A Way Around Powerful
Article published on
October 26, 2009
A new firm is being
developed that would verify that boards have responsibly and faithfully
conducted compensation decisions when putting a pay plan to a stockholder
vote. The firm, called Soundboard Review Services
and led by former Glass, Lewis & Co.
CEO Greg Taxin, would be one way to undercut
the rising influence of proxy advisory firms on compensation plans.
Companies would pay Soundboard to audit the compensation committee’s process
for determining pay plans. The movement toward universal say on pay spawned
the idea for Soundboard, but the third-party firm would review the process
for all compensation-related stockholder votes, from say on pay to stock
option repricing plans. The company is in the process of securing its first
Many observers think that in order for comp committees to agree to be
audited by a third party, they will want to participate in setting the
standards by which they are judged. Soundboard is attempting to do this by
working with The Shareholder Forum — a
group of companies, governance professionals and investors that have been
discussing say on pay for several years — to develop the processes that will
“The thing that many forum participants consider most important is that the
standards be defined by the people who are actually responsible and know
what’s required. Nobody on either the corporate or investor side wants
another set of bureaucratic rules or black box formulas that discourage
competitive adaptation,” says Gary Lutin,
chairman of the forum.
“Boards ought to be focusing shareholders on their process for coming to
compensation decisions,” Taxin says, rather than the total CEO pay figure.
Soundboard would certify that companies’ compensation committees did their
due diligence, hired outside counsel and thoughtfully executed executive pay
“From our standpoint the process by which an outcome is achieved is many
times [as] important, sometimes more important, than the actual outcome,”
says Glenn Booraem, principal and assistant
fund controller with The Vanguard Group.
In regard to say on pay, many corporate governance professionals have become
increasingly concerned that shareholders will not be able to cast an
educated vote on the compensation of every company in their portfolios.
Instead, some fear, shareholders will outsource the research required to
make an educated judgment to proxy advisory firms that issue voting
recommendations based upon screening tools and formulas that don’t take into
account nuanced information that only the board can know.
Taxin says he wants to help boards communicate to shareholders “their good
intentions, hard work and analysis that goes into compensation decisions.”
Soundboard will provide a report to the board on how it came to its decision
on whether to certify the board process. But unless boards share that report
with shareholders, investors will simply know whether a company is certified
by Soundboard or not. “Much like a fairness opinion in the context of an M&A
deal, what matters is that a third party has been satisfied about the price,
not so much how they were satisfied,” Taxin says.
The problem with investors’ casting votes on executive compensation is not
just time and money but also information that only the board has, Taxin
says. Shareholders shouldn’t be focused on using say on pay to judge
compensation figures or specific metrics, but rather that the board is
spending the right amount of time and effort on executive pay, he says.
John Wilcox, who sits on the advisory
committee of Soundboard, thinks proxy advisory firms and Soundboard can
complement one another. “Greg’s service comes between what the proxy
advisory service does and what a big institutional investor would do on its
own,” says Wilcox, who is also chairman of Sodali,
a consultancy firm for public companies. For example, if a proxy advisory
firm recommends that its clients vote down the compensation of Company A,
but Soundboard certifies that the board of Company A had the right
compensation processes in place, an institutional investor is left with more
information to come to its own decision, he says.
Like Wilcox, Booraem says Soundboard will be another useful tool for
institutional investors but should not be a substitute for their own due
Focusing on Say on Pay
The development of a
third-party certifier is just one indication of the momentum say on pay has
garnered. Even though some investors have said they don’t want this
privilege, politicians such as the influential House financial services
chairman, Barney Frank (D-Mass.), have
latched on to it as part of a panacea to runaway CEO pay and excessive
“Our biggest proposal is say on pay. That’s the biggest single thing to give
shareholders a chance to say,” Frank told Fox Business channel in June prior
to the passage of his
executive compensation bill.
Whether they agree with say on pay or not, if investors are granted this
right, they will take it seriously, Taxin says. “I think the thing that’s
been lost on a lot of people is having a vote on this matter won’t be
treated frivolously by shareholders,” he says.
While a say-on-pay bill passed the House this summer, it isn’t expected to
pass the Senate in time to be implemented for the 2010 proxy season, giving
boards and investors another year to decide how to fine-tune the policy.
Prudential Financial and
Microsoft are the latest to voluntarily
adopt say on pay, but also the first to do so in a modified form. Prudential
shareholders will vote on the “overall executive compensation policies and
procedures employed by the compensation committee” every other year,
according to a
press statement. Microsoft shareholders will vote on pay every three
years (known as the triennial option).
Another alternative to the mandatory, annual say-on-pay policy is one put
forward by Columbia University’s
Jeffrey Gordon. He has suggested that
Congress and the SEC consider having only large accelerated filers adopt the
provision, or only companies where a majority of shareholders ratify the
As part of the say-on-pay
debate, several groups are putting forward their own lists of compensation
best practices that can be adopted by the board.
The National Association of Corporate Directors
comes out with periodic reports on compensation best practices from
its Blue Ribbon Commission on Executive Compensation. The
Conference Board Task Force on Executive
Compensation issued a “practical set of
guidelines” for companies to follow in September. And now the
Independent Directors Executive Compensation
Project (IDEC) is promoting a set of
compensation principles for boards to adopt.
IDEC is unique in that it is led primarily by independent directors and is
promoting general principles instead of prescriptive metrics for
compensation, according to veteran corporate director
Pastora San Juan Cafferty, who is leading
the effort along with compensation consultant
It’s important to merge various groups’ guidelines into one set of
principles that is governed by a nonprofit, independent clearinghouse or
commission of some sort, Cafferty says. While that idea hasn’t been
discussed by IDEC yet, it could be a next step. “The compensation industry
doesn’t have any principles or certification,” she says.
As with the sentiment behind Soundboard, Cafferty says, the process by which
compensation committees make their decisions is more important than pay
levels when judging compensation plans. It also makes it easier to have
broad-based principles in the interest of widespread adoption.
Among other things, IDEC’s principles say boards should verify that all
compensation members are independent, that compensation consultants are
independent from management and the board, that comp committees verify the
appropriateness of peer group companies, and that data is obtained from
The group is creating a secure website that board members can join to
continue to discuss the adoption of principles and is holding its next
meeting at Northwestern University’s
Kellogg School of Management Nov. 20. The organization is also looking to
hold future meetings in New York.