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Wall Street Journal, February 27, 2008 column


The Wall Street Journal  

February 27, 2008





'Say on Pay' Gets a Push,
But Will Boards Listen?
February 27, 2008; Page A2

In Australia, Sweden, Britain and the Netherlands, shareholders vote each year on whether a company's executive compensation is acceptable. A thumbs-down vote doesn't force board members to start over, but it does put pressure on them to think twice about management's rewards.

Could such a system help U.S. companies get chief executive officers' pay under control?

Activist shareholders hope so. They are bombarding nearly 100 companies' proxy statements this year with resolutions calling for advisory votes on executive-compensation plans. Shareholders in companies such as Citigroup, Wal-Mart Stores, Merck, Apple and Occidental Petroleum will be asked whether they want what is becoming known as a "say on pay."

Such nonbinding resolutions attracted slightly more than 40% support on average last year, when they first began appearing in sizable numbers in U.S. proxies. That support elated union and church-group sponsors, whose proposals often fetch 15% or less of holders' votes. Some of these activists began talking about say on pay as a governance breakthrough that could soon become standard practice in the U.S., too.

The activists, however, didn't reckon on big companies' resistance. For a variety of reasons -- some stated in proxy statements, others expressed more bluntly in private conversations -- most big companies don't like say on pay. So instead of rapidly meeting the desires of these shareholder coalitions, many are digging in their heels and hoping the whole brouhaha goes away.

"This is fairly tough medicine for boards to take," says Richard Ferlauto, director of corporate governance and investment policy at the American Federation of State, County and Municipal Employees union, which is a leading sponsor of say-on-pay proposals. "They see this as giving up too much of the board's prerogatives."

In proxy statements, companies contend that unhappy shareholders have sufficient redress already. Such holders can contact directors on their own about pay gripes. Holders also can vote against directors on a company's compensation committee. So, these companies contend, a say-on-pay vote isn't necessary.

Privately, corporate leaders and their allies squirm at the notion of letting outsiders with their own agendas peer too deeply into the murky world of pay deliberations. Union-affiliated holders may want to pressure a CEO for political reasons, they fear. Hedge funds may want rapid changes that don't allow long-term plans to be carried out.

There's also apprehension that if some companies in an industry let holders vote on executive pay and others don't, the first group could be at a competitive disadvantage. And if investors won the right to vote regularly on pay, could other boardroom decisions be reassessed by holders, too, to the point that boards' power would become seriously compromised?

All those fears may be cowardly, or, at the very least, may be attracting undue weight. Executive pay has been climbing at rates as high as 13% a year, far outstripping general productivity or economic growth. That suggests boards could use some help in firming up their pay discipline.

Yet most companies that have been targeted with say-on-pay proposals are holding firm against them. That includes companies such as Valero Energy, where 53% of holders last year said they wanted an advisory vote on pay. Valero hasn't granted one. The matter is due for another vote this year, and while Valero's official response in its proxy isn't out yet, a company spokesman says a major change from last year's position isn't likely.

Of the 50 or so U.S. companies where say on pay made it to the ballot last year, only Verizon Communications and Par Pharmaceutical have decided to give shareholders such annual advisory votes. (Aflac is embracing say on pay on its own.)

This year, shareholder activists have targeted a lot of financial companies whose slumping business results and hefty bonuses or severance packages for ousted executives may stir up investor indignation.

Say-on-pay votes also are scheduled for companies such as General Electric and International Business Machines, which generally have been regarded as models of sound management. Those votes may attract fewer supporters.

Longtime activists such as the California Public Employees' Retirement System generally support say on pay. So do most of the shareholder-advisory services. But Fidelity Investments and Barclays Global Investors have generally abstained or voted against say on pay, regarding it as getting overly involved in details better left to directors.

In Britain, studies suggest that advisory votes have helped tie CEO pay more closely to performance but haven't slowed rising costs overall.

A closer look at say on pay's popularity around the world, in fact, shows that it generally catches on as the result of comprehensive governance reform, rather than a company-by-company approach. In the U.S., activists and corporate boards are committed this spring to slugging it out at annual meetings, one company at a time. But the initiative's ultimate fate is more likely to be decided in Washington, particularly if the Democrats prevail in November.

Democratic presidential front-runner Sen. Barack Obama last year introduced a say-on-pay bill in the Senate, a measure that attracted support from his main Democratic rival, Sen. Hillary Clinton. Such legislation passed in the House but remains stalled in the Senate. An Obama spokesman said recently that the candidate would push for it if elected.

Write to George Anders at george.anders@wsj.com3

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