The report of the Parliamentary Joint Committee on Corporations and Financial Services (the Committee) released on 7 November has provided a salutary warning for board remuneration committees – understand and control for potential conflicts of interest in the advice you seek.

The primary focus of the committee’s report on Ethics and Professional Accountability: Structural Challenges in the Audit Assurance and Consultancy Industry is the assurance of integrity in capital markets, i.e. the effectiveness of audit. The committee has made 40 Recommendations to improve the integrity of the audit and assurance industry and its consulting arms.

The report and its recommendations address the committee’s concern for market integrity where there are actual or perceived conflicts of interest.  The report indicates how the growth in size and services of the multidisciplinary firms over the last twenty years has contributed to a loss of confidence in market integrity. All 4 major audit firms have consulting revenues that exceed audit revenues. The profit margins from consulting are significantly higher as well.

Remuneration committees (as well as other board committees and the board) will want to be satisfied that conflicts of interest are fully considered and managed.

Consulting firms that serve two masters within the same client can be inclined to orient advice to meet the needs of primarily one master, the one who provides higher fees. This includes, for example, firms that provide executive remuneration advice authorised and received by the board, and taxation, financial, remuneration, cyber, environmental or technology consulting commissioned and received by management. The firms’ fees from executive remuneration services to the board will typically be greatly exceeded by fees for services to management. A conflict of interest arises where advice to the board directly impacts the remuneration of management, and the services commissioned by management directly impacts firm partner remuneration.

While the committee’s report and recommendations have a long way to travel, the messages for boards are there – ensure conflicts of interest are considered and addressed.

See the committee’s report HERE.

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