April 7, 2012
IN spring, a shareholder’s
fancy turns to thoughts of pay.
Executive pay, that is — something that, in investing circles, can be
more irritating than April pollen.
figures, disclosed in corporate proxy statements this time of year, are
often maddening. Many corporate boards talk a good line about paying for
performance. Then they turn around and award fat paychecks to chief
executives who, by many measures, don’t deserve them.
this year, this rite of spring has an extra kick. We are starting to see
something that, for the most part, we haven’t before: evidence that
shareholders — the people who actually own public companies — are gaining
some influence over corporate pay practices.
These straws in the wind appear as a result of the Dodd-Frank law. Rules
mandated by the law require companies to put their pay practices to a
shareholder vote at least every three years.
Admittedly, these votes aren’t binding — which means that boards can
choose to ignore them. But the say-on-pay rules went into effect in 2011,
so this year’s crop of corporate proxies provides the first real glimpse
into how companies are, or aren’t, responding when their shareholders
express displeasure over C.E.O. pay.
early indications are positive: some companies seem to be listening.
That’s a refreshing change, particularly given how corporate America has
pushed back on other aspects of the Dodd-Frank legislation.
Granted, shareholders have to get pretty angry, or at least organized,
before companies respond. Pay experts generally consider it a sign that
shareholders are deeply unhappy when at least 20 percent vote against a
company’s pay practices. The good news is that some companies in this
category have responded with changes that they hope will calm restive
Consider what happened at Stanley Black & Decker. Last year, fully 48
percent of the shares voted at the annual meeting objected to its pay
Management seems to have gotten the message. According to the latest proxy
statement, Stanley Black & Decker ended its practice of staggered terms
for directors, a shareholder-friendly move that makes directors less
entrenched. It also significantly raised the minimum stock ownership
required of its executive officers.
company didn’t stop there. It said that, henceforth, new severance
agreements with executives would no longer have the company foot their tax
bills, a practice known as gross-up. Executives also have to hold on to
stock options or restricted shares they receive for a year after they are
John F. Lundgren, the C.E.O., took a 63 percent pay cut, according to data
compiled for The New York Times by Equilar. (Still, Mr. Lundgren got $12.1
million last year.)
Another example of a shareholder-induced change came at Johnson & Johnson.
In 2011, its pay practices got a thumbs-down from a quarter of the shares
voted at its annual meeting. This year, J.& J. revamped its long-term
incentive program for executives.
went longstanding cash payments for long-term incentives. Now, the company
awards stock units that vest only over three years and after meeting three
goals aligned with shareholder returns. The company’s proxy statement said
the change came “as a result of what we learned in 2011.”
FABRIZIO FERRI, an assistant professor at the Columbia Business School,
said he thought say-on-pay votes would bring many changes like these. He
bases this view on his studies of such votes among companies in
Britain, where they have been a fact of life since 2001.
Ferri and David Maber, an assistant professor at the Marshall School of
Business at the University of Southern California, examined companies
whose pay practices received objections from more than 20 percent of the
shares cast. They found that after such votes, these companies were more
likely to remove provisions that were seen to reward failure than those
where shareholders had not expressed high dudgeon over pay. Once the
problematic provisions vanished, the companies experienced lower dissent —
or none at all — in the next proxy season.
These shifts show the positive impact shareholders can have when they are
engaged in the proxy process. Say-on-pay votes “assure that rules of the
game are fair in terms of the process of setting pay and that there are
clear checks and balances on provisions that may be viewed as
controversial or that may be manipulated,” Mr. Ferri said in an interview
for every active shareholder who votes for change, thousands of passive
ones remain disengaged. Votes that abstain, are never cast or that are
delegated to brokerage firms to vote, typically in support of management,
still make up a lot of the proxy counts.
Many shareholders have long felt that voting against management is futile.
But it is troubling that so many are absent when it is becoming clearer
that they can make a difference.
“The higher the level of ‘absent’ votes, the easier it is for someone to
exploit a company,” said Gary Lutin, chairman of the Shareholder Forum, a
series of programs supporting investor access to decision-making
information. “Self-dealing executives know this, and so do opportunistic
Consider an analysis by
Morningstar of shareholder votes last year at the 100 American
corporations whose chief executives were paid the most, based on a
separate analysis conducted for The Times by Equilar. Morningstar found
that the median absentee vote on pay among these companies in 2011 was 24
percent, a figure that equals the median absentee voting at the companies
in the Russell 3000.
median supportive vote at these companies, meanwhile, was 66.6 percent
last year, while dissent stood at 6.1, Morningstar said.
Absentee votes reflect an abdication of shareholders’ rights and
obligations as owners. Because non-votes are typically removed from the
count when calculating results for such proposals, the outcomes often look
more favorable to management than they actually are.
first glance, for example, shareholders of
Viacom, a perennial at the top of the best-paid list, largely
supported the company’s pay practices last year. Only 3.41 percent of the
shares voted were opposed in 2011, while 82 percent supported the
take a closer look. About 15 percent of the shares outstanding did not
vote on the company’s pay practices at all. And when the millions of
shares held by its insiders, like Sumner M. Redstone, its chairman, were
eliminated from the equation, support for its pay eroded significantly.
Counting only shares voted by independent owners, just 8.9 percent
supported the pay. Almost double that percentage — 17.3 percent — opposed.
Framed as a percent of votes cast for and against Viacom’s pay, fully
two-thirds of nonmanagement votes opposed the compensation, while
one-third supported it.
the company’s shareholder meeting in early March, shareholders voted again
on a number of matters. One involved Viacom’s senior executive short-term
incentive plan, with a potential pool of 525 top employees. The plan’s
terms stated that the maximum award to any participant for a performance
period could not exceed eight times that person’s annual base salary, or
$50 million, whichever came first.
results of that vote showed that 92.7 percent of shares supported the plan
while 2.9 percent opposed it and 4.4 percent were absent. But eliminating
management’s stake brings those figures down to 64.4 percent in support
among independent shareholders, 14.3 percent opposing and 21.3 percent
who are all these absentee shareholders? Probably not institutional
investors, who consider it their duty to vote the shares they hold on
behalf of their clients. If these holders abstain from voting, it may be
because they hope to stay away from a controversy at a company.
Most likely, the AWOL stockholders are people who simply can’t be bothered
to vote. Like Americans who stay home on Election Day, these investors are
giving leaders — in this case, corporate ones — free rein to do what they
years, investors have been powerless to change the dynamic at companies
that award outsize pay to executives for undersize performance. Now that
shareholders’ voices can at last be heard, silence should not be an
A version of this article appeared in print on April 8, 2012, on page
of the New York edition with the
headline: A Rich Game of Thrones: At Last, Signs That Shareholders Are
Making Their Voices Heard.