The Professional Standards of Executive Remuneration Consultants

London Financial Regulation Seminar: The Professional Standards of Executive Remuneration Consultants Presented by: Dr Calvin Jackson (Institute of Advanced Legal Studies) Date: 18 January 2022 Context 1. Executive pay - really important topic in society 2. Electorate needs to maintain faith in capitalist system  Good jobs  Taxes to pay for public services 3. Post-GFC: Concerns over 'high pay'/'rewards for failure' • Concept of 'responsible capitalism' 4. Writing book on professional standards of executive remuneration consultants 5. Publisher: Routledge (late 2022) 6. Formerly 25 year 'veteran' executive remuneration consultant 7. Advised remuneration committees around the world (particularly in financial services) 8. Decade ago, invited to return to practicing at Bar 9. Disciplinary Panel Chair - major UK professional body 10. Combined with IALS LLM, then PhD 11. Perspective: Ringside seat on development of UK executive remuneration consultancy, plus undertaken extensive empirical research programs Executive Remuneration Consultants - Love them or hate them - key role in REMCO pay determination process - Remuneration committees, executive remuneration consultants and in-house executive reward specialists - Provision of 'independent advice' crucially dependent on professional standards of executive remuneration consultants - 'Professional standards': Technical expertise/experience,plus ethical/training considerations - Self-regulation: Remuneration Consultants Group (2009) - RCG: 11 member firms - Big Four, Actuarial & Benefit Consultants and Boutiques - Niche 'business advisory' service, as opposed to fiduciary obligations - No specific specialized accreditation nor qualification/no license to practice - Executive remuneration consultants at most senior level tend to be actuaries, chartered accountants, chartered tax advisors, lawyers or MBAS - Only about 250 executive remuneration consultants in UK - Perhaps 50 'really senior' executive remuneration consultants - Too small a 'profession' for examinations/disciplinary sanctions on individual consultants? - RCG's Voluntary Code of Conduct - not a 'trade body' - Monitor and review VCC - never received a complaint about member firm (nor individual consultants) Empirical Doctoral Research Programs  2014: identification of 'Big Six Issues' - e.g., 'short-termism', 'incentive plan design' and 'corporate ethics/behaviors'  One of BSI - 'professional standards' of executive remuneration consultants  Certain of BSI may well merit reform, but hypothesis for doctoral research was that current UK regulation and practice applicable to executive remuneration consultants broadly appropriate  2016 (updated:2021): 53 doctoral research interviews of protagonists on UK pay scene  Quantitative -v- qualitative research  Qualitative, in footsteps of Bender, Adamson, Bender & Franco- Santos and d Gannes  Focus on professional standards: Executive remuneration consultants and in-house executive reward specialists  Qualitative semi-structured 'elite' interviews 1. REMCO Chairs/members 2. Executive remuneration consultants/in-house executive reward specialists 3. Institutional shareholder bodies/proxy advisors 4. City lawyers/Regulators/BEIS  59 invitations/56 acceptances/53 completed interviews (2016)  13 updating interviews (2021)  18 research aspects  Result: Strong evidence to support the research hypothesis Research Aspects 1. REMCO/executive remuneration consultants working relationships? 2. Executive remuneration consultants: Genuinely independent and objective? 3. Business of executive remuneration consultancy in UK and US: Key players, regulations and practices 4. Self-regulation - how is RCG working? 5. In-house executive reward specialists: Working relationships? Conflicts of interest satisfactorily addressed? 6. 'Professional standards'. 7. Professional standards: - Technical expertise/experience/training/ethics - Consideration of specialized accreditation/qualification and/or license to practice regime (disciplinary sanctions) 8. Professional standards: - Shareholders' binding vote on appointment of executive remuneration advisory firm - Shareholders' annual binding vote on DRR - Pay ratio disclosure - Workers on Board - Disclosure of fees charged for 'Other Services' Research Programs Results  Ascribed interview responses: 'Positive', 'Mid-position' or 'Negative'  Strong consensus overall, but dispersion in particular respects - UK remuneration committee advisory scene (three-way 'split') - Genuinely independent and objective? (three-way 'split') - Executive remuneration consultants: working relationships (generally 'Positive', some 'Negative') - Executive remuneration consultants: conflicts of interest (generally 'Positive', some 'Negative')  Professional standards: - Ethics/professional standards ('split' between 'Positive' and 'Mid- position') - Technical expertise/experience ('split' between 'Positive' and 'Mid- position') - Specialized accreditation/qualification (predominantly 'Negative, but some 'Positive' or 'Mid-position') - License to practice (predominantly 'Negative, but some 'Positive' or 'Midposition') - UK: Self-regulatory regime and RCG (predominantly 'Mid-position', but some 'Positive' or 'Negative') - In-house executive reward specialists: Conflicts of interest (predominantly 'Mid-position', but some 'Positive' or 'Negative')  Very limited appetite for UK regulatory or practice reform  Scarcely surprising: Executive remuneration consultancy/consultants: 1. At 'really senior' level, usually professionally qualified. 2. Tiny 'profession': not growing 3. Lack of resources/infrastructure for specialized professional qualification/examinations/disciplinary processes 4. Arguably 'competitive oligopoly' of two Big Four and two Actuarial & Benefit Consultancies, but Boutiques gaining ground  Why have US and UK gone down such different routes on regulations and executive remuneration consultancy firms? What's Next? - - Further research: Remaining BSI  In-house executive reward specialists  Emerging practices in financial services (key financials centers worldwide) On independent external reviewer's advice, seeking US co-author for book on 'Future of Executive Pay' - Invited to collaborate on screenplay for feature film on an 'Executive Pay Dilemma'/'Trouble in a City Boardroom'