The Advisors' Blog

– Jesse Brill, CompensationStandards.com

Now that the SEC has wrapped up its rulemaking with respect to say-on-pay, one of the next corporate governance rulemakings on the agency’s list relates to advisor independence. Since the SEC came out with its revised disclosure rules regarding fees paid to executive pay consultants in early 2010, the default definition for independence has been whether or not the advisor provides other services, or at least other non-executive compensation services in excess of $120,000 in a given year.

Given all the various conflicts that could exist in the relationship between a company and its advisor, limiting consideration of independence to any single criterion would be a mistake. Instead, a compensation committee should be held accountable for affirmatively deciding whether it is getting independent advice by looking at all potential conflicts, not simply whether the advisor provides other services beyond those related to the compensation committee.

Congress had it right when they decided as part of Dodd-Frank that it was the obligation of the compensation committee to make the determination on independence, and that determination should be based on more than whether the advisor provides other services to the company. The legislation also acknowledged that it is possible to mitigate potential conflicts. I’m hoping the SEC’s rulemaking will provide constructive guidance about a range of potential conflicts and conflict mitigation approaches that go beyond a simplistic “other service” litmus test so shareholders can be confident in the governance process behind executive pay decisions. It might also be appropriate to require some form of certification so that those advising companies and boards feel accountable to shareholders.