Is Moody’s Investors Service a member of the free press or a financial advisory firm? If you listen to the credit rating outfit’s arguments for some of the duff advice it has given investors over the years, you’d think it was the former. But when it comes to determining executive compensation, it fancies itself as the latter.
Like its rival Standard & Poor’s, a unit of McGraw-Hill, Moody’s conveniently uses the free speech protections of the US Constitution's First Amendment to shield itself from legal liability when its ratings turn out badly. It argues that ratings are no different than published opinion pieces, so investors shouldn’t be allowed to go after them if those opinions turn out to be wrong – as they have plainly been in rather staggering quantities over recent years, especially in the structured finance area.
Yet the assertion that the rating firms deserve the same free speech protections given to journalists doesn’t seem intuitively quite right. For instance, the agencies are paid by debt issuers, analogous to a media organisation's sources rather than its audience. And the rating firms’ status as Nationally Recognized Statistical Rating Organizations in the US - and similar recognition by authorities elsewhere - gives them a veneer of officialdom that would be unheard of in the context of a free press.
So it is curious to see that when it comes to executive pay, Moody’s - in which Warren Buffett's Berkshire Hathaway owns a 20% stake - actually doesn’t seem to consider itself in the same category as traditional publishers at all.
The company's latest proxy statement lists 21 companies as peers. Among these are a half-dozen money managers including BlackRock, several equity and futures exchanges, and even the Union Bank of California. There’s not one newspaper publisher among the bunch, though Thomson Reuters and McGraw-Hill make an appearance thanks to their financial data businesses.
As a result, Moody’s boss Raymond McDaniel received $7.6m in total compensation for last year - more than double what newspaper groups like Gannett and McClatchy paid their chiefs. Maybe this makes no difference to a judge next time the rating firm pleads its case for protection from disgruntled investors who bought triple-A rated collateralised debt obligations that later turned toxic. But it does look like a case of Moody’s bosses trying to have their cake and eat it.
