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Financial Times, June 15, 2007 article



Fund group offers say on executive pay

By Francesco Guerrera in New York
Published: June 14 2007 23:01 | Last updated: June 14 2007 23:01


TIAA-CREF, one of the largest fund managers in the US and a strong corporate governance advocate, has taken the unprecedented step of giving its 3m insurance policyholders a say on the compensation of its top executives.

The move, to be announced on Friday, is the first time a US company has held a UK-style, non-binding vote on executive pay and will boost TIAA-CREF’s campaign to get the companies it invests in to do the same.

Executive pay is the most controversial corporate governance issue in the US after a series of high-profile large pay-outs for ousted chief executives at companies such as the drugmaker Pfizer and the retailer Home Depot.

Rising shareholder anger at lavish compensation packages for top executives has prompted several large pension funds to urge companies to follow the UK in allowing investors an “advisory” vote on pay.

The vote on the compensation policies could prove controversial for TIAA-CREF, which manages $400bn in assets on behalf of teachers, academics and doctors.

When the insurer hired Herb Allison, a top Merrill Lynch executive, as its chairman and chief executive in 2002, some observers criticised his compensation package, in particular the high pay-out he stood to receive if he left.

TIAA-CREF officials stressed that policyholders would be asked to vote on the company’s policies and disclosure on compensation rather than the level of pay of Mr Allison, whose total compensation was $7.4m in 2005, and other executives.

However, the documents mailed on Thursday to TIAA-CREF’s policyholders allow them to write comments, as well as giving a yes/no vote – a feature that will enable them to air detailed grievances on the company’s compensation policies.

“This is a logical extension of our corporate governance focus,” said Hye-Won Choi, TIAA-CREF’s associate general counsel. “It is our practice to see how the governance policies we ask of portfolio companies apply to ourselves”.

Only one US company, the health insurer Aflac, has voluntarily agreed to hold an advisory vote on pay but only in 2009.

Shareholders in four other groups, including telecoms groups, Verizon and Motorola, have voted in favour of such a ballot but the companies have the right to ignore such requests.

Allowing policyholders to vote on executive pay will give TIAA-CREF, which is unlisted, more leverage in asking companies to introduce the measure.

However, unlike other, more activist, fund managers, TIAA-CREF has mantained that investors should not set pay levels for executives but require the board to disclose the reasons for compensation decisions.




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