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Financial Week, October 22, 2007 article


Say-on-pay critics warn of problems
Proposed law could mean lawsuits galore, plus additional legislation, Oxley says


Proposed legislation to give investors an advisory vote on executive pay, if passed, would lead to the unintended consequences of messy litigation and more law-making from Congress, according to Michael Oxley, vice chairman of Nasdaq and a former Republican representative from Ohio.

Addressing the annual conference of the National Association of Corporate Directors in Washington last week, Mr. Oxley said that the so-called say-on-pay proposal being floated by Rep. Barney Frank (D-Mass.), chairman of the House Committee on Financial Services, “will not stop at a non-binding vote” because there are so many unanswered questions about how the process would actually work.

Mr. Oxley said that while Mr. Frank has said to “take the proposal simply at face value,” the Senate would likely have to make amendments to the proposal, as boards try to determine what their responsibilities are if shareholders vote against their pay programs.

“Litigation would not be far behind the Senate,” Mr. Oxley suggested.

Say on pay and executive compensation in general were very much on the minds of the roughly 600 attendees. Now that businesses have completed the first proxy season under new Securities and Exchange Commission pay disclosure rules, much of the focus has turned to 2008—an election year in which executive compensation will likely be a flash-point issue. (Presidential hopeful Sen. Barack Obama [D-Ill.] has created a companion bill to Mr. Frank’s.)

In a session on the top proxy issues for next year, Patrick McGurn, special counsel to proxy adviser Institutional Shareholder Services, said the say-on-pay issue—along with proxy access for shareholders to nominate directors—will likely give way to a confrontation between investors and companies if directors don’t immediately reach out and begin discussions with key shareholders.

“The clock is now ticking, and there’s limited time before consensus can be made,” he said, or it “will be mandated like Sarbanes-Oxley.”

A consensus, of course, will be tough. Mr. McGurn noted that while polls show 85% of investors support a say-on-pay vote, 95% of corporate directors are against it.

Later, in a session on executive pay, Pearl Meyer, senior managing director at compensation consulting firm Steven Hall & Partners, said, “Say on pay is going to put us into a morass.” She predicted that the issue will be a huge bonanza for proxy advisory firms like ISS and Glass Lewis.

“If [the proposal] goes through, buy stock in [ISS parent] RiskMetrics,” Ms. Meyer said.

During the same session, Michael McCauley, director of investment services and communications at the State Board of Administration of Florida, said more communication between board members and shareholders is “extremely important” in solving the pay problem. Many companies are still “very defensive” and “would rather we go away,” he said. “Please talk to your shareholders, have a dialogue and disclose more, and we’ll all be better off.”

Phillip Lochner Jr., a director at Apria Healthcare and Monster Worldwide, agreed that talking regularly to shareholders and “knowing their thinking on subjects” is increasingly important for directors, particularly when investors don’t clearly understand a company’s strategy. FW

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Copyright ©2007 Crain Communications Inc




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