Expert Perspective by Grahall’s OmniMedia Editorial Board
If anyone was surprised by the announcement last week that Hewitt Associates divested its Executive Compensation Consulting business, they haven’t been following the discussion about the SEC new rule that essentially demands that companies who use multi-service firms for executive compensation and other consulting services disclose fees paid for the other services when those fees exceed $120,000. (For details go to the SEC final rules.)
Under the agreement, a select number of Hewitt principals and consultants will be leaving Hewitt to form Meridian Partners LLC, which will operate as an “independent executive compensation consulting firm”, as reported in Trading Markets and other media.
(By the way the emphasis on the word independent above was mine and was intentional. That word in that sentence may be irony at its best as the entire focus of the proposed and now finalized rules has been just that: INDEPENDENCE!)
When this “independence” (aka fee disclosure) rule was proposed by the SEC in early 2009 it created quite an up roar in the consulting community. The SEC received more than 130 comments on the proposals and every consultancy weighed in with the large multi-service firms voicing strong arguments against fee disclosure.
In Hewitt’s comment letter, to the SEC (which ran some 19 pages plus appendices) Russ Fradin, CEO and Chairman of Hewitt, wrote: “The proposed disclosure of consultants’ fees presumes that the provision of additional services by compensation consultants and their affiliates creates a conflict of interest that may call into question the objectivity of the consultants’ executive pay recommendations to the compensation committee.” The letter goes on to say, “…many companies will feel compelled to switch from a multiservice firm to a boutique consultant in order to avoid fee disclosure” and by doing so will lose “access to the best resources they need to make informed decisions about executive pay”.
I guess Russ has changed his mind, because in the press release announcing the new boutique executive compensation consultancy, Meridian, he is quoted as saying “This spin-off keeps … clients’ best interests in mind–they can continue to work with their current executive compensation advisor and team, without compromising the appearance of independence”.
Hewitt’s announcement isn’t the first of its kind, TowersWatson, Mercer and other multi-service firms have seen many of their key executive compensation consultants leave to start their own boutique firms or join one of the other executive compensation consultancies.
“As we said last October in our blog “It Just Makes No Sense”, the bottom line is this: “if either the company or the consultant thinks that the mere disclosure of the facts and fees associated with a multi-service firm’s advice to both Board and management is a problem, then it probably is a problem.” By spinning off or starting up new independent firms, these companies and consultants have avoided the need to disclose fees, but we wonder if these changes have really fixed a problem.
In the end will all this moving around and shaking up of the consultants really make a difference? Will Meridian or any of the other freshly minted consultancies really look any different than they did when they were part of the multi-service firm? For example, if Meridian doesn’t do its own research but instead buys it from Hewitt, then the executive compensation advice may very well remain the same.
Perhaps some Boards think that is fine, but those boards would be wise to check the mood of the public, the government, their stakeholders and shareholders to see how satisfied those groups are with the executive compensation strategies being used.
If the executive compensation strategy needs to be transformed, it may be that the only way to accomplish that is to change the advisors.
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