Q&A: Upside to
Executive Pay Votes
By ELLEN SIMON
02.27.07, 4:10 PM ET
As companies including JPMorgan Chase & Co. and Pfizer Inc.
consider whether to give shareholders an advisory vote on their
executive pay, one person they're asking for advice is Stephen M.
Davis, who has worked on governance issues since 1988.
Advisory votes have been one of the most talked about fixes for
ultra-rich pay packages this proxy season. Rep. Barney Frank, D-Mass.,
chairman of the House Financial Services Committee, has said he will
introduce legislation on the issue as soon as this week. Aflac Inc.
adopted a rule giving its shareholders the vote earlier this month.
Ten companies, including Pfizer, JPMorgan, Intel Corp.,
Colgate-Palmolive and Bristol-Myers Squibb Co., are studying whether
to adopt the non-binding shareholder votes on executive compensation.
While shareholders wouldn't be able to rescind pay, they could voice
Davis, co-author of "The New Capitalists: How Citizen Investors are
Reshaping the Corporate Agenda," is briefing the companies about how
advisory voting has worked in the United Kingdom, where its been in
place since 2003. The Associated Press talked to Davis about his
Q: What, if anything, have the advisory votes changed in the UK?
A: Advisory votes have been a big plus in the UK, in terms of
better aligning CEO pay with corporate performance. It's no panacea,
but it has produced some very big benefits.
It used to be that when remuneration or compensation committees set
the pay, they consulted the board, and there was almost no
consultation with the shareholders. Now they have to consult with
When GlaxoSmithKline PLC lost its vote (in 2003), it caused an
almost overnight realization among corporate boards that they now have
to talk to their shareholders about pay packages; not just talk to
them, they have to persuade them.
There was a threefold increase in consultation and contacts between
corporations and shareholders following the Glaxo defeat.
Shareholders had to figure out how to analyze these packages and
express their views. There's a big learning curve going on: Boards are
still trying to figure out how to best communicate and persuade,
shareholders are trying to figure out the best way they can use this
Q: What happened at Glaxo after its pay package failed to win
A: Glaxo was the first big company to see its remuneration report
defeated. They could have legally ignored the negative report and
carried on. In practice, it was a real slap in the face, not just to
the company, but to the compensation committee and the chairman. The
company spent a year trying to understand the shareholder objections
and rework the package. The next year's package was approved, but
there are some shareholders who will tell you that they remain
Q: Shareholders are a much more concentrated group in the UK; how
would United States companies approach their diffuse shareholders?
A: Maybe instead of having nice quiet chats among a club of
shareholders, they could have roadshows across the country. Companies
do that today when they're trying to increase their share price. They,
of course, have never had a reason to do that with CEO pay.
At the same time, investors are really going to have to get up to
speed, really get their hands dirty understanding these compensation
These are good challenges to have, as opposed to there being a
stone wall between companies and shareholders on executive pay.
Q: What are some of the company arguments against advisory pay? How
would you answer them?
A: One of the arguments: This is just too complex for shareholders
to deal with. Boards spend lots of time sorting through data and
hiring outside counsel.
In the UK, shareholders would argue, "We're sophisticated enough to
decide to buy or sell stock, we certainly can be sophisticated enough
to determine whether pay is linked to performance."
Another criticism from companies is, "We already have sufficient
dialogue with our shareholders. If they have a problem with their pay
package, they'll tell us."
Most roadshows, they talk to portfolio managers, who many not be
concerned with corporate governance. They may be listening to or
talking to the wrong shareholder institutions.
Another argument: If you have a problem with compensation policies,
just express that through a vote on a compensation committee director.
There are a couple problems with this argument. Most companies
still operate through plurality voting, so a vote for directors is
pretty meaningless. Shareholders, even if they have a problem with
compensation policies, may not want to oust the board.
In Britain, they describe this in soccer terms. A vote against the
compensation package is a yellow card, a warning. If the company
doesn't respond the next year, then you respond with a red card and
vote against the directors.
That only works with majority voting for board members. This will
work best in the U.S. when combined with majority rule voting.
Q: Why did the government in the UK institute the votes?
A: UK government introduced the advisory vote process to get the
fat-cat pay monkey off the government's back. Headlines were calling
for government action to curb CEO pay; what the government did was
empower shareholders to take on this issue.
They feel the advisory vote process is a boost to UK
competitiveness. It's meant to install a way for shareholders to keep
companies in fighting trim by linking incentives to performance.
That's relevant here. If we're thinking of making our companies
more competitive and giving our public shareholders more power to gain
better returns, then the advisory vote makes sense.
Copyright 2006 Associated Press. All rights reserved.