From our perspective, the proxy that Morningstar (MORN) filed this year is at once a little more and a little less interesting than the thousands of others that cross our inbox. More interesting because Footnoted is now part of Morningstar, so it’s a mild understatement to say we have a strong personal curiosity about its disclosures.
But objectively, the proxy has been pretty dull, especially compared to others. Even though Morningstar could treat itself as a controlled company under the NASDAQ’s rules — founder, Chairman and Chief Executive Joe Mansueto owns close to a majority of the company’s shares — it still has a mostly independent board. And director pay, at under $150,000 a year primarily in stock (still not bad for part-time work), and a whopping $680 in perks and “other compensation” to all five of its top executives, combined — is a tenth of what some individual executives elsewhere get for financial planning subsidies alone. Mansueto doesn’t bop around on a company jet, and whether he owns a fish camp or not, Morningstar apparently has never paid him to use it. Dull city.
This year’s proxy, however, has a new wrinkle: two separation agreements, entered into with senior executives who left Morningstar late last year and early this year. As far as we can tell, it’s a first for Morningstar since going public in May 2005.
Before we go further: Morningstar is, of course, our parent company. Any time journalists write about their own, it’s at best a little awkward; for readers, it can be hard to know how much skepticism to apply. In our case, the folks here at Morningstar have been pretty open when faced with the prospect of us writing about them, even if they haven’t necessarily agreed with our conclusions.
Michelle already footnoted Patrick Reinkemeyer’s departure, announced in November and effective in mid-December. The more recent departure is former Chief Operating Officer Tao Huang, whose resignation was announced in late January. The language around his departure cast it as a mutual parting of the ways, or even suggested it was entirely his decision, yet the filings at the time made clear he was getting substantial severance: $3.75 million — a combination of an annual bonus, a consulting agreement, and the usual (for other companies, anyway) non-competition and non-solicitation agreements. (Separately, Morningstar had already promised in early 2010 to pay Huang $3.7 million to make up for the tax impact of converting stock options granted in 2000 from incentive stock options to non-qualified stock options.)
Now, $600,000 of his total severance was last year’s bonus. Half of the rest ($1.58 million) was paid out up-front, and Huang is getting the balance over the course of the next year or so, on Morningstar’s regular payroll schedule. It did catch our eye that the consulting agreement includes a 10-hour monthly maximum. Morningstar won’t break down the dollar figures beyond the bonus payment, making it hard to put a value on that consulting gig — if it accounted for even half the payroll portion of his severance (so a quarter of the non-bonus payments) it would be a remarkable $6,563 an hour. We suspect that, internally, folks considered the non-compete far more important than the consulting agreement. But we think it would be valuable for shareholders to know what the company’s managers found most important: keeping Huang off the market or rewarding him for a job well done?
More interesting still is the very fact that Morningstar has started to enter into these kinds of ad-hoc agreements. The company makes clear in its filings that it doesn’t believe in employment contracts — Mansueto doesn’t have one (though as a controlling shareholder, he hardly needs one), nor do the company’s other top executives.
And that raises a question: Which is better for shareholders, from a transparency and governance perspective: No employment agreements and ad-hoc severance arrangements? Or employment agreements that spell out just what executives will get if they leave under various circumstances?
On the one hand, doing without employment agreements gives the company maximum flexibility, even if it can be more unpredictable for the executives. It means there’s a little less of a privileged-vs-plebeians hierarchy in the company. At the same time, if the result is a series of custom severance arrangements, maybe the more transparent option is to spell it all out in advance.
Morningstar’s spokeswoman told us Huang’s separation agreement reflects multiple factors — his two decades at the company, his pay over the years ($900,000 in salary and incentives, plus nearly $550,000 in stock awards last year), the non-compete and non-solicitation pacts, and what other companies pay in severance, as well as the consulting agreement. But the company didn’t assign values to any of those elements except his 2010 bonus. “[W]e looked at them in aggregate,” spokeswoman Margaret Kirch Cohen said in an email response to questions. “We believe the amount is appropriate for Huang’s specific situation.”
As for whether to hash out severance at hire or at the point of departure, the company says that its current practice works well. “The circumstances surrounding an employment separation vary, and we believe our practice gives us the flexibility to take those differences into consideration when crafting these types of agreements,” Cohen says.
Fair enough, and it certainly hasn’t escaped our notice that plenty of companies enter into employment agreements and then all but ignore them when executives leave, crafting ad-hoc arrangements anyway. Then again, nothing would stop Morningstar, or any other company, from drafting agreements and sticking to them. It’s worth considering.
Note: We rephrased a sentence after hearing from Morningstar, to make it clearer that we have no idea whether Mansueto owns a fish camp. Our point was that some companies have paid their CEOs to lease fish camps and the like, and that Morningstar isn’t one of them.