Giving investors say on pay could pressure boards
May 9, 2007
In 1981, three Harvard University eggheads published a book about
negotiating, titled "Getting to Yes." It sold well, largely because its
prescriptions seemed to apply broadly to many kinds of disputes.
But their advice has not reduced the antipathy between corporate executives
and dissident shareholders.
Investors, empowered by their stakes in the stock market, frequently
confront recalcitrant company managements on the basis of their status as
shareholders versus the status of the executives as agents of shareholders
-- exactly the wrong approach, according to the Harvard experts.
Step 1: Move beyond assertions of status.
Today, in an age of corporate raiders, combative hedge funds and Democratic
majorities in Congress, the opportunity for what the British call
"constructive engagement" between shareholders and managements is settling
on a simple idea.
It's called "say-on-pay," giving shareholders a non-binding vote to approve
the executive pay package presented each year by the compensation committee
of a company's board of directors.
An advisory vote on executive pay became law in the United Kingdom in 2002,
and led to shareholders in 2003 rejecting the pay package of drug giant
GlaxoSmithKline. The idea was proposed at a few U.S. companies last year by
the American Federation of State, County and Municipal Employees, and is
getting significant votes in dozens of annual meetings this year.
"We felt that the root of the problem wasn't the mechanics of pay but
directors who were irresponsible in the decisions they made about pay," said
Richard Ferlauto, director of pension investment policy at AFSCME. "We were
looking to intervene in the process to hold members of the compensation
"It's been the break-out issue this year," said Patrick McGurn, executive
vice president at Institutional Shareholder Services, a proxy voting
adviser. "It's got a great deal of momentum behind it."
Investor Carl Icahn endorsed a "say-on-pay" proposal at Monday's annual
meeting at Motorola. Sen. Barack Obama introduced a "say-on-pay" bill after
the House approved a measure in April.
"Most of the shareholder proposals on executive compensation are not well
thought out," said Greg Kinczewski, general counsel at pension consultant
Marco Consulting Group.
For example, increased pay disclosure, a popular cause among many activists,
frequently leads to higher pay, as CEOs use the revelations to demand more
than their peers, Ferlauto said.
In contrast, "say-on-pay" puts at risk the reputations of corporate
directors. "Boards don't want to be publicly rebuked for how they pay their
senior managers," said James Allen, policy analyst for the CFA Institute
Centre for Financial Market Integrity.
The concept is overwhelmingly approved by professional investors. In a
recent survey, 76 percent of members of the CFA Institute endorsed it,
though they were opposed to enacting "say-on-pay" into federal law.
"Say-on-pay" forces negotiations toward performance-based pay and an
alignment of pay incentives with the strategic plan of the company, rather
just enriching the CEO, said Ferlauto. The goal is approval by both sides.
Removing directors from their status as board members is tough; potentially
embarrassing them is a better path to "yes."
Copyright © 2007, Chicago