Shareholder Activism Accomplish Anything?
Tuesday, 20 Nov 2012 | 9:39 AM ET
By: Alec Foege
Special to CNBC.com
Outrage over rising
executive pay levels during the economic crisis of 2008 was the driving
force behind the "Say on Pay" rule, a component of the 2010
Dodd-Frank Act that gave
shareholders a nonbinding vote on executive pay.
But some corporate
governance experts argue that Say on Pay has had little if any impact on
reining in what public companies decide to pay their leaders.
Indeed, in some cases, Say
on Pay has had the opposite of its intended effect, according to some,
allowing the boards of public companies to rubber-stamp inflated pay
packages for top executives and then certify them by coaxing a high
approval rating from large shareholders.
investors can use high negative Say on Pay votes as de facto ratings that
help them target companies ripe for change — easy prey for investors
looking to stir shareholder dissent for their own financial gain.
The original intention of
the Say on Pay rule was to provide shareholders with a tool to weigh in on
the composition of pay packages offered to a company’s management team. It
was passed in Washington as resentment surged after some too-big-to-fail
banks that received government bailout money paid large bonuses to
executives. Lawmakers touted Say on Pay as a way to rein in extravagant
pay practices that reward failure.
The reality has been far
less dramatic. Instead, Say on Pay has been “used in a surgical way,” said
Fabrizio Ferri, an assistant professor at Columbia Business School who has
studied the impact of say-on-pay votes in the U.K. “It has helped identify
certain design issues within executive compensation packages.”
Ferri said Say on Pay “is
just a tool” that is “supposed to work as a threat” to management,
especially when high executive pay is linked to poor company performance.
The fear of humiliation certainly has encouraged corporate board member to
tie more elements of executive compensation to performance, though those
elements can vary wildly.
Still, said Ferri, Say on
Pay “helps open up other conversations with the board and allows
shareholders to interact with a company’s directors.” He admitted,
however, that “things were headed in that direction anyway.”
Unfortunately, experts say,
most Say on Pay votes are filed by institutional shareholders and
brokerage houses, which are more likely to support management, as well as
a company’s pay practices. By some estimates, less than 10 percent of
individual, or retail, shareholders vote in proxy elections.
In July, Moxy Vote, an
online shareholder voting service designed to empower individual
shareholders, shut down, citing the unwillingness of brokerages to pass
along proxy votes from individuals, among other factors.
“In concept, Say on Pay
sounds great,” said Allan McCall, a co-founder and principal of Compensia,
an executive compensation consultancy, currently researching corporate
governance at the Stanford Graduate School of Business. “In reality, what
we’ve seen is, since this vote was not demanded by shareholders, there’s
been this movement to outsource the decision-making.”
typically hire proxy advisers such as Institutional Shareholder Services
and Glass Lewis, which don’t have a stake in the outcome, to formulate
their votes on pay. “It’s changing the calculus of what the right answer
is,” said McCall. He said in some cases, corporate boards vote against
their better judgment to avoid the risk of a negative Say on Pay vote.
Whatever companies are
doing to quell shareholder dissent, it’s working. A recent report from the
Conference Board revealed that of 1,856 companies that supplied detailed
Say on Pay vote results through June 30, only 49 executive compensation
plans (a slight increase from 41 in 2011) did not received a majority vote
from shareholders. That group includes high-profile cases such as
Citigroup , American Eagle Outfitters , and
Pitney Bowes .
The research also revealed
that very few companies receiving a negative Say on Pay vote in 2011
remained on the list in 2012, suggesting a systematic effort by companies
to influence shareholders regarding their compensation plans prior to the
Meanwhile, CEO pay
continues to climb. Research done by USA Today and GMI Ratings in April
found that the median pay of CEOs rose 2 percent in 2011 after soaring 27
percent in 2010.
These days, boards “only
consider Say on Pay in terms of compliance,” said Gary Lutin, chairman of
the Shareholder Forum, a host of educational programs designed to inform
investors. “Say on Pay was a misguided approach because it turns too much
power over to the consultants.”
While Lutin is skeptical
that any governmental regulation could change the dynamic of escalating
executive pay, he sees a silver lining in Say on Pay for individual
“Investors can look at
positive Say on Pay ratings as a vote of confidence from professional fund
managers,” said Lutin. He argued that small investors can use this
“presumably well-informed vote of confidence in picking stocks for
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