By MATTHEW BRODSKY, senior editor/Web editor of Risk & Insurance®
Here's the real deal: The now-complete $4.9 billion merger of Aon and Hewitt is going to put a new Securities and Exchange Commission (SEC) rule to the test.
Companies using Hewitt as a compensation consultant for its compensation committee or management and that also use Aon as their insurance broker might be required to disclose how much they pay Aon in brokerage fees.
The move could cause public corporations that use both Hewitt and Aon services to take certain corporate governance actions, such as considering and clarifying potential conflicts of interests.
The rule regarding compensation consultants is just one part of new SEC guidelines, effective Feb. 28, 2010, but is "one of the more significant and controversial provisions," according to a client alert on the matter issued by law firm Proskauer Rose LLP.
"Even before entering into the merger, Aon and Hewitt shared similar goals and values around client focus, excellence and integrity. But only once the merger closed Friday afternoon (Oct. 1) were we able to discuss in any detail our respective clients and their circumstances, including instances in which we had provided different services to the same client. That said, we will handle each client situation as appropriate throughout the integration and beyond," said Joe Micucci, a spokesman for Aon Hewitt.
The SEC intended the new rule, in its own words, to "facilitate investor's consideration of whether, in providing advice, a compensation consultant may have been influenced by a desire to retain other engagements by the company."
The situation that Aon clients now confront is no different than the situation that clients of other so-called "multiservice consulting firms" have faced. Any definitive proxy statement (DEF 14A) issued in 2010 had to include the revelations if required.
"We've already been through one complete round of fee disclosure," said Charles Salmans, a spokesman for Mercer, the consultancy that's part of Marsh & McLennan Cos., parent of insurance brokerage Marsh.
"Mercer and our affiliated companies fully support both full disclosure of revenues and the highest standards to ensure the objectivity and integrity of the executive remuneration advice that we provide to the compensation committee of the board for our client companies. We have long had in place global business standards to ensure the objectivity of our advice, including procedures to ensure that that executive remuneration advice is not influenced by other business Mercer or our affiliates do with a client company," wrote Will Ferguson, senior partner of Mercer, in an e-mail to Risk & Insurance®.
"Companies need to weigh a range of factors to determine which executive remuneration advisor is the best fit for them. Many choose to work with a consultant that has the global reach, resources and professionalism of Mercer," he said.
It appears, though, that many companies also have decided to move away from such a global remuneration advisor to boutique consultancies to avoid disclosure requirements, said Doug Friske, head of executive compensation consulting at Towers Watson. Friske noted how Towers Watson carved out and made independent a boutique firm, Pay Governance, just to give clients such a choice (though he said that his firm is still the biggest in the space).
That's because the SEC has made a limited exception to the disclosure requirements if the compensation board has retained its own, independent consultant.
This disclosure issue wasn't new, even before the SEC adopted the latest guidelines.
"The rules themselves essentially just capped off a trend we'd been seeing for a while," Friske said.
They amend existing SEC disclosure requirements for the role of compensation consultants in determining executive and director compensation and how they advise the compensation committee, according to the Proskauer Rose note to clients.
The new rules "go one step further," according to the authors of the Proskauer Rose report, by forcing fee disclosure in two key scenarios:
-- If the compensation consultant is the board's executive remuneration advisor and fees for other services from a related company (in this case, an insurance brokerage) are greater than $120,000.
-- If the compensation consultant is providing remuneration advice for management and the board does not have a separate independent consultant, and fees for other services from a related company (in this case, an insurance brokerage) are greater than $120,000.
October 6, 2010
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