Expert Perspective from OmniMedia’s Editorial Board
In 2006 the SEC established rules regarding Compensation Discussion and Analysis (popularly referred to as CD&A) and now with executive compensation headlining news reports on an almost daily basis, the SEC is considering expanded CD&A disclosure requirements. Per the SEC’s press release #2009-147 these measures “…are intended to better inform and empower investors to improve corporate governance and help restore investor confidence”.
As is summarized in the Morrison Foerster article titled “SEC Proposes Rules to Enhance Compensation and Corporate Governance Disclosures”, on “July 1, 2009, the Securities and Exchange Commission (the “SEC”) unanimously approved proposed changes to the proxy rules designed to enhance disclosure of:
· the relationship of the company’s overall compensation policies to risk;
· the qualifications of directors, director nominees, and executive officers;
· the company’s leadership structure; and
· the role and potential conflicts of compensation consultants.”
The summary also notes that: “The SEC has requested that all interested parties provide comments on the proposals. Comments on the proposals will be accepted by the SEC for 60 days following the publication of the proposed rules in the Federal Register. Anyone wishing to comment on the proposals should follow the instructions provided by the SEC at: http://www.sec.gov/rules/submitcomments.htm.”
As we said on our blog on the Towers Watson merger “Will Towers Watson Beat the Odds?”: “… conflicts of interest must be addressed. Conflict of interest has been a subject under scrutiny for some time now, and rightfully so…There is no doubt that Watson provides consulting to companies for whom Towers does executive compensation work. The reverse is certainly true as well… Therefore, in each case where there is overlap, the executive compensation work will need to move, or at a minimum, all projects will be disclosed.”
A recent study by Equilar “lists the Top 10 consulting firms, by executive compensation consulting market share, at Fortune 1000 companies”. It shows that Towers Perrin is #1 with 19% of the Fortune 1000 firms and Watson Wyatt is #5 with 7%. The merged firm would command over 26% of the Fortune 1000 market for executive compensation consulting.
Of course nothing precludes or prevents companies from using the same firm to handle HR consulting, benefits consulting and executive compensation work, and most broad based consulting firms publish strict policies and construct “chinese walls” to help prevent any actual conflicts from arising. But oddly, even with all these measures in place at these consulting firms, the Waxman report on Conflicts of Interest Among Compensation Consultants showed that “[t]here appears to be a correlation between the extent of a consultant’s conflict of interest and the level of CEO pay. In 2006, the median CEO salary of the Fortune 250 companies that hired compensation consultants with the largest conflicts of interest was 67% higher than the median CEO salary of the companies that did not use conflicted consultants. Over the period between 2002 and 2006, the Fortune 250 companies that hired compensation consultants with the largest conflicts increased CEO pay over twice as fast as the companies that did not use conflicted consultants.”
We think that is pretty damning evidence that conflicts exist. But wait – could one argue that the extra executive compensation is a form of rebate? Speaking of rebates, what if any portion of the benefits consulting is paid via commission. Are the commissions defraying any of the executive consulting fees? This would be considered illegal rebating. And speaking of illegal, are any of the pension plan fees paid out of the pension trust assets? Is it possible that the pension plan fees are padded and fees paid for executive compensation services lowered so that the trust is in essence paying executive compensation consulting fees? Nobody is saying that Towers, Watson, or any of the firms are engaging in any of these practices but they are potentially exposing themselves to the appearance of such.
Frankly, the SEC could have come out with proposed requirements that executive compensation services could not be provided by a firm that also provides other service. But instead they proposed more disclosure. We eagerly await the comment period to see how companies and consultants react to the SEC proposals.
Will publicly traded companies embrace these new requirements? Well it probably will depend on the “hassle factor”.. The added disclosure requirements might just convince the Board that a non-conflicted consultant would be a safer and easier especially since good alternatives exist. How about the broad based consulting firms, what do they think? Will consultants protest that there is no problem warranting increased disclosure? Our reaction to that (with apologies to Shakespeare): the consultants “doth protest too much”, we thinks.
Email Grahall’s Editorial Director at firstname.lastname@example.org