Proxy Statements for Law Firms? On The Consequences of Full Disclosure

Regular readers will know that I'm a firm subscriber to the Law of Unintended Consequences, which is also why I try to exercise consistency in analyzing "dynamic" and not just "static" effects of a proposal.  Clarification:  The "static" effect of Rule X is simply what it says.  "Mandate airbags in cars," for example.  And the static result will be that new cars will come with airbags. 

The "dynamic" effect is how either people's behavior (most likely) or the pertinent environment (less likely, but worth consideration) will change as a result of the new mandate.  With all-but-universal airbags, we now know that drivers perceive the increased margin of safety as license to drive faster or otherwise less cautiously (knowing the consequences of an accident have been, on average, reduced) with the ultimate result that vehicular injury rates remained essentially unchanged—while accidents produced less serious injuries, there were more of them.

A second core, or at least default, belief of mine is that Disclosure Is A Per Se Good.   One reason I gravitated to practicing securities law is that, conceptually at least, I believe the (US) securities laws can be summed up as follows:  "You have permission to do anything, so long as you fairly disclose what you're doing."  (I will not insert any editorial commentary here about whether Sarbanes-Oxley graffiti'ed over that pristine canvas, but will leave it to those who still do securities law and commentary for a living.)

Which brings us to the SEC's newly announced initiative to require complete, thorough-going disclosure of all forms of compensation to CEO's and other top corporate officers—and to do so, for a change, all in one place, that place not to be inscrutable proxy footnotes.

A value will have to be put on everything from stock options and the use of corporate jets to Metropolitan Opera tickets, skyboxes, maid service, and the ugly new duckling on the block, "gross-up's" to pay taxes on all these perks.  As The New York Times' Joseph Nocera puts it:  "All in all, it's going to be a pretty sickening sight."

And we're talking real money here:

"According to Lucian A. Bebchuk, an executive compensation expert at Harvard, from 2000 to 2003, the total compensation of the five best-paid officers of all publicly held companies amounted to 10 percent of corporate earnings."

Ten percent!  You can argue methodology until the cows come home, but whether it was 8 or whether it was 12, it is to my mind "highly material." And: Ethically unconscionable, socially divisive, morally corrosive, economically indefensible, and (by rights) personally humiliating.    Then again, as Graef Crystal, "grand old man of executive compensation critics," observes, "it turn[s] out that when somebody is hauling in $200-million, he's not embarrassable"—even though the current ratio of CEO pay to that of the average worker at the same company is 400:1.

Litany of the caveats:

• No one should gainsay true entrepreneurs outlandish wealth:  Bill Gates, Michael Dell, and our own Mayor Mike Bloomberg deserve everything they've got.  We need more of them, not fewer.
• "It's a free country," and some combination of shareholders, Boards of Directors, and institutional investors could slam on the brakes; the fact that they have yet to do so suggests at least as an initial proposition that the competition for top corporate officers is not a completely malfunctioning marketplace.
• And most importantly, it is not the job of the SEC, Congress, Joe Six-Pack, or yours truly to enforce what might be our own views of decorous behavior on top executives.

Rather than view with alarm (since the facts speak for themselves), and rather than propose any reforms or remedies (see bullet #3, supra), my aim is simply to shed some light on how we got here.

We got here, largely, by trying to shed light on corporate compensation practices in the first place.

Remember back in 1993 when Congress eliminated the tax-deductibility of executive salaries in excess of $1-million?  Two things happened:  First, this added rocket fuel to the growth of stock option grants; but second and even more interestingly, $1-million/year on the W-2, rather than becoming a ceiling, became the new floor.

I fear we're about to re-run the same movie.  Under the new rules, not only will you and I learn that GE is paying for Jack Welch's Red Sox tickets, so will every other current or former CEO.  And if history is any guide, anyone in that club still suffering the indignity of buying MLB tickets himself will be on the phone to their comp. committee in about 30 seconds.  Full disclosure, meet the law of unintended consequences.

Now, what has this to do with law firms?

The American Lawyer's profits-per-partner ranking, is what.  At this point in the industry's trajectory, my own view is that TAL's PPP figures (and all their other financial-performance metrics) are simply a given.  Rightly or wrongly, like them or loathe them, view them as invasions of privacy or refreshing beams of sunlight, we are living with them:  If you don't like it, "Get over yourself," as we say in New York.

That does not mean, of course, that they are without consequence.  While the competitive one-upmanship of our friends (and clients) in the Fortune 500 may be unseemly in the extreme, we are not immune from jealous glances.  Just as corporate compensation packages will be different before and after mandatory disclosure, so our profession's compensation structures are not merely reflected in the inanimate and passive mirror of the TAL figures:  Over time, that mirror profoundly influences the landscape it takes in.