http://business.timesonline.co.uk/tol/business/columnists/article5157781.ece
President-elect Barack Obama had plenty to say about corporate excess on the campaign trail and one place where his presidency should have a direct and early impact is in “say on pay” legislation that would make annual shareholder votes on senior executive compensation part of securities law.
The question is whether that would actually accomplish anything in terms of reining in over-the-top executive pay – not to mention whether CEO pay is what is ailing Corporate America most right now.
Regardless, the natives are restless amid an economic meltdown that has wiped out trillions of dollars of shareholder value around the world and corporate leaders are under an intense glare.
With executive pay as a flashpoint, shareholder advocates say big changes may lie ahead in the new administration, particularly if, as many expect, a Democratic appointee is named to head the Securities and Exchange Commission.
“Over the next six months or so, it’s going to get very interesting,” says Richard Ferlauto, the director of pension policy at the American Federation of State, County and Municipal Employees union.
Indeed, the very day after the Presidential election, on November 5, Sun Microsystems shareholders also cast ballots for change and voted in favour of a “say on pay” resolution by the largest margin yet, with 67 per cent in favour. The tech company has seen its stock drop 83 per cent in the past year and some shareholders were up in arms over chief executive Jonathan Schwartz’s $7.7 million (£5.2 million) package.
Connecticut treasurer Denise Nappier, who oversees $23 billion in state pension funds and who spearheaded the vote, depicted it as a turning point in how shareholders will address executive pay in next year’s proxy season.
Last year Mr Obama introduced a say on pay Bill in the Senate that would make nonbinding “advisory” shareholder votes on executive compensation packages mandatory at annual meetings. Congress has already passed a similar Bill, while the one proposed by Mr Obama has languished in the upper house – a state of affairs that probably won’t last for long.
Including Sun, 100 companies have voted on the subject since 2006 and in close to 20 instances shareholders were in favour. To be clear, these are votes to agree to adopt a policy of holding votes on pay rather than votes on the actual figure. The first vote on pay itself at a US public company was in May at insurer Aflac and 93 per cent approved the CEO’s package.
According to the Corporate Library, these resolutions to adopt say on pay policies have gained, on average, 42 per cent of votes supporting them. It is an ironic season and, ironically, some of the companies where these resolutions have the weakest support over the past couple of years are the now-limping financial groups, including Merrill Lynch, Morgan Stanley, Citigroup and Wachovia. And, interestingly, even in cases where the resolutions have gained the majority of votes, most of the companies have not gone ahead and adopted the provisions (something legislation would make mandatory).
There are a few nagging questions raised by all this. For starters, is CEO pay really the hot issue, or is this another step down what Mr Obama’s harshest critics see as his Marxist path? I’d argue that as long as the votes are “advisory” and the intent is to make sure that compensation is tied to performance, then there’s no harm. If anything, it sounds like good business right now to be open to more shareholder input.
If anything, the say on pay movement, which mirrors shareholder practices in the UK and elsewhere, sounds a bit toothless because of the advisory nature of the vote. “Say on pay is in and of itself but a baby step,” says Charles Elson, a governance expert at the University of Delaware. “Ultimately the issue is replacing the directors who approve the bad pay.”
This is where say on pay could get interesting because it is closely linked to another movement, “proxy access”, which basically would give investors greater ability to nominate their own directors and perhaps include some kind of statute to reimburse shareholders for the costs of nominating dissident directors if they are successful. (This would replace the current practice of investors withholding votes for directors.)
There are even more drastic calls for reform afoot: Mr Elson, for one, thinks that all two-tier share structures in which a controlling shareholder does not own the majority of a company’s equity should eventually be outlawed. Never mind that shareholders bought into these companies – whose ranks include Google and the parent company of this newspaper by the way – knowing what their rights were.
Like the rest of us, the American CEO has had an interesting time over the past decade or so. We’ve seen the “rock star CEO” era, followed by “CEOs in cuffs” scandals of several years ago. Now, it seems, we have the “I feel your pain” CEO. An important issue raised by what appears to be a new era of shareholder rights on US stock markets is to make sure that say on pay doesn’t become euphemism for “CEO payback”. The tenure of a typical American boss is already declining and attracting and keeping the best is going to be critical. Clearly, a balance needs to be struck between rewarding success and, as Connecticut’s Nappier put it, some corporate boards’ “tendency toward unfettered greed at shareholder expense”.
On the stump, Mr Obama noted that in 2005 the average CEO earned 262 times the pay of the average worker. That’s an attention-getting and in some ways distasteful statistic to be sure but, then again, 2005 sure looks good about now.
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