Expert Perspective by Grahall’s Editorial Board
Two articles this week caught the attention of Grahall’s Editorial Board. First was the article Opinion: SEC Proposal Could Limit Comp Consultant Choices by Paul Platten and Steve Seelig of Watson Wyatt, published in Agenda Week on October 19, 2009, where the authors say: “One rule would require companies to disclose the fees charged by multi-service firms for both compensation consulting and other human resource (HR)-related consulting… Simply stated, the proposed rule will have onerous consequences, by unnecessarily curtailing compensation committee choice and ultimately depriving companies of the competence and capabilities multi-service firms offer.”
Grahall wonders – exactly how does fee disclosure deprive a company from accessing the capabilities of a multi-service firm? Well, the answer is it doesn’t. Nothing in the SEC proposals suggests that multi-service firms cannot be used for executive compensation and other services. So what’s going on? Well, perhaps the second article can shed some light.
The Corporate Board Member interviewed Hewitt Associates’ Chairman and CEO Russ Fradin in Take Five: Dissecting the SEC’s Executive Compensation Reform Proposals “about the Securities and Exchange Commission’s proposals, where Hewitt disagrees with the SEC, and what it means for board members.” Fradin says: “The only rule we’re concerned with is the compensation consultant fee disclosure rule, which would require large firms to disclose fees paid for any other unrelated services that they provide to these companies, which we think is competitively sensitive information.”
Oh, now we get it. It’s not that Boards can’t use multi-service firms, it’s that multi-service firms don’t want to disclose their non-compensation related fees.
Let’s step back and take a clear-eyed view of this. The SEC is not proposing a prohibition against working with a multi-service firm. The requirement is to disclose the facts and the fees associated with a company’s use of its executive compensation consultants for other non-board services. That doesn’t mean the company must fire the consultant – unless, of course, the company or the consulting firm is unwilling to have those fees disclosed.
Further, the proxy enables any company to explain the basis for its decision making in detail – and gives the company the opportunity to explain to its shareholders why it believes the advice they are receiving does not present a conflict, as well as why that company believes that it benefits from the retention of a multi-service firm. If the reporting company can’t easily or fully articulate the basis for these beliefs, well, then maybe there is a problem.
In addition, there is no rule that prohibits a company from retaining a multi-service firm to benefit from the consultant’s wonderfully rich breadth of resources, while retaining a separate firm solely for its compensation consulting needs.
These two articles seem each suggest the multi-service firm viewpoint that public perceptions are binary. That is, perceptions are either black or white, you’re safe at the plate or you’re out, you’re conflicted or you’re not – and we believe the proposition that requiring fee disclosures will imply conflict where none may exist is both self-serving and inaccurate.
Bottom line: 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.
Grahall’s blog Management, Boards and Comp Consultants: A Change of Heart notes that: “Among the Grahall consultants, we have had many ‘prior lives’. We have worked at most of the major consulting firms and know that survival at these places is very much a condition of cross-selling. In fact, cross-selling is an important part of any large, integrated firm’s business model but is also one that can be at odds with independence in compensation decisions and appropriate governance structures… like [with] compensation, perverse incentives can drive perverse behavior.”
To borrow a line from Shakespeare’s Hamlet, the multiservice firms “doth protest too much, methinks.”
Contact Grahall’s OmniMedia Edotiral Board at firstname.lastname@example.org