Directors paid by the company to lobby also help set CEO pay,
raising potential conflicts
By Theo Francis and Brody Mullins
At Louisiana health-care company LHC Group Inc., the board's
compensation committee has approved a 90% raise for the chief
executive over two years and given him personal use of the company
plane.
Members of compensation committees must be independent directors
with no financial ties to the company or its executives, say rules
adopted after the financial crisis.
At LHC, however, two of the committee's three members are
lobbyists for LHC, which foots the bill for their work. The two are
former Sen. John Breaux and former Rep. Billy Tauzin, both of
Louisiana.
The 2010 requirement that only independent directors can set
executive pay at most public companies was the latest in a string
of efforts by Congress, regulators and stock exchanges to make sure
people who hold important roles on corporate boards are free of
potential conflicts of interest that could sway their judgment.
A Wall Street Journal review of lobbying data and securities
filings found that despite such efforts, financial ties persist
between some corporate directors and CEOs -- ties running through
Washington's lobbying corps. They involve directors whose lobbying
fees are paid either by the company where they are a board member
or by an industry association where the company's CEO has
influence.
In the case of Messrs. Breaux and Tauzin, it is both. They are
paid lobbyists for LHC as well as for an industry group co-founded
and chaired by LHC's chief executive, Keith Myers.
An LHC executive said its board conducts a yearly review of the
independence of each director and has determined that Messrs.
Breaux and Tauzin qualify.
"This annual review is undertaken with full knowledge of the
arrangements with and payments" to their lobbying firms, said Josh
Proffitt, LHC's chief financial officer, in an email. The board
"has affirmatively determined that these arrangements do not
undermine or compromise the independence of Senator Breaux or
Congressman Tauzin."
Mr. Tauzin's office referred questions to LHC, as did Mr.
Breaux's.
The Journal found nearly a dozen large companies where directors
on important board committees were also lobbyists paid either by
the company or by a group at which the company's CEO had
influence.
At Boeing Co., the lead director, deemed independent, has for
years been a lobbyist for a business group that Boeing CEOs helped
oversee in many of those years. At railroad Kansas City Southern, a
director helps determine the CEO's pay and also works at a lobbying
firm retained by a trade group on whose board the CEO recently
served.
There is no evidence these ties influenced decisions by either
the CEOs or the board members. They raise questions, however, about
whether such board members are independent to a degree that allows
them to serve the best interests of shareholders while serving on
sensitive committees.
Ties between directors and trade groups overseen even partly by
a company executive deserve serious attention from boards, said
Douglas Chia, executive director of the Governance Center at the
Conference Board and a former corporate secretary for Johnson &
Johnson.
"If the director is a lobbyist of a trade association the
company belongs to, and the CEO is heavily involved in the
leadership or has an official role, there is some type of
interlocking relationship that could affect the decision-making of
that particular lobbyist-director," Mr. Chia said. "That's
definitely an interlock situation that companies, if they're
following the spirit of the rules, should probably be disclosing,
at a minimum disclosing to the board for their review."
Many such directors are former government officials. Companies
have good reason to court such officials, who can provide access to
lawmakers or regulators and help navigate the bureaucracy.
About half of the 500 largest U.S. companies have one or more
former government officials on their boards -- more than 300
directors in all -- according to data from ISS Corporate Solutions,
a unit of proxy adviser Institutional Shareholder Services.
Whether some are also paid lobbyists isn't easy to know because
the federal rules on who must register as a lobbyist are relatively
relaxed. People who lobby but spend less than 20% of their time on
the task don't have to register, nor do those who work behind the
scenes to influence legislation. Lobbying ties among companies and
directors could be more common than the Journal review
suggests.
Public criticism of CEO pay helped lead to the rules to avoid
board conflicts of interest. The critique of CEOs' pay, which in
the U.S. often runs 200 to 300 times the pay of ordinary employees,
by various estimates, grew louder after the financial crisis.
It was the postcrisis Dodd-Frank legislation that said directors
serving on compensation committees must be independent. The idea is
there must be no ties that could tempt a director to treat a CEO
especially generously -- or that, in turn, could tempt a CEO to
keep a director happy through a paying role such as lobbying.
The provision joined existing laws, regulations and
stock-exchange rules that said board members on audit and
nominating committees also must be independent.
The rules on who is independent draw some bright lines,
excluding any director who is related to the CEO or recently worked
for the company. Companies must disclose "related-party
transactions," where a director has dealings with the company or
its executives, and "interlocks," where executives of two companies
sit on one another's compensation committee.
Beyond this, boards are free to decide whether a director is
independent. Their decisions usually stand unless challenged by
stock-exchange officials, regulators or investor in a lawsuit.
Shareholder suits raising the issue are rare. Regulatory challenges
usually go no further than urging boards to fix any problems,
without bringing the matter the public, regulators say.
In some cases, director-CEO ties the Journal identified date
from well before the Dodd-Frank law.
At Boeing, Kenneth Duberstein, a former Ford administration
official and White House chief of staff under President Reagan,
joined the board in 1997. He has a lobbying firm, Duberstein Group
Inc. One of its clients since 1998 has been the Business
Roundtable, an association of big-company CEOs. Federal records
show the Roundtable pays Duberstein Group nearly $400,000 a year
and has paid it $5.6 million in all.
Boeing executives weren't among the Roundtable's top officials
when the group first hired Mr. Duberstein's firm. Boeing's chairman
or CEO served on the Roundtable's executive committee in 12 of the
following 18 years, however, and as the Roundtable's chairman in
four of those years.
Jim McNerney, who retired as Boeing CEO last year, was on the
Roundtable executive committee from 2009 through mid-2015; Boeing's
current CEO, Dennis Muilenburg, joined it this year.
Mr. Duberstein now is Boeing's lead director, chairman of its
governance committee and a longtime member of the compensation
committee. He approves meeting agendas and leads executive sessions
and talks with shareholders, securities filings indicate. A Boeing
proxy statement said Mr. Duberstein led the process that promoted
Mr. Muilenburg to CEO in June 2015 and that invited Mr. McNerney to
remain chairman for eight more months.
In 2015, Boeing paid Mr. McNerney about $20 million for his last
six months as CEO and final year as chairman. Mr. Muilenburg
received a 12% raise to about $13 million.
Boeing said its board follows a code of conduct that addresses
potential conflicts as well as requirements for director
independence, considering all the circumstances. A company
spokesman, Charles Bickers, notedthat Mr. Duberstein served on the
boards of Boeing plus a predecessor company, McDonnell Douglas, for
about a decade before he began lobbying for the Business
Roundtable. Messrs. McNerney and Muilenburg had no additional
comment, another Boeing spokesman said.
Roundtable President John Engler said the group's staff decides
which lobbyists to hire. The executive committee on which Boeing
CEOs have served approves broad spending plans, not specific
contracts, and hasn't recommended specific lobbyists during his
tenure, said Mr. Engler, a former Republican governor of
Michigan.
Mr. Duberstein said he has never talked with Boeing CEOs about
his firm's lobbying for the Roundtable, and there hasn't been a
need for the Boeing board or its governance committee to discuss
the relationship.
"This is as clean as it could be," he said. "I am not discussing
the Roundtable with the Boeing executives, and the Boeing
executives are not discussing Roundtable activities, other than in
front of the full board, with me."
He said his decisions as a Boeing director aren't influenced by
his role as the Roundtable's lobbyist. "I don't even get close to
the line, let alone step over it," Mr. Duberstein said.
One member of the compensation committee on Kansas City
Southern's board is former Transportation Secretary Rodney Slater.
He also works for a law and lobbying firm, Squire Patton Boggs.
An industry group called the Association of American Railroads
has paid Squire Patton Boggs $2.4 million for lobbying over eight
years. In 2013 and 2014, Kansas City Southern's then-CEO, David
Starling, was on the railroad association's board.
Mr. Starling's pay more than doubled from his first full year as
CEO in 2011 to $7.9 million last year.
A spokesman for the railroad association said its board members
aren't involved in deciding which lobbying firms to hire. A Kansas
City Southern spokeswoman, C. Doniele Carlson, said Mr. Slater
doesn't personally lobby on the railroad association's behalf.
Kansas City Southern's latest proxy filing said transactions or
relationships between the company and its directors, executives or
major shareholders are reviewed by the Nominating and Corporate
Governance Committee of its board, which makes sure any
out-of-the-ordinary transactions are disclosed properly. "There
were no related party transactions in 2015," it said. Mr. Slater
heads the nominating and governance committee.
Messrs. Breaux and Tauzin at LHC Group, a Lafayette, La.,
company that provides in-home nursing, left Congress in 2005 after
long careers. Both became lobbyists.
Mr. Tauzin, a Republican, joined LHC's board as its lead
director in 2005, and Mr. Breaux, who is a Democrat, joined two
years later. In 2013, both joined the compensation committee. Its
third member is a former Tauzin aide in Congress.
LHC pays $20,000 a month to the lobbying firm that employs Mr.
Breaux, Squire Patton Boggs, federal lobbying records show. At the
firm, Mr. Breaux is listed as among those handling duties on behalf
of LHC.
The records show that since 2008 LHC has paid $1.25 million to
Squire Patton Boggs and a firm it acquired, the Breaux-Lott
Leadership Group, which Mr. Breaux co-founded.
LHC's Mr. Proffitt said his company also paid $200,000 last year
and through this August to Tauzin Consultants, a lobbying firm Mr.
Tauzin formed with his son Thomas. The son owns the firm and his
father is a consultant there, said LHC.
Tauzin Consultants, in turn, paid Tauzin Strategic Networks -- a
firm owned by Billy Tauzin -- $100,000 during the same period, Mr.
Proffitt added, for what federal lobbying records describe as work
"on behalf of LHC Group, Inc." Federal records show higher figures
because of rounding, Mr. Proffitt said.
An industry group called the Partnership for Quality Home
Healthcare also has employed Messrs. Breaux and Tauzin's lobbying
firms for several years. LHC's chief executive, Mr. Myers,
co-founded the Partnership and is its chairman.
Federal records show the Partnership paid $1 million from 2010
through 2013 to Mr. Breaux's employer Squire Patton Boggs and the
Breaux-Lott firm it acquired. The records also show the Partnership
has paid Tauzin Strategic Networks $1.8 million since 2011.
In yet another lobbying connection, LHC's Mr. Myers has in
recent years served on the board of a second industry group, the
National Association for Home Care and Hospice, which paid about
$1.2 million to Squire Patton Boggs and the Breaux-Lott firm from
2008 through 2014. The association didn't respond to requests for
comment.
LHC proxy statements disclose unspecified consulting
relationships with Squire Patton Boggs and Tauzin Consultants
without giving dollar amounts. Thomas Tauzin's office referred
questions to LHC.
Mr. Proffitt, the CFO at LHC, said its agreements are with the
lobbying firms that employ the board members, not with them
personally. Messrs. Tauzin and Breaux are both registered as
lobbying for LHC.
Mr. Profitt said not only has the board found the arrangements
don't undermine the directors' independence, but "as a technical
matter, the structure and financial terms of these arrangements do
not trip any of the tests for director independence (or lack
thereof)."
Mr. Myers, LHC's chairman as well as its CEO, earned $1.76
million in 2013, which jumped nearly 50% in 2014 to $2.6 million,
and then rose in 2015 to $3.38 million.
LHC gave little explanation for the raises, though one proxy
statement said 2015 executive pay "increased in tandem with our
corporate performance."
LHC's net income fell 2.2% to $21.8 million in 2014 before
rising to $32.3 million in 2015. In investment terms, its total
return -- stock gains plus dividends -- trailed the medical-care
industry in 2014 but exceeded it significantly in 2015, according
to Morningstar Inc. data.
The LHC compensation committee in 2014 also restored a CEO perk
that had lapsed, the right to use the company plane for personal
travel. Through 2015, latest proxy statements say, Mr. Myers has
taken about $160,000 worth of personal trips on it.
--Joann S. Lublin contributed to this article.
(END) Dow Jones Newswires
October 05, 2016 02:47 ET (06:47 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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