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Associated Press (as published by Forbes), February 27, 2007 article


Associated Press

Q&A: Upside to Executive Pay Votes
By ELLEN SIMON 02.27.07, 4:10 PM ET

As companies including JPMorgan Chase & Co. and Pfizer Inc. consider whether to give shareholders an advisory vote on their executive pay, one person they're asking for advice is Stephen M. Davis, who has worked on governance issues since 1988.

Advisory votes have been one of the most talked about fixes for ultra-rich pay packages this proxy season. Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, has said he will introduce legislation on the issue as soon as this week. Aflac Inc. adopted a rule giving its shareholders the vote earlier this month.

Ten companies, including Pfizer, JPMorgan, Intel Corp., Colgate-Palmolive and Bristol-Myers Squibb Co., are studying whether to adopt the non-binding shareholder votes on executive compensation. While shareholders wouldn't be able to rescind pay, they could voice their displeasure.

Davis, co-author of "The New Capitalists: How Citizen Investors are Reshaping the Corporate Agenda," is briefing the companies about how advisory voting has worked in the United Kingdom, where its been in place since 2003. The Associated Press talked to Davis about his findings.

Q: What, if anything, have the advisory votes changed in the UK?

A: Advisory votes have been a big plus in the UK, in terms of better aligning CEO pay with corporate performance. It's no panacea, but it has produced some very big benefits.

It used to be that when remuneration or compensation committees set the pay, they consulted the board, and there was almost no consultation with the shareholders. Now they have to consult with shareholders.

When GlaxoSmithKline PLC lost its vote (in 2003), it caused an almost overnight realization among corporate boards that they now have to talk to their shareholders about pay packages; not just talk to them, they have to persuade them.

There was a threefold increase in consultation and contacts between corporations and shareholders following the Glaxo defeat.

Shareholders had to figure out how to analyze these packages and express their views. There's a big learning curve going on: Boards are still trying to figure out how to best communicate and persuade, shareholders are trying to figure out the best way they can use this new voice.

Q: What happened at Glaxo after its pay package failed to win shareholder approval?

A: Glaxo was the first big company to see its remuneration report defeated. They could have legally ignored the negative report and carried on. In practice, it was a real slap in the face, not just to the company, but to the compensation committee and the chairman. The company spent a year trying to understand the shareholder objections and rework the package. The next year's package was approved, but there are some shareholders who will tell you that they remain unhappy.

Q: Shareholders are a much more concentrated group in the UK; how would United States companies approach their diffuse shareholders?

A: Maybe instead of having nice quiet chats among a club of shareholders, they could have roadshows across the country. Companies do that today when they're trying to increase their share price. They, of course, have never had a reason to do that with CEO pay.

At the same time, investors are really going to have to get up to speed, really get their hands dirty understanding these compensation packages.

These are good challenges to have, as opposed to there being a stone wall between companies and shareholders on executive pay.

Q: What are some of the company arguments against advisory pay? How would you answer them?

A: One of the arguments: This is just too complex for shareholders to deal with. Boards spend lots of time sorting through data and hiring outside counsel.

In the UK, shareholders would argue, "We're sophisticated enough to decide to buy or sell stock, we certainly can be sophisticated enough to determine whether pay is linked to performance."

Another criticism from companies is, "We already have sufficient dialogue with our shareholders. If they have a problem with their pay package, they'll tell us."

Most roadshows, they talk to portfolio managers, who many not be concerned with corporate governance. They may be listening to or talking to the wrong shareholder institutions.

Another argument: If you have a problem with compensation policies, just express that through a vote on a compensation committee director.

There are a couple problems with this argument. Most companies still operate through plurality voting, so a vote for directors is pretty meaningless. Shareholders, even if they have a problem with compensation policies, may not want to oust the board.

In Britain, they describe this in soccer terms. A vote against the compensation package is a yellow card, a warning. If the company doesn't respond the next year, then you respond with a red card and vote against the directors.

That only works with majority voting for board members. This will work best in the U.S. when combined with majority rule voting.

Q: Why did the government in the UK institute the votes?

A: UK government introduced the advisory vote process to get the fat-cat pay monkey off the government's back. Headlines were calling for government action to curb CEO pay; what the government did was empower shareholders to take on this issue.

They feel the advisory vote process is a boost to UK competitiveness. It's meant to install a way for shareholders to keep companies in fighting trim by linking incentives to performance.

That's relevant here. If we're thinking of making our companies more competitive and giving our public shareholders more power to gain better returns, then the advisory vote makes sense.


Copyright 2006 Associated Press. All rights reserved.



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