U.S. lawmakers this week heard testimony from investor representatives who called for more disclosure from companies about other work done by consulting firms that advise boards on executive pay.

The hearing of the House Committee on Oversight and Government Reform was called by panel Chairman Henry Waxman, a Democrat from California, to determine whether compensation consultants are likely to recommend excessive executive pay in exchange for lucrative contracts on other services for companies. The Dec. 5 hearing coincided with the release of a report by Democratic lawmakers drawing a link between egregious pay practices and the competition by pay consultants for other contracts.

Labor and state pension funds previously have expressed concern that work done by compensation consulting firms outside of advising boards on executive pay may compromise a consultant's independence. The AFL-CIO and other labor funds filed nine proposals on this topic this year--three of which went to a vote--and plan to file similar resolutions for 2008.

In testimony to lawmakers, shareholder advocates blamed rising executive pay on the Securities and Exchange Commission's failure to require U.S. companies to tell their investors what services outside of pay advice these consulting firms provide. The SEC's 2006 compensation disclosure rules do not require issuers to list the outside services provided by pay consulting firms or how much money was paid for these services.

"The SEC betrayed investors by not going far enough in their disclosure rules," said Daniel Pedrotty, director of the AFL-CIO's office of investment. "The board is relying on advice that could be conflicted," he added, "and shareholders should know about that."

Meredith Miller, assistant treasurer for policy in the Connecticut State Treasurer's Office, which oversees the state's pension funds, said corporate disclosure on pay consultants has been "woefully inadequate."

Competing for contracts that can pay much more than compensation consulting alone, Miller said, puts consultants "on the exact same path" toward being totally beholden to top management as auditors were before the accounting scandals at Enron and WorldCom.

"One of the lessons of Enron is that when an auditor has a business relationship with companies, their independence is questionable," said Rep. Elijah Cummings, a Democrat from Maryland.

Republican lawmakers criticized the comparison between audit firms that fraudulently signed off on company accounts and compensation consultants who do other projects for the company, and questioned the need for disclosure to shareholders.

"Shareholders rely on audit reports, but not on compensation consultant reports. Only directors rely on that," said Rep. Tom Davis of Virginia, ranking minority member of the committee.

Houman Shadab, a research fellow at George Mason University and a witness at the hearing, agreed. "Having companies disclose information that is not material to deciding whether to purchase securities … would flood the market with confusing information," Shadab said.

During the hearing, many Republicans questioned the need for additional disclosure when the compensation committee is already required in many instances to be free of ties to executives. Since 2003, the New York Stock Exchange has required companies to have a pay committee that is composed entirely of independent directors.

In 2004, the National Association of Corporate Directors released a report stating that firms providing pay advice to board compensation committees "should not be retained by the company in any other capacity."

Rep. Virginia Foxx, a Republican from North Carolina, said that if shareholders were truly upset about compensation consultant disclosure, they would have contacted lawmakers prior to the hearing. Democratic Rep. Peter Welch of Vermont acknowledged that he had not heard from shareholders about the issue, either.

However, Miller and Pedrotty said they have approached the SEC and individual companies. The Connecticut State Treasurer and the AFL-CIO joined 11 other institutional investors in October 2006 in writing letters to the 25 largest U.S. companies, urging them to exceed the SEC's reporting requirements on compensation consultant independence.

Miller said that 11 companies out of the 25 that received letters now have an outright ban on compensation consultants doing other services for the same company. In December 2006, General Electric agreed to provide additional disclosure in response to a proposal by the AFL-CIO.