May 19, 2009
The Worst Vice
Posted by J.W. Verret

The worst vice, as they say, is advice. But Senator Schumer's "Shareholder Bill of Rights" is set to be released today at 11:30, and based on what I have been learning about the proxy access and say-on-pay provisions of the Schumer Bill, I thought that I would share some free investment advice with the Glom community on how I think these developments in Congress and the SEC will translate into investment opportunities. As I mentioned in my last post, I think that the Schumer Bill will legislatively buttress the proxy access initiatives already underway at the SEC. 

If a bill directly authorizing proxy access is passed it means there is no hope that the DC Circuit will be able to overturn an SEC access rule.  I think that this only firms up my long held opinion that Riskmetrics, and to a lesser extent its competitors, is a rational bet at this point. It trades, by the way, under the symbol RMG.  I should note that one reason I very much think that any proxy access rule that comes out of the SEC will benefit Riskmetrics is that SEC Chairman Schapiro hired a top level Riskmetrics Executive as her advisor on proxy access issues, see here.  

The say-on-pay element of the Schumer bill is also interesting.  Say-on-pay was introduced by Obama in the last Congress and it is also a part of the Schumer Bill.  I think it is worth considering how it will impact the publicy traded executive compensation consulting firms.  As best I can tell, the top 6 are listed in letters from House Oversight here.  Two of them are directly publicly traded: Watson Wyatt and Hewitt.  A third, Mercer, is a wholly owned sub of Marsh Mac, which is publicly traded but has a portfolio of six or so other consultancies, so perhaps any effects on the parent's share price will be diluted.  

It seems to me that, knowing what I know about Board Compensation Committee process, in an era of say-on-pay requirements the consultants become MUCH more important.  And, the consultants are already something of an oligopoly, which limits price competition. Plus there is the fact that the executive authorizes the company to pay the fee, but the executive gets the benefit of their work, in a transaction in which there is a conflict between executive and corporation, so we have
demand for a product that is somewhat inelastic (not responsive to price).  If I remember nothing from Econ class, I remember that the best position for a seller to enjoy is to have market power and sell an inelastic's like having a monopoly on an addictive drug.

Now, the oligopoly and inelasticity effects are likely capitalized into the current value of shares, but my point is that both effects significantly magnify the value added from increases in industry demand resulting from the Schumer Bill. Riskmetrics, by the way, has a near monopoly on shareholder advisory services.  If I had money to spare, in this day and age, I would put every dime on Riskmetrics, Watson Wyatt, and Hewitt.

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