Investors and directors
call for say-on-pay dialogue
Companies should improve disclosure.
Investors need to give input. Better late than never
Compensation is in the headlines again, with US pay czar (who doesn’t like
to be called czar) Kenneth Feinberg slashing pay at the biggest TARP
Down in the trenches where IROs and corporate secretaries are – or should be
– preparing their compensation battle plans, there’s more gloomy news.
According to survey results this week from Pearl Meyer & Partners, a
compensation consulting firm, few companies are preparing for say on pay or
are planning to do so in the next six months.
An advisory shareholder vote on pay is expected to be approved by the Senate
in time for the 2010 proxy season, as part of either the Corporate and
Financial Institution Compensation Fairness Act, passed by the House this
summer, or Senator Charles Schumer’s shareholder rights bill.
Despite this legislative juggernaut, just 7 percent of the 231 companies in
the Pearl Meyer survey say they’re very concerned about the say-on-pay vote.
Two thirds say they haven’t taken any steps to prepare, though around one
third say they plan to do so in the next six months.
At a say-on-pay forum yesterday in New York, institutional investors and
corporate directors demanded action: better compensation disclosure and more
dialogue on both sides.
The forum, held by the New York chapter of the National Association of
Corporate Directors (NACD), attracted dozens of corporate directors and
institutional investors, including some of the biggest US pension funds, to
the Third Avenue headquarters of pension fund TIAA-CREF.
Say on pay on the way
There was general agreement that say on pay is coming, probably with smaller
Ed Durkin, director of corporate affairs for the United Brotherhood of
Carpenters, which has proposed a triennial vote only for the largest
companies, implied it wasn’t too late for Washington to change course on say
on pay. He challenged companies and investors to ‘let the decision-makers
know that this could be a valuable tool if it’s done right, but it could
also result in a lot of wasted time and resources.’
Speakers were divided over the potential for meaningful discussion or indeed
any change coming from say-on-pay votes.
‘There has been improved communication and better disclosure but we’re not
there yet,’ said Hye-Won Choi, TIAA-CREF’s head of corporate governance.
‘Boards think shareholders are micromanaging, and shareholders think boards
aren’t listening,’ she added.
Ken Bertsch, executive director of corporate governance at Morgan Stanley
Investment Management, pushed for better disclosure, and suggested looking
down under to learn how: ‘Australian companies do it better. Part of it is
graphic. It’s easier for shareholders to see what companies are doing.’
Donna Anderson, head of global corporate governance at T Rowe Price, pointed
to JPMorgan’s proxy as best practice. It may not measure up to a checklist
assessment, but it is ‘a real narrative.’
The UK was repeatedly held up as an example. ‘We’ve had say on pay for six
or seven years and the earth hasn’t fallen apart,’ declared audience member
Daniel Summerfield, responsible investment adviser for the Universities
Superannuation Scheme (USS), one of the UK’s largest pension funds. ‘What
has resulted is a much better interaction between boards and shareholders.’
Concerns about violating Reg FD, which have stood in the way of private
meetings of US directors and shareholders to talk about executive pay, have
been overstated, he added.
Walking softly the UK way
Summerfield later suggested that say on pay was essential to improving
corporate transparency: ‘If you don’t have this stick to beat companies over
the head with, then the communication channels won’t open up.’
Mary Louise Weber, assistant general counsel at Verizon, which voluntarily
adopted say on pay in 2007, agreed that it has increased dialogue.
‘Along with the say-on-pay vote, there was a renewed commitment to engaging
more with institutional holders on the part of the board,’ Weber explained.
For example, the compensation committee’s independent compensation
consultant began regular calls with institutional investors, soliciting
feedback and reporting back to the committee. ‘There’s no question that it
has generated more conversation,’ she said.
Panelists agreed that early dialogue is important and post-proxy
conversations are needed to uncover the nuance behind the ‘up-or-down’ proxy
vote. But aside from that oblique reference to Verizon’s calls with
investors, little was said about the form the vaunted say-on-pay dialogue
Nina Henderson, lead director at Del Monte Foods and a director at Pactiv
and AXA Financial, said she encourages investor days and likes board members
to attend. ‘I want to hear the questions investors ask,’ she said.
Durkin, who has led wide-scale engagement initiatives over many years,
allayed directors’ fears about facing off with institutional shareholders.
‘We don’t need to talk to the comp committee. We want the corporate
secretary or HR or whoever had their hands all over the CD&A,’ he said.
The forum audience was comprised of company directors, corporate
secretaries, institutional investors and consultants of all stripes. One PR
veteran privately suggested the say-on-pay dialogue might lead to
communications pros being recruited as board members. ‘Boards don’t need any
more accountants. What they need is more awareness of image and crisis
management,’ he confided.
Too much to do
Durkin’s main argument against universal annual say on pay is that investors
don’t have enough resources for all the analysis that will be needed. The
Carpenters funds, for example, have more than 3,600 companies, and Durkin
says the research would have to be more than a checklist approach.
Anderson admitted T Rowe Price would be ‘triaging’ companies’ pay plans,
with ‘no’ votes reserved for the 20 percent or so that are ‘real outliers’ –
the ‘compensation cavemen.’
There was discussion about advisory firms like RiskMetrics, and whether they
would be the ultimate deciders of pay questions. The large investors present
disputed this notion. ‘They have a role to play, but reports of their level
of influence and power are overblown,’ Choi said. ‘We subscribe to all the
major ones, but we have our own policies.’ Anderson said she ‘took issue
with the idea that RiskMetrics is controlling the vote.’
Jim Melican, chairman of PROXY Governance, a proxy adviser, responded from
the audience, arguing that few institutional investors have the capacity to
analyze proxies and come to decisions themselves. ‘There may be 50
institutions that really have devoted any kind of staff support to analyzing
governance – out of the thousands in the US,’ he said.
‘Thoughtful institutional investors who actually care about the issue and
want to do the right thing are not going to be the majority,’ agreed Kenneth
Kopelman, partner at Kramer Levin Naftalis & Frankel and president of NACD’s
New York chapter.
Choi told how TIAA-CREF’s voting process is integrated with its investment
management process. That may be the exception among institutions. ‘There is
a wide gulf between voting and portfolio managers,’ Kopelman suggested.
Henderson recently completed her term as a director of Royal Dutch Shell.
She underlined the conclusion about lessons from the UK: ‘Say on pay created
additional dialogue, and things were brought up that were much broader than
pay. Also, it has brought portfolio management and governance together.
Companies meet with both, sometimes in the same room.’
The exhortation to companies from Henderson: ‘Have the discussion. Get out
in front, talking and getting feedback.’
By Neil Stewart