Investor calls for advisory votes on pay and other measures to reform
executive compensation will resonate in 2008 as U.S. capital markets slide
in the face of recession.
A network of investors, led by Boston-based Walden Asset Management and
the American Federation of State, County and Municipal Employees, has so
far filed more than 90 proposals calling for an advisory vote on pay,
compared with 44 such resolutions at this time last year.
membership--which ranges from retail shareholders to pension fund giants
including the California Public Employees’ Retirement System--also has
grown from 2007. Nearly 75 investors have come together this year to file
the measure at primarily large and medium-sized companies.
“Companies receiving the proposal include those where shareholders
believe there has been non-performance, options backdating, and other
major issues that shareowners need to address,” Timothy Smith, senior vice
president at Walden Asset Management, told Risk & Governance Weekly.
Abbott Laboratories, Capital One, Lexmark and Wells Fargo are among those
Spokeswomen at Capital One and Wells Fargo declined to comment on the
filings, while officials are Abbott Laboratories and Lexmark did not
immediately respond to requests for comment.
The proposal, dubbed “say on pay,” also will be filed at companies such
as General Electric that are generally viewed positively by shareholders
with respect to executive compensation and other facets of governance,
according to Smith. “We believe [such companies] should provide leadership
in adopting an advisory vote” on pay, said Smith, who also noted that
dialogue on the issue has increased this year.
Governance watchers have in recent months called for increased
communication between issuers and shareholders on a range of issues
including compensation. “Improved communication and dialogue … may provide
compensation committees with a broader perspective and balance in relation
to the views provided by management,” wrote Weil, Gotshal & Manges
attorneys Ira M. Millstein, Holly J. Gregory, and Rebecca C. Grapsas in a
memo to clients earlier this month. “It may also lessen the push for an
advisory vote on executive compensation.”
Last year, 20 companies and investors came together to form the
“Working Group on the Advisory Vote on Executive Compensation” to study
Three companies--Par Pharmaceuticals, Verizon Communications, and Aflac—have
so far taken steps to allow for advisory votes on pay following
shareholder proposal filings in 2007 calling for the right. Aflac, the
Georgia-based insurer, will be the first to give shareholders the vote
when it holds its annual meeting on May 5. The company originally planned
to allow for the vote in 2009.
Concerns over compensation in 2008 will not be limited to calls for
advisory votes on pay, though. Novel proposals will include demands for
companies to adopt a policy on the use of so-called 10b5-1 stock-selling
plans, and those seeking to limit or bar tax gross-ups for senior
executives. Another resolution seeks to place limits on executive
First year proposals generally do not fare as well as those in their
second and third year, though this year may prove an exception.
“As the market declines, there’ll be more support for compensation
reform,” notes Charles Elson, director of the University of Delaware’s
Weinberg Center for Corporate Governance. “The downturn will only fuel the
efforts of shareholders.”
Reports of record Wall Street bonuses at financial firms that sustained
considerable losses in 2007 as a result of exposures to mortgage-related
investments are likely to stimulate broad support for proposals tied to
executive pay. Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman
Brothers, and Bear Stearns together awarded roughly $39 billion in
year-end bonuses, exceeding the $36 billion distributed in 2006 when the
industry reported all-time high profits, Bloomberg News reported.
CEOs at Morgan Stanley and Bear Stearns forfeited bonuses in light of
bad bets on subprime mortgage-backed securities. That may mollify
shareholders who are expected to vote on a range of proposals including
those calling for strengthened links between pay and performance. Labor
funds, led by the United Brotherhood of Carpenters’ and Joiners of
America, have so far filed more than 50 such resolutions at spring annual
More than three-dozen proposals requesting a pay-for-performance link
received average support of nearly 30 percent in 2007, while roughly two
dozen similar resolutions received more than 36 percent support in 2006.
This year’s proposals typically call for compensation committees to adopt
a pay-for-superior-performance principle by establishing compensation
plans that set strict criteria for achieving payout targets. For example,
measures call for the establishment of performance targets for each plan
financial metric relative to the performance of peer companies, as well as
delivery of a majority of the plan’s target long-term compensation through
performance-vested equity awards rather than time-vested awards.
Bear Stearns is one company that is challenging the proposal at the
Securities and Exchange Commission. The firm is seeking permission from
the SEC to omit the proposals on the grounds it has been “substantially
implemented,” arguing its compensation committee “has historically
followed the long-held principle that the executive officers should be
rewarded based on both the [c]ompany’s and their own individual
In their Dec. 21 letter to the SEC, lawyers for the New York-based
financial firm note that the commission has in the past stated that
exclusion may be appropriate “…even if company practice does not mirror
the proposal exactly.”
Thirty-two percent of Bear Stearns’ shares present and represented,
including abstentions, voted in favor of a Carpenters’ pay-for-performance
proposal at last year’s annual meeting.
The Carpenters have so far filed pay-for-superior-performance proposals
at 33 companies, including Best Buy, Honeywell International, WellPoint,
and Northern Trust, according to RiskMetrics records.
New Concerns Spotlighted
Troubled by the potential for executives to abuse certain benefits, labor
pension funds are filing two new proposals in 2008.
AFSCME plans to submit proposals calling on companies to adopt tighter
controls on executive stock sales under “Rule 10b5-1” plans. That SEC
rule, enacted in 2000, was meant to provide flexibility to insiders who
may not trade on information that is not available to outsiders by
allowing them to set up automatic trading protocols that operate
regardless of insider trading “windows.”
However, critics of the rule contend that loopholes allow executives to
cancel trades when nonpublic information would indicate, for example, that
a sale may not be beneficial. A September 2007 study by Stanford
University researcher Alan D. Jagolinzer found that the rule “appears to
enable strategic trade[s],” and SEC officials have warned that the study
suggests the possibility of abuses, which they are investigating.
AFSCME's 10b5-1 proposal, filed so far at Safeway and SanDisk, seeks to
close potential loopholes by tightening disclosure requirements and
putting in place stronger controls. The resolution calls on boards to
adopt principles to help ensure that 10b5-1 plans are not abused. For
instance, one principle would limit amendments, or the early termination
of plans. Another would require the broker handling 10b5-1 plan trades not
to handle other trades for an executive in order to minimize the
likelihood that the executive will inadvertently communicate material
nonpublic information to the broker.
The proposal also calls for a 90-day gap between adoption or amendment
of a 10b5-1 plan and initial trading under the plan, barring executives
from trading in company stock outside plans, and a requirement to identify
plan transactions on Form 4 reports, which are corporate filings on trades
“We believe that 10b5-1 plans, with proper safeguards, can serve a
useful function,” AFSCME notes in the proposal's supporting statement.
“The disclosure-related principles aim to increase transparency regarding
AFSCME also is submitting a new compensation-related proposal that
seeks to limit the use of tax gross-ups, whereby companies cover the tax
liability of executives, often following a change in control. Such
payments have received widespread coverage in recent years as use of perks
has proliferated and new SEC compensation disclosure rules make it easier
for investors to identify such potential payments.
AFSCME’s proposal calls on companies to refrain from making or
promising to make gross-up payments to its senior executives, except those
“provided pursuant to a plan, policy or arrangement applicable to
management employees” generally, such as those related to relocation or
expatriate tax-equalization policies.
The proposal defines a gross-up as “any payment to or on behalf of the
senior executive whose amount is calculated by reference to an actual or
estimated tax liability of the senior executive.” The definition is
designed to focus on the often large payments made in conjunction with
severance packages awarded after takeovers.
“Gross-ups highlight the dubious effects of privilege that allow CEOs
to avoid taxation, while ordinary Americans cannot,” said Richard Ferlauto,
director of pension and benefit policy at AFSCME. Proposals have so far
been filed at Nabors, American Express, Textron, CVS Caremark, Northrop
Grumman and Clear Channel Communications.
Connecticut Retirement Plans and Trust Funds is seeking to bridge the
gap between CEO pay and that of the next highest-paid named executive
officer, or NEO. So far, the pension fund is calling on two
companies--Abercrombie & Fitch and SUPERVALU--to adopt an internal pay
equity policy. Under the proposal, compensation committees would be
charged with conducting peer group and other analyses and then disclosing
to shareholders “the role of internal pay equity considerations in the
process of setting compensation for the CEO and other NEOs.”
We “believe that large CEO to NEO pay ratios may indicate inadequate
succession planning, since large disparities may be seen as reflecting
significant differences in contribution and ability,” fund officials wrote
in the proposal.
Meanwhile, the AFL-CIO is submitting a new resolution that seeks to
curb employment contracts for named executive officers. The limits include
capping such agreements at three years, barring evergreen clauses that
allow for renewal without shareholder approval, and barring the
accelerated vesting of stock-based awards and the use of excise tax