Leading institutional investors are to push for tighter rules for executive pay consultants because they say a code of conduct the advisers have proposed would not do enough to curb boardroom excess.
The Association of British Insurers is unhappy with the best practice guidelines put forward by seven leading pay consultancies to counter significant doubts about the independence and quality of their advice.
Peter Montagnon, the ABI’s director of investment affairs, said they did not go far enough in acknowledging potential conflicts of interest that were “obvious to most people”.
Executive pay consultants are hired by the non-executive directors who sit on the remuneration committees of listed businesses. They advise on the issues these part-time board members need to understand when setting rewards at the top of the company. Top practitioners can charge as much as £500 an hour.
Critics say the advice they give is compromised on several levels, however. One criticism concerns a perceived bias towards ratcheting up the salaries, bonuses and longer-term incentives offered to executives.
This was once satirised by Warren Buffett, the billionaire investor, who joked that “Ratchet, Ratchet and Bingo” would be an apposite name for a firm of pay consultants.
Pay consultants have also been accused of conflicts of interest because some work for companies that sell other services – such as general human resources advice – to the executives whose wages they help set.
Leading consultancies drafted a code of conduct in response. It has been signed by Deloitte, Hay Group, Hewitt New Bridge Street, Kepler, Mercer, Towers Perrin and Watson Wyatt.
|Top ten, by number of clients|
|FTSE 100||FTSE 250||Total|
|New Bridge Street Consultants||19||44||63|
|Deloitte & Touche||19||26||45|
|Hewitt New Bridge Street Consultants||6||23||29|
|Mercer Human Resource Consulting||10||14||24|
|Hewitt merged with New Bridge Street in 2008, figures compiled from name shown in clients’ annual report|
|Source: Manifest - The Proxy Voting Agency|
The signatories view the code more as a way of explaining existing best practice than as a reform.
Sir David Walker, who has been asked to look at reforms to the way British banks are run, gave a tentative welcome to the code in his report on corporate governance in financial services, released last month.
However, when it makes its official response to the Walker Review in the coming weeks, the ABI said it would call for a more aggressive stance.
It wants boards to disclose publicly how much they spend on pay consultancy each year, as well as how much management spend on other services from the same firms.
The draft code of conduct recommends that this information be given to the chair of the remuneration committee but not be published.