Divisions Grow Within
Article published on
July 7, 2008
As “say on pay” has become
a more politicized and activist initiative, many mainstream investors and
governance professionals are turning against the concept after initially
Former supporters don’t like the way the movement is developing. One concern
is that it will hurt dialogue between shareholders and companies. Another is
that the initiative won’t go far enough to hold compensation committees
Rick Smith, senior vice president and
executive compensation practice leader at Sibson
Consulting, is concerned that say on pay has become too politicized
and that there isn’t enough information to know what its impact will be.
“It’s gone from a boardroom discussion now to something they’re talking
about making mandatory,” he says.
Instead of say on pay, several individuals now support voting against comp
committee members to send a message about executive pay practices.
Say on pay, or advisory voting as it was called at the time, was first
introduced in the U.S. corporate governance community during an open forum
of investors, corporations and analysts in December 2006. It was brought up
as part of a broader conversation of board-shareholder communications as a
way to bring about collaboration, according to Gary
Lutin, the moderator of the forum and an investment banker by trade.
About half of the 30 or so people in the room at that December meeting had
never heard of advisory voting. But the idea quickly caught on, Lutin says.
“The thing that was really remarkable was virtually everyone in the room
thought it was a good idea. But the concept of advisory voting as it was
brought up in December was a process for cooperative communication for
cooperative interests,” he says.
That quickly changed as shareholder activists latched on to the concept.
Shareholder groups like Afscme formed another,
this time closed, working group and filed dozens of say-on-pay proposals in
time for the 2007 proxy season. During that time, other governance
professionals, such as Stephen Davis of
Yale University’s Millstein Center for
Corporate Governance and Performance, recommended legislative adoption to
the House Financial Services Committee. Many original advocates of advisory
voting in December, including the U.K. investor group
Hermes, were opposed to say on pay’s mandatory application and
surprised by the direction the initiative was taking.
This proxy season has seen some progress for say on pay. Eight companies
have adopted the measure. H&R Block became
the latest, announcing its adoption along with a host of other governance
changes last month. But support levels for the proposals have remained flat
and some prominent supporters of say on pay have come out in opposition
Broc Romanek, former assistant general
counsel of Lockheed Martin and editor of
TheCorporateCounsel.net, for one, originally thought say on pay was a good
idea but has rethought that as more information has come to light. In the
U.K., where shareholders have a nonbinding advisory vote on pay, most
executive pay packages are approved, he says: “If say on pay becomes a
reality, it’s likely 99% of pay packages get an affirmative vote and comp
committees will think they’re doing OK.” The measure will also give comp
committees more legal cover against egregious pay packages to show they had
the backing of shareholders, he adds.
Another widely expressed concern is that say on pay would increase investor
dependence on proxy advisory firms. It would be nearly impossible for
investors to sift through all of the Compensation Discussion and Analysis
sections of the proxies on their own, so they will be relying largely on the
recommendations of proxy advisory firms, says Ken
Bertsch, executive director of corporate governance for
Management. Bertsch says he has concerns about whether proxy advisors
or money managers are ready for say on pay. Morgan Stanley tended to support
say-on-pay resolutions last year but has reversed that this year, generally
voting against them.
It’s uncertain what the future holds for say on pay in the U.S.,
particularly as former supporters back away. Presumptive presidential
nominees John McCain and
Barack Obama both support say on pay in
principle. Romanek doubts there will be widespread corporate adoption
without a mandate.
With questions unanswered about the viability of say on pay, a new forum is
being established, sponsored by the same group that led the original
advisory voting forum. The new format, Lutin says, will “focus on the
essential purpose of compensation: to reward competitive success.”