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Chicago Tribune, May 9, 2007 article,0,6676637.column?coll=chi-business-hed


Giving investors say on pay could pressure boards

Bill Barnhart
Market report

May 9, 2007

In 1981, three Harvard University eggheads published a book about negotiating, titled "Getting to Yes." It sold well, largely because its prescriptions seemed to apply broadly to many kinds of disputes.

But their advice has not reduced the antipathy between corporate executives and dissident shareholders.

Investors, empowered by their stakes in the stock market, frequently confront recalcitrant company managements on the basis of their status as shareholders versus the status of the executives as agents of shareholders -- exactly the wrong approach, according to the Harvard experts.

Step 1: Move beyond assertions of status.

Today, in an age of corporate raiders, combative hedge funds and Democratic majorities in Congress, the opportunity for what the British call "constructive engagement" between shareholders and managements is settling on a simple idea.

It's called "say-on-pay," giving shareholders a non-binding vote to approve the executive pay package presented each year by the compensation committee of a company's board of directors.

An advisory vote on executive pay became law in the United Kingdom in 2002, and led to shareholders in 2003 rejecting the pay package of drug giant GlaxoSmithKline. The idea was proposed at a few U.S. companies last year by the American Federation of State, County and Municipal Employees, and is getting significant votes in dozens of annual meetings this year.

"We felt that the root of the problem wasn't the mechanics of pay but directors who were irresponsible in the decisions they made about pay," said Richard Ferlauto, director of pension investment policy at AFSCME. "We were looking to intervene in the process to hold members of the compensation committee accountable."

"It's been the break-out issue this year," said Patrick McGurn, executive vice president at Institutional Shareholder Services, a proxy voting adviser. "It's got a great deal of momentum behind it."

Investor Carl Icahn endorsed a "say-on-pay" proposal at Monday's annual meeting at Motorola. Sen. Barack Obama introduced a "say-on-pay" bill after the House approved a measure in April.

"Most of the shareholder proposals on executive compensation are not well thought out," said Greg Kinczewski, general counsel at pension consultant Marco Consulting Group.

For example, increased pay disclosure, a popular cause among many activists, frequently leads to higher pay, as CEOs use the revelations to demand more than their peers, Ferlauto said.

In contrast, "say-on-pay" puts at risk the reputations of corporate directors. "Boards don't want to be publicly rebuked for how they pay their senior managers," said James Allen, policy analyst for the CFA Institute Centre for Financial Market Integrity.

The concept is overwhelmingly approved by professional investors. In a recent survey, 76 percent of members of the CFA Institute endorsed it, though they were opposed to enacting "say-on-pay" into federal law.

"Say-on-pay" forces negotiations toward performance-based pay and an alignment of pay incentives with the strategic plan of the company, rather just enriching the CEO, said Ferlauto. The goal is approval by both sides.

Removing directors from their status as board members is tough; potentially embarrassing them is a better path to "yes."

Copyright © 2007, Chicago Tribune



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