“Independent” pay adviser regulation impact
26/02/2010
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Evidence continues to mount that independent remuneration consultant regulation will have a significant impact. The Australian Productivity Commission recommended that companies disclose who their advisers are, to whom they report and who appointed them (see HERE).  They also recommended that ASX 300 companies be subject to regulation similar to APRA’s requirement that remuneration committees independently appoint their own advisers from 1 April 2010 (see HERE).

 

In the UK the Walker report (see HERE) recommended that the remuneration committee report state whom their adviser is and if this adviser has any other relationship with the company.

 

But while it is early days in Australia, the impact the regulations may have may be gauged by developments in the US.

US company boards are rapidly moving away from major broad based multi service consultancy firms and engaging independent firms that avoid potential conflicts by declining to work simultaneously for boards and management.

The move has been driven by a new proxy disclosure rule, proposed legislation, the merger of two major consulting groups, and departures of executive consultants from the broad based firms to existing independents or to establish their own businesses.  A new Securities and Exchange Commission rule effective from 28th February requires companies to disclose in their proxy reports whether the board’s pay advisers provide other services to the business and the level of fees they receive if the management services exceed US$120,000 in a year.

Additionally, in December, the US House of Representatives passed a bill requiring the SEC to create independence standards for board compensation consultants.  These initiatives are not as restrictive as Sarbanes-Oxley’s ban on audit firms providing non-audit services to their corporate clients, as they only require disclosure and do not prohibit the provision of the services.  However, reports from the US indicate that boards are becoming very sensitive to any suggestion of a conflict of interest and taking steps to avoid possible misconceptions.  Echoing APRA regulation, the US National Association of Corporate Directors has adopted the position that the compensation committee should engage its own pay consultant and that consultant should not be retained by the company to do work in any other capacity.

The issue has been placed further under the spotlight by the merger of rivals Towers Perrin and Watson Wyatt to form Towers Watson from 1 January 2010.  Between them, these firms were said to provide services to over 25% of the board compensation committees of Fortune 1000 companies.

The Wall Street Journal (January 11, 2010) reported that the issue was spawning a number of new independent consultancies, many staffed by former senior consultants from the large firms.  In many cases, these advisers were motivated to retain board client relationships that would otherwise have been severed because the majors elected to maintain the higher value broader management services.  Some of these independents have claimed annual growth rates in excess of 30% per year, presumably at the expense of the large firms.

Further evidence of the changes in the market came early last month, when another major player, Hewitt Associates, announced that it was selling its executive compensation consulting business in North America to a group of employees and consultants.  Its statement on 1 February attributed the decision to the pressure from regulators and institutional shareholders for the firm’s clients to adopt exclusivity guidelines requiring boards to work with executive compensation consulting firms that provide no other services to their company.

Having closely monitored developments in the US, the UK, Canada and elsewhere over the past few years, we are not surprised to see this trend and expect to see a similar picture emerge here as boards take steps to avoid unnecessary additional public, regulatory and political scrutiny regarding the independence, or perceived independence, of their remuneration advisers.

© Guerdon Associates 2021
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