Corporate Governance Does Not Belong in the Home!

The increasing concerns of institutional investors and their advisors around reimbursement of new executive hires for losses on home sales necessitated by relocations, summarized in an excellent article by Joann Lublin of the WSJ of October 25, 2010, entitled “Shareholders Hit the Roof Over Home-Loss Subsidies” is confusing, to say the least. It’s certainly desirable that large shareholders are becoming more vigilant in their oversight of boards and management. However, I don’t see what is accomplished through a focus on this item.

As an illustration of the current situation, Patrick McGurn of ISS states that “Home loss provisions are a hot-button issue with our institutional clients.”

This may be, but I think it is unproductive. I’m a lot more concerned with management and board performance, as it translates into company performance, than I am with pay per se. To the extent pay is relevant, this should be on account of either its overall incentive effects regarding performance or whether it has any connection to “market value” for the position in question. Simply protesting this (or any individual) item of someone’s pay package has nothing to do with company performance. It makes no sense to address any individual line item for someone, without addressing their aggregate pay and assessing its implications and level.

Money being fungible makes it pointless and counterproductive to protest reimbursement for a home sale loss, if the beneficiary’s overall package is well structured for incentive purposes and in line with the market. If a corresponding increase in salary or bonus would not prompt shareholder protest, why should a protest result from the name of the payment? Similarly, if there is good reason to protest total compensation, the rationale still exists, notwithstanding the formal designation of a portion of it. Good performance relative to total pay should not lose its luster because of a home sale provision … and vice versa! For new hires, there will be little opportunity to evaluate performance, so the incentive structure and “fit” in the market will need to be closely evaluated.

All of this being said, it seems curious that the topic even exists. Such provisions make it more costly to hire someone who recently purchased a home, and is now required to relocate than someone who is similarly qualified but purchased their home 10-15 years ago, and still has some profit, or who has been renting during the same period. A given position is worth what it is worth in the market, and should not have its value tied to the housing status of its occupant any more than to such person’s marital status.

With the crying need for improved governance in order to avoid future financial meltdowns and corporate scandals, I suggest that a fundamental step in this direction would be an increased focus on aggregate performance and compensation and a reduction in concern with specific items, irrespective of what the analyst thinks of any of them.