U.K. Investors Warn
U.S. About Say on Pay
Article published on
Nov 12, 2007
Say on pay is a tremendous burden for boards and investors alike and has the
potential to be even more burdensome in the U.S., cautioned European
investors at a recent conference in New York. Their warning defies U.S. say
on pay proponents who have argued the process would go smoothly here based
on the U.K. example.
“We didn’t realize how difficult say on pay would be. It’s extremely time
consuming,” commented Anita Skipper, head of corporate governance at Morley,
one of the largest asset managers in the U.K., at the conference. But
Skipper added she wouldn’t want to give up the advisory vote U.K. investors
have on executive pay.
Boards considering Verizon’s recent decision to give investors an advisory
vote on executive pay should therefore take heed, while shareholders need to
be careful what they ask for.
By joining Aflac in adopting say on pay, Verizon could turn the tide on the
controversial issue. As one corporate executive, who wished to remain
anonymous, explains, once you get a few companies adopting say on pay, more
boards may ask themselves, “What’s the harm?”
For boards, the harm is clear: adding more work to an already unprecedented
Elizabeth McGeveran, vice president for governance and sustainable
investment at London-based F&C Asset Management, explains how say on pay
creates a tremendous amount of work. F&C works with 60 pay consultants a
year to get through the proxies of all the companies in their portfolio. At
the same time, the asset managers themselves must be familiar with pay
metrics, requiring more due diligence and work on their part.
Say on pay usually requires comp committee members to meet with their
shareholders before the annual meeting. However, in the U.S., there are more
investor groups to meet with and the geography of the country makes ferrying
shareholders and board members to company headquarters difficult, says
Yet, despite that hassle, she says say on pay has proven to be invaluable.
“It helps boards to understand that shareholders are deeply concerned about
pay for performance,” she says.
It can also be a tool for boards to use against a strong CEO, McGeveran
says. “It allows [the board] to say, ‘Actually, no. We are getting messages
from shareholders that this pay is not appropriate.’”
That same sentiment is unlikely to be echoed by U.S. boards. Directors in
the U.S. are generally united in their opposition to say on pay. Evidence
that the rule has proven to be more costly and time consuming in the U.K.
will only embolden directors in that opinion.
The way corporate America is structured, shareholders can vote against
directors to express their displeasure, says Thomas Preston, a director at
WSFS Financial Corp. There is no realistic way shareholders can participate
in the depth of conversation around executive pay that goes on in the
boardroom, he says. Even with more detail on comp in proxy statements this
year, public information on boards’ rationale for pay only scratches the
surface, he adds.
Despite Verizon’s adoption of say on pay, some activist investors are
unhappy with the 2009 timetable Verizon offered, instead desiring immediate
implementation. However, the delay can be seen as an illustration of the
complications the policy creates.
Verizon shareholders need the time to figure out all that the new policy
entails, says Gary Lutin, an investment banker who spearheaded a forum to
discuss advisory pay at Verizon last winter. It will be considerably more
work for investors, and some may obtain the services of a proxy advisory to
go through the proxy statement and effectively evaluate it, he says.
Ever since a say-on-pay shareholder resolution narrowly passed at Verizon’s
annual meeting this summer, management has been meeting with the company’s
large institutional shareholders to discuss executive pay. Spokesman Bob
Varettoni declined to specify the role of the board in the discussions. He
said the company will spend next year working out the logistics of how the
board will communicate with shareholders once say on pay is adopted at the
2009 annual meeting.