to be proxy advisers.
I don't think I've ever talked to one." He wasn't finished: "They've never worked in a public company. They've never been down into the bowels of a public company. They're theorists, and then they have the hide to take money off people."
A rogues gallery… of success
And Harvey isn't alone.
Rag trader, billionaire and chairman of listed Premier Investments (the company behind Smiggle, Peter Alexander, Just Jeans and others), Solomon Lew recently said: "The proxy advisers are not the purchasers of the stock … for the majority they don't even talk to the company, so I can't answer the question better than to tell you the buyers of the shares don't have a problem."
Of course, both men might well say that — after all, each was at the wrong end of the proxy advisors' views on corporate governance and pay. Washington H. Soul Pattinson's chairman, Robert Millner called similar criticisms of that company's board "rubbish".
These men are very wealthy, very successful, and have delivered very strong results for shareholders. They have a very strong point — what's more important, meeting arbitrary criteria, or building long-term wealth for shareholders?
And then there's the other side of the coin — those consultants hired to tell companies that they're doing the right thing. Well, they're officially hired to provide an independent view of a company's operations… but have you ever seen a consultant's report on management remuneration that said the CEO was grossly overpaid?
Or another consultant, engaged to determine whether a takeover offer is 'fair and reasonable', who said it wasn't? I can only recall a handful of offers that were deemed otherwise — the vast bulk get a big green tick.
Don't blame me — blame him
On the surface, I get the appeal — both to companies and shareholders. An independent third party casts an eye over the situation, and gives their blessing, absolving a board, management or shareholders of having to take responsibility.
Except for one thing. Isn't that exactly what we want directors, CEOs and managers for? To take responsibility, to be accountable, and to deliver results for shareholders? And if not, what exactly are we paying them for?
And as investors, that's our sole responsibility: to determine if a company is worth our investment dollars. Don't trust management? Don't invest. Think they're being paid too much? Don't invest. Unsure about a takeover? Sell your shares.
And as to the consultants being independent? I'm sure they are. And take their professional responsibilities very seriously. But remember the ratings agencies, who were paid by the very banks whose products the agencies were assessing.
How long do you think those companies would have existed had they told the investment banks that their products were rubbish? And that's not their fault — it's the fault of the system.
Those looking for registration of a shonky car will go to the mechanic who will overlook the car's faults. Subconscious bias can be the most insidious of all.
So the board that gets criticised for paying its CEO too much points to the expert report that says it's okay. The company trying to buy another tells the target's shareholders that the expert says the offer is 'fair and reasonable'.
The governance expert makes sure it shows that it's doing something, by applying arbitrary rules and writing long reports.
Most of the time, these experts are probably right. But the governance 'industry' is too big, too conflicted and too arbitrary to really help shareholders. Warren Buffett, the world's richest man, has a board that experts consider 'not independent' and which should be shaken up.
Tell that to the shareholders for whom he's delivered 20% per annum, on average, for over half a century.
Play by the rules
Rules and guidelines are made — sensibly — for the lowest common denominator. But that means discretion is needed when applying them. I don't care if Robert Millner and Gerry Harvey run afoul of the 'experts'. I don't care if Solly Lew is claimed to be paid too much.
And you'd better believe I'm more than happy with Warren Buffett's 'not independent' board.
Outsourcing responsibility might give you plausible deniability, but I'd much prefer a company that stands on its record of long-term outperformance, rather than relying on arbitrary rules.
