The Advisors' Blog

– Broc Romanek, CompensationStandards.com

In the wake of yesterday’s merger announcement, a reporter sent me this question: “What do you make of Korn Ferry’s acquisition? Does this raise independence issues under Dodd-Frank for companies that might pay a substantial amount to Korn Ferry for CEO, board search etc. who also consult with Hay Group on executive compensation? Most companies use the same consultant for executive and director compensation consulting. Is there extra due diligence required by the comp committee if they use the same firm for both services? Additional disclosure? Will boards have to start reporting how much they pay for executive and board searches?”

Here’s an answer that I received from Mark Borges:

I wouldn’t think board recruiting would trip a comp consultant’s independence. As you know, advisor “independence” must be considered, but there’s no requirement that a Compensation Committee use an independent advisor. So the assessment is really all about whether, in the opinion of the Compensation Committee, the highlighted relationship with the company impairs independence.

As you note, there is, on its face, a possible independence issue where a company retains Korn Ferry for specific services (such as a CEO, director search) while the Compensation Committee also uses the Hay Group for its executive compensation consulting. It’s really no different than the issue that the major HR firms faced a few years ago when they had to choose between their retirement and health care consulting services and their executive compensation consulting services. They chose the former because it presented a larger revenue stream and spun off their consulting businesses.

You can argue that an organization such as Korn Ferry is large enough to establish an effective barrier between its general services and its consulting business to avoid actual conflict situations (and, I suspect, that’s exactly what they will do). However, for many companies, it’s the appearance rather than the reality of a conflict which caused them to shy away from relationships with companies where they may have been receiving both consulting and non-consulting services. This may, in fact, happen here.

While the rules don’t prevent anyone from using Korn Ferry for their general services and Hay Group for their compensation consulting, it’s probably going to lead to a little extra diligence to justify the arrangement to be able to respond to inquiries about independence.