Shareholders Seek More Say on Pay
By Heather Landy
Special to The Washington Post
Sunday, December 21, 2008; F01
So you're a shareholder in a company you believe pays its top
executives far too much. What can you do about it?
Well, not much -- for now.
But the deepening financial crisis -- and the growing outrage over
executive pay packages and the arrival of a new
White House administration -- are breathing new life into the "say
on pay" movement, which aims to give shareholders a stronger voice on
Companies adopting say-on-pay policies agree to hold annual
shareholder votes on executive compensation packages. The votes would
not be enforceable -- boards would still have the ultimate
responsibility for setting pay -- but advocates of the policy say it
gives shareholders an important venue for voicing their opinions.
Say on pay has been gathering momentum slowly. In the 2008 proxy
season, shareholders filed more than 75 say-on-pay resolutions,
averaging 42 percent support and winning majority votes at 10 companies,
according to RiskMetrics, which researches corporate governance trends.
That was up from a 41.7 percent average support level the previous year,
when say-on-pay resolutions passed at eight companies.
Activist funds suspect they'll find broader support going into the
2009 proxy season, when say-on-pay resolutions are expected to be filed
with more companies, and in some cases re-filed with companies where the
measures failed in previous years.
Skeptics question the effectiveness of say on pay when it comes to
restraining runaway compensation. Like many of the matters shareholders
take up at annual meetings, say-on-pay votes are nonbinding, meaning
boards can simply take shareholders' sentiments under advisement without
carrying out reforms.
And opponents of say on pay argue that it undermines the authority of
boards and could steer talented executives into private companies where
their compensation would be subject to less scrutiny.
But now that the deepening financial crisis has turned executive pay
into a potent rallying cry, corporate governance experts are predicting
a growth of support for say-on-pay initiatives.
"Clearly there's something crazy going on with executive
compensation. Is it going to be fixed by say on pay? My sense is that
just the mere discussion of it has already had some impact," said Jay
Lorsch, a professor at
Harvard Business School and chairman of its Global Corporate
Governance Initiative. "People in boardrooms are realizing that the
growing criticism of the business community is a thing to be concerned
about, and that to get back into the public's good graces, they've got
to do something."
The pressure to reform pay also is playing out on
Capitol Hill, where debate over the government's role in the issue
has been a key part of the discussion over the bailout of the financial
industry and the federal loans sought by automakers. The public furor
over pay practices could clear the way for legislation requiring
say-on-pay votes at public companies, governance experts said.
It's a remarkable turn of events for say-on-pay proponents.
The fledgling movement was nearly written off six months ago, as
legislative efforts to force companies to implement say-on-pay policies
stalled in the Senate and failed to win several closely watched
shareholder votes. But the Illinois Democrat who introduced the Senate
Barack Obama, is now headed to the White House. And Rep.
Barney Frank (D-Mass.), who helped get a say-on-pay bill passed in
the House in 2007, plans to reintroduce the issue in the next
Meanwhile, many of the say-on-pay shareholder resolutions that came
up short at annual meetings in 2008 appear likely to resurface in 2009.
New York City Comptroller's Office spokesman Michael Loughran said
the city's employee retirement system, which oversees about $95 billion
of pension money, resubmitted a say-on-pay proposal to
Home Depot after garnering 42.1 percent of the vote at the company's
last annual meeting.
"Given the widespread negative impacts of corporate greed, it is
indisputable that excessive executive compensation must be reigned in,"
Loughran said. "Shareholders must be afforded a fundamental right to
cast an advisory vote on the executive compensation proposals of public
Critics of corporate compensation practices point to frequent
disconnects between pay and performance. The Corporate Library, a
governance research firm, found that only six of last year's 30 highest
paid chief executives had a better five-year track record than their
peers when it came to delivering shareholder returns.
The recent carnage in the stock market may help level the playing
field, as many executives who rely on stock option grants for the bulk
of their compensation find themselves unable to exercise their awards at
a profit. Even before this year's slump, executives at one in three
companies were holding out-of-the-money stock options in 2007, according
to consulting firm Watson Wyatt. But the market's decline may work to
the advantage of say-on-pay advocates. Efforts to fix what some would
call a broken compensation system resonate with shell-shocked investors.
Boston Common Asset Management, a fund at the vanguard of the
say-on-pay issue, failed to find enough support from fellow investors
this year for its proposals to adopt say on pay at
IBM and Waddell & Reed Financial, where only 43.3 percent and 49.5
percent of the respective votes were cast in favor of implementing the
policy. But Boston Common has refiled say-on-pay resolutions with both
companies for their 2009 annual meetings.
"With the new administration coming in and the economy in the state
it's in, this is an issue that's not going away," said Dawn Wolfe, a
researcher at Boston Common. Other major proponents of say-on-pay
policies include the
California Public Employees' Retirement System and the American
Federation of State, County and Municipal Employees. Say-on-pay laws
allowing for advisory votes by shareholders have been on the books for
several years in countries including Britain and Australia. But it is
still a relatively young concept in the United States.
In May, shareholders in
Aflac, the first American public company to agree to an advisory
vote on pay, cast their ballots. Only 2.5 percent voted against the
compensation granted to the insurance company's top executives -- not
that Daniel P. Amos, Aflac's longtime chief executive, was worried.
Say on pay "gives shareholders an opportunity to express how they
feel," Amos said. "I think in life people want to be heard, and I think
what has happened in recent years is there's a feeling out there that
they are not being heard. Well, our shareholders are being heard. And if
they had voted no on our pay, then we would have changed going forward
because it would have sent us a signal that we need to evaluate what
GlaxoSmithKline, which in 2003 became the first big British company
to have its pay plan rejected by shareholders, replaced the head of its
compensation committee that year and hired a consulting company to
review its policies and listen to investors' concerns. Soon after, the
$28 million severance promised to the chief executive if he were to lose
his job was reduced to $5.6 million. The next year, the company's pay
plans were approved by a vote of 82 percent.
There's no guarantee that U.S. companies that adopt say on pay would
be as responsive. While nonbinding votes frequently spark boardroom
discussions, they don't always lead to reform. But it's that type of
ambiguity that makes weighing in on say on pay a relatively easy call
for Congress, said Steve Balsam, a professor at the Fox School of
Temple University in Philadelphia. "It's a way for politicians to do
something, or say they're doing something, about executive compensation
without actually mandating anything," Balsam said. "It just sounds