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Comments of
Peter C. Clapman
August 5, 2008
I have a number of
comments responsive to the Gordon Paper. I believe Professor Gordon has
analyzed the issues extremely well and his conclusions are very much on
target about the potential problems with a mandatory "Say on Pay" advisory
vote on executive compensation..
Indeed, although
Professor Gordon and I have never discussed these issues, his conclusions
are very much in accord with the views expressed in my article:
“Shareholder Rights: Next Steps? Be Careful What You Wish For" in the
recent 2008 Directors & Boards Annual Issue.
As Professor Gordon
appropriately notes, there already is considerable shareholder input into
the process for determining executive pay. Most equity compensation
already requires shareholder approval; shareholders have the right, and
exercise that right, to "withhold" votes from board nominees, who have
approved compensation practices deemed inappropriate whatever measure the
shareholder wishes to apply.
Shareholders also have
the right to file shareholder resolutions at companies deemed to have
excessive compensation practices, and have broadly utilized this right.
The question then, as
posed by Professor Gordon is this: Should the current system be changed to
require mandatory advisory votes at all US companies? The problems he notes
are concerns I included in my article, among them, that homogenization of
practices are inevitable as guidelines begin to rule the day and control the
process. This will crowd out innovative practices suitable to particular
companies, but which do not conform to guidelines.
Professor Gordon also
notes that the number of companies where the vote would take place greatly
exceed the number of such votes in the UK. Inevitably, most investors,
beyond TIAA-CREF, my former employer of 32 years, and a small number of
public pension funds and mutual funds that are willing to devote time and
resources to case-by-case review, will outsource the analysis and decision
making to the proxy advisory services. Even the investors that do take
their voting responsibilities seriously will inevitably rely on their own
guidelines and simply will not devote the time and resources to take on such
a daunting task as reviewing all the compensation disclosures and
discussions from all of their portfolio companies.
In the final analysis,
however, the ultimate question may come down to why some shareholders
believe they need this additional lever beyond what they already now have
under the latest corporate governance rules and practices. As someone who
greatly respects the corporate governance system in the UK, with its broader
reliance on greater shareholder rights, it is understandable and tempting to
adopt UK practices, on the assumption that they can work well here in the
US. A more sophisticated analysis would recognize that they are vast
structural difference in the markets between the US and the UK, including
number of companies, concentration of institutional investors and
regulatory rules, all of which reduce the logic of the US adopting UK
practices without a great deal of thought.
As a long-time
shareholder rights advocate, I am concerned that at some point---and we may
be at that point---shareholders overreach in how much in the way of new
rights are claimed, the effect of which is erode rather than enhance
director accountability. Calling a vote "advisory" only, in my view, masks
the inevitable effect such a vote would have; any company director that
chooses to challenge or not comply with the purport of the vote would
inevitably be subject to a "withhold" campaign at the next election of
directors.
Thus, I agree with
Professor Gordon that the current corporate governance system provides
sufficient shareholder input and gives shareholders the needed clout to
engage with company directors and bring their views on executive
compensation to the board. This is the better approach in my view than
moving to an untried new regime which would likely provoke more needless
confrontation between management, boards and shareholders without benefit
even for shareholders.
Peter Clapman
Governance for Owners,
Inc.
914-886-8701
pclapman@optonline.net |