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For other reports on the subject of "Say on Pay" presented by Stephen M. Davis, one of the authors of the column below, see


Compliance Week, July 8, 2008 article


Compliance Week

A Weekly Newsletter On Corporate Governance, Risk And Compliance


Dreaming the Impossible Governance Dream

hen I was your age,” the Queen said to Alice in Wonderland, “sometimes I believed as many as six impossible things before breakfast!” Corporate governance may not be quite so radical, but by late next year the United States may well see two things happen that most boardrooms today consider impossible.



Stephen M. Davis is widely considered a pioneer in the field of international corporate governance. A founder of the Global Shareholder Service at the Investor Responsibility Research Center, Davis also co-founded the International Corporate Governance Network, which represents the interests of institutional shareowners with $10 trillion in assets around the world.

A Pulitzer-nominated author who has published seminal books and studies on shareholder rights, Davis also writes a regular column for The Financial Times, and sits on the editorial boards of several governance newsletters in the United Kingdom and Eastern Europe.

He is currently the president of Davis Global Advisors—which consults to institutional investors, government bodies and others—and is a member of numerous governance institutes, panels, and working groups in the United Kingdom, Japan, Australia, Russia, and elsewhere in the EU. His firm publishes a weekly newsletter called “Global Proxy Watch,” as well as prominent studies like the annual Leading Corporate Governance Indicators report.

Stephen Davis can be reached via e-mail.


Jon Lukomnik was previously the deputy comptroller for the City of New York, where he was investment advisor for the city’s treasury, and for defined benefit plans totaling $80 billion in assets. In that role, Lukomnik gained a reputation for forward thinking on governance issues, overhauling the city’s corporate governance program, and earning election to position of chairman of the Council of Institutional Investors’ Executive Committee.

A former governor of the International Corporate Governance Network and member of the World Bank/International Finance Corporation’s Investor Task Force, Lukomnik not only serves on numerous international advisory boards, but has had a role in changing the national regulatory and legislative framework. He was one of two investor representatives who successfully negotiated changes in the proxy voting processes, and his testimony before Congress on the predecessor bill to the Securities Litigation Reform Act helped identify the issues that were ultimately included in that law.

A former hedge fund managing director, Lukomnik is currently managing partner of Sinclair Capital, which provides consultative services for institutional investors, the investment management industry, and numerous multinational corporations including Coca-Cola, Pfizer, WorldCom, Korea Telecom, and others.

He can be reached via e-mail.

First, Congress likely will pass ‘say on pay’ legislation to give shareholders advisory votes on executive compensation, possibly as part of a broader set of sub-prime scandal market regulation reforms. And we can now forecast that whoever is elected president will sign it into law.

The presumptive Democrat nominee, Barack Obama, has long been on the record in support of say-on-pay. The Illinois senator sponsored legislation in that chamber echoing a bill passed by a 2-to-1 bipartisan majority in the House of Representatives. Pushed by Massachusetts Congressman Barney Frank, chair of the powerful House Financial Services Committee, the bill would require every U.S. public company to place a non-binding resolution on the ballot of each annual meeting asking shareowner endorsement of compensation practices.

What nobody knew until June was that Republican standard-bearer John McCain would make his own endorsement of say-on-pay legislation official, unequivocal, and even more far-reaching than Obama’s. If McCain wins the Oval Office, the Arizona senator declared in a June 10 speech, “all aspects of a CEO’s pay, including any severance arrangements, must be approved by shareholders.”

Actually, McCain’s wording made it sound like he would want such votes to be mandatory, as is done in the Netherlands. (In Britain and elsewhere, the votes are only advisory.) Either way, McCain’s announcement removes a big hurdle to Senate action on the bill. Outgoing President George W. Bush’s implacable opposition to say-on-pay is thought to have helped stymie the measure in the Senate this year. But in 2009, a new Congress, with expected stronger Democratic majorities, is now certain to face an occupant in the White House with signature pen at the ready.

Why Washington is jumping on the say-on-pay bandwagon is hardly a mystery. The same day that McCain unveiled his populist position, the Wall Street Journal printed a front-page exposé about contracts that award big payouts to CEOs—even after they are dead. Seizing the outrage prize: Shaw Group CEO James Bernhard, who is to earn $17 million for not competing with the firm after he expires. Days later, an Associated Press survey showed continuing gains in CEO pay despite lagging performance. Plus, The Corporate Library released figures showing that CEO pay at S&P 500 companies climbed by a median 16 percent in troubled 2007, compared to a 2 percent rise at smaller firms. Lastly, despite some misleading early proxy season reports that say-on-pay vote totals had declined, the latest tally by RiskMetrics found that support for such resolutions climbed again this year, from an average 42.5 percent in 2007 to 43.4 percent in 2008.

Moreover, general wisdom holds that the large mutual funds, pension funds, and insurance companies that dominate proxy voting are more tolerant of high executive compensation than the general public. Grassroots support for political action to rein in out-of-touch CEO compensation is gaining amid the painful economic downturn. For politicians on both sides of the aisle, say-on-pay in 2009 seems a no-brainer, as it shows them to be sensitive to the issue without imposing arbitrary caps antithetical to U.S.-style capitalism.

Some in the corporate establishment, though, are still in denial. In early May, 36 large U.S. companies formed the Center on Executive Compensation (CEC) with a mission, in part, to spearhead corporate opposition to advisory vote lawmaking. But that particular horse has left the barn. Even the CEC has strained to find a coherent approach. On one hand, it concedes that links between executive compensation and corporate performance need strengthening. On the other hand, it rejects say-on-pay. Perhaps the CEC can mobilize support for an alternative, but the odds seem against it. Forward-thinking executives need to prepare boards for mandatory, market-wide say-on-pay. That means speaking political reality to directors and putting readiness on the agenda of compensation committees.

Life in the Big Chair

And the second impossible thing coming to U.S. corporate governance? The separate, non-executive chairman. You haven’t seen media notice of this yet, but surprising recent data point to an historic upswing in the number of boards splitting the chairman and CEO jobs. More investors, and indeed many directors, increasingly favor a separate chair to strengthen board capacity to oversee management—and to fire a CEO when things go wrong.

Until now, it has been virtually unthinkable to challenge the U.S. habit of combining the chairman and CEO roles. But after years of little change, three watchers—executive and director search firm Spencer Stuart, voting advisory firm RiskMetrics, and ratings agency GovernanceMetrics International (GMI)—are separately reporting unmistakable rises in the numbers of separate and independent chairs in the United States.

Look at the numbers. GMI has found that only a bare majority—52 percent—of companies in its U.S. database now still combine the chairman and CEO roles. Three years ago the figure was 62 percent. Spencer Stuart says 35 percent of S&P 500 companies separated the posts last year, compared to a mere 16 percent in 1998. Moreover, the firm found that the percentage of separate chairs that are fully independent of management has popped since 2004, from 7.6 percent to 13 percent. Spencer Stuart is soon to reveal that further increases took place over the past 12 months. RiskMetrics says its forthcoming figures are similar.

In addition, a group of chairmen led by Nortel’s Harry Pearce announced in June that they will found a first-ever permanent group of U.S. and Canadian independent chairs. The “Chairmen’s Forum” is to debut with an Oct. 7 session in New York, aiming to adopt best practices and explore collaboration on common issues. The forum stems from a project initiated by the Millstein Center for Corporate Governance and Performance at the Yale School of Management, which will start off serving as secretariat to the group.

Nobody expects wholesale conversion to separate chairs and CEOs overnight. Even if a board favors a non-executive chair, it is likely to install the practice at the time it switches CEOs, rather than to take the chairman’s job away from a serving leader. On the other hand, don’t think the shift will be glacial, either. In Britain most boards combined the chairman and chief executive roles before 1991, when the Robert Maxwell scandal begat Cadbury Code recommendations for greater accountability through a split. Within just a few years, 90 percent of FTSE 100 firms had named separate chairs. Of course, not all motion is one-way; Marks and Spencer just named a combined Chair/CEO in the face of a storm of investor criticism. But the division of the two top roles is now the default option in the United Kingdom.

Look closer to home, too. In 2003, just 20 percent of Canadian public companies featured non-executive chairmen. Then the powerful Canadian Coalition of Good Corporate Governance set to work applying collective investor pressure on boards to split the roles. Today, after only five years, a lofty 85 percent do just that, according to GMI.

Indeed, looking around the world, the United States is an outlier: the only major market where a majority of companies combine the chair and CEO positions. Only in France and Mexico are the two jobs held by the same person in even 40 percent of large companies. In Britain the number is 3 percent; Australia 2 percent; and the Netherlands 3 percent. In Austria, Denmark, Finland, Germany, Indonesia, New Zealand, Poland, South Africa, Sweden, and Thailand, none of the companies in the GMI universe (the largest capitalization companies in those counties) have a combined chair and CEO. The trend is clearly toward separation.

So be ready as pressures mount for an independent chair. It will no longer be enough to hand the CEO the chairmanship routinely. Boards will need to demonstrate that they have explored all options; if directors opt for the combination, be ready to offer shareowners persuasive reasons. If directors choose to split the roles, they will need to make sure the chairman’s job is defined to run the board, not the company.

And they will have to be careful to find the right mix of personalities to occupy both posts. Nothing is so destructive as an incompatible chair and CEO. Of course, as the GMI data show, companies worldwide take on that challenge and succeed. But it will be a new task for U.S. nomination committees. Nonetheless, like Alice, U.S. boards are going to find that what is now thought impossible will soon become the everyday.

Compliance Week provides general information only and does not constitute legal or financial guidance or advice.

© 2007 Financial Media Holdings Group, Inc.




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