Prospective regulatory changes for executive compensation consultant disclosure requirements
02/06/2008
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As we flagged in our March newsletter, the federal government is committed to executive remuneration regulatory change (see HERE).

The Minister for Superannuation and Corporate Law Nick Sherry has reinforced this with various recent releases (for example, see HERE).

While we have focused to date on the government’s commitment to ensure that “performance-based executive remuneration arrangements are genuinely linked to performance”, we also need to forewarn subscribers of other likely changes.  One of these is the government’s commitment to “consideration of the role of the remuneration consultancy industry in the setting of executive remuneration” (for the government’s other commitments on executive pay and corporate regulation see HERE).

US institutions advocating reforms to US disclosure requirements have put forward an alternative that has a real prospect of being considered.  While the Sarbanes Oxley Act only requires US proxy reports to disclose board compensation advisers (although that is one step ahead of Australia’s requirements), the institutions want further information. A coalition of 21 institutional investors led by Connecticut Treasurer Denise Nappier (see press release HERE), recently sent a letter to the Security and Exchanges Commission asking the SEC to require companies to disclose to shareholders in annual proxy statements whether consultants working for compensation committees are also providing consulting or employee benefits services to the management of the same companies. 
 The letter also calls for companies to disclose any ownership interest the consultant may have in the parent consulting company. 

Investors are concerned that such ownership interests could negate attempts by some firms to separate their consulting business from other business units and that advice given to a compensation committee may be compromised in the form of higher pay if the firm also provides more lucrative services for management. 



The letter addressed to SEC Chairman Christopher Cox reads in part:

“We believe a potential conflict of interest exists at companies in which consultants are hired to do work for both a company’s management and its compensation committee. When a consultant performs such services as benefits management on the one hand and advises the board’s compensation committee on executive pay matters on the other hand, we believe that the consultant’s integrity may be jeopardized.”

The signatories to the letter represent US$1.4 trillion in assets under management and include state and local treasurers and comptrollers from California, Connecticut, Florida, Illinois, Maryland, New York City, New York State, and North Carolina. Other institutional investor signers to the letter include AFL-CIO Reserve Fund, Amalgamated Bank LongView Funds, Hermes Equity Ownership Services Limited, International Brotherhood of Teamsters, Master Trust, Universities Superannuation Scheme Ltd; and Walden Asset Management. 



The issue received prominence in late 2007, when the US Congressional House Oversight Committee reviewed the actual or perceived conflicts of interest of full service consulting firms that offer management services beyond executive compensation consulting. We have addressed the issue before (see HERE).

Currently, the SEC only requires companies to disclose the name of the consultants and not the fees paid to them.  The House Oversight Committee has collected this data in the past, but it is not publicly available to investors and others.  Various lobbyists suggest companies be required to disclose all fees paid to compensation consultants for compensation consulting and all the fees paid to the consultants’ firm for other services, and to also disclose the type of work performed by the consultant.  They compare the disclosure of the independence of compensation consultants to the disclosure of the independence of auditors to senior management.  

Last month, Senator Hillary Rodham Clinton introduced the “Corporate Executive Compensation and Accountability Transparency Act” (S. 2866) which has several important pay-related proposals, including requiring the SEC to promulgate rules “clarifying and strengthening” the disclosure requirements concerning pay to compensation consultants. Senator Barack Obama has proposed similar measures.

As with the last major amendments to executive remuneration disclosures, it is likely that Australian regulation will be changed before US regulation, given the current Australian government’s commitments. So while the debate on the nature and form of regulatory change is more vociferous in the US, it is likely that change will occur in Australia first.

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