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Note:  Pfizer has been represented on the Forum Advisory Panel that defined principles for shared management and investor interests in compensation practices, including the exchange of information needed by decision-makers; Stephen M. Davis, has been preparing research papers for the Yale University Millstein Center for Corporate Governance relating to that Forum program's project addressing advisory voting and to the broader applications of its shareholder communication processes.


New York Times, April 6, 2008 article


April 6, 2008

Say on Pay: A Whisper or a Shout for Shareholders?

TWO years ago, Boston Common Asset Management asked Aflac to give investors a chance to weigh in on top management’s compensation. Daniel P. Amos, Aflac’s chairman and chief executive, was taken aback. “I’m in the typical range of C.E.O. pay, and no shareholder had ever complained,” he said.

But he thought about it and decided, why not? Aflac’s shares were rising, so investors were unlikely to feel vengeful toward management. And even if they did, shareholders were not asking for a mandate, just a retrospective thumbs-up-or-down vote on pay that was awarded the previous year.

So this year, Aflac became the first American company to give shareholders a nonbinding vote on executive compensation, which investors refer to as “say on pay.”

“We want people to look at us and say, ‘Here’s a company that will even let you vote!’ ” said Mr. Amos, who has headed Aflac for 18 years. “It’s symbolic, but it’s an important symbol.”

Indeed it is. Last year, investors filed 60 resolutions asking for a say on pay and got about 44 percent of the vote, on average. This year, there were more than 90 such resolutions filed, and while the final tally is not in, they seem to be getting a majority of the votes.

“Shareholders are recognizing that, when chairmen of compensation committees understand that their decisions will be subject to a vote of confidence, they try harder to get it right,” said Stephen M. Davis, project director at the Millstein Center for Corporate Governance and Performance at Yale.

A result, said Scott A. Fenn, managing director of policy for the proxy advisory firm Proxy Governance, is that “say on pay is the issue that’s resonating most with shareholders this year.”

TIAA-CREF, the big pension fund, is a prime example of that. Hye-Won Choi, its head of governance, has been raising compensation practice questions with a large number of companies this year — she will not divulge their names — and say on pay has been front and center in those conversations. TIAA-CREF is particularly interested in advisory votes as a means to register disapproval of boards that issue new stock options without shareholder approval.

“We don’t want to micromanage companies, encroach on the board’s province or substitute our judgment for theirs,” Ms. Choi said. “But we do want to hold boards to high degrees of accountability on their compensation plans.”

In one sense, American investors are coming late to the party. Say-on-pay resolutions have been common in Britain and Australia for several years, and governance experts say they have most likely reined in compensation in those countries. In the United States, both the House of Representatives and the Senate have proposed bills requiring all public companies to establish shareholder advisory votes on compensation.

A handful of companies — Verizon Communications, Par Pharmaceutical, Blockbuster and RiskMetrics among them — have agreed to adopt say on pay in coming years. And many more are discussing the issue.

A group of companies and investors, led by Pfizer, Walden Asset Management and the American Federation of State, County and Municipal Employees, has been working with the Millstein Center to see if they can forge common ground on say on pay. The group held its first roundtable in July and has another scheduled this month.

The Aspen Institute convenes frequent sessions at which labor leaders, institutional investors and corporate chiefs debate controversial topics. Rebecca K. Darr, a senior fellow for corporate programs at the institute, said that lately, “say on pay has become a real buzzword” among many of the corporate attendees. “They are asking, ‘Where do you draw the line?’ and ‘What does this ultimately mean for corporate governance in general?’ ” she said.

Those are not rhetorical questions. Indeed, even say on pay’s strongest supporters stop short of calling it a panacea.

RiskMetrics, which went public last year, is offering say on pay because “it is important to let shareholders influence a topic that they clearly care deeply about,” said M. Ethan Berman, its chief executive. But he describes say on pay as caught in a Catch-22: It addresses a nonissue at companies that do not overpay their chiefs. “But I don’t think it’s the answer in a company where executive compensation has gone out of control,” he said.

Say on pay is by no means universally lauded in governance circles, either. “Say on pay is a half step, and it’s a slippery slope,” said Charles M. Elson, a governance expert at the University of Delaware, who worries that granting say on pay will encourage shareholders to try to usurp board authority on other issues. In the long run, he and a growing chorus of other governance experts say, shareholders will be better off accepting that it is the board’s job to set compensation. If directors do it badly, these experts say, shareholders should simply vote them out of office.

A few such well-publicized shareholder revolts could go a long way toward revamping compensation practices throughout corporate America, suggested Nell Minow, co-founder of the Corporate Library, the governance research group.

“If we start seeing comp committees booted off boards,” she said, “it will have a huge effect on improving the links between pay and performance everywhere else.” But as good as that sounds in theory, investors say, it may be unrealistic to expect shareholders to coordinate well enough to vote off an entire board. So they see say on pay as the best stopgap tool they have, at least for now.

Calpers, the big California pension fund, filed say-on-pay resolutions at Tech Data and the Interpublic Group, but what it really wants is proxy access — the ability to nominate a slate of directors.

“We’ve been supporters of say on pay for several years, and we still think it’s a good tool,” said Dennis Johnson, the senior portfolio manager for corporate governance at Calpers. “But we don’t really want to prescribe pay practices. We want to elect truly independent directors who will align compensation with shareholder interests.”


[The following statement was appended to a modified version of this article.  The copy above is the original, uncorrected version that was seen by readers on the publication date.]

Correction: May 11, 2008
An article on April 6 about proposals to give shareholders of various companies a nonbinding vote on executive compensation referred incorrectly to the precedent set by Aflac, the supplemental insurance company. It is the first publicly traded company to offer such a vote, not the first company over all. (That distinction is held by TIAA-CREF, the big pension fund, which has given policyholders a so-called say on pay since last summer.) The April 6 error was discovered when TIAA-CREF sent an e-mail message on Tuesday pointing out that a headline and an article in Business Day that day contained the error.



A version of this article appeared in print on April 6, 2008, on page BU9 of the New York edition.



Copyright 2008 The New York Times Company




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