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The article below was published in Agenda, a Financial Times private subscription newsletter for corporate directors, and is presented with permission.


Agenda, December 22, 2008 article





Article published on December 22, 2008
By Kristin Gribben

In anticipation of congressional action on a say-on-pay bill, boards are starting to lay the groundwork to ease the implementation of such a policy.

The changing of the guard in Washington makes a say-on-pay bill all but inevitable, say experts. With legislation looming, the issue is increasingly being raised in director education courses. And some directors are asking for the advice of boards that have voluntarily adopted say on pay. Of course, at this point, boards with experience in this area are still rare: Only nine known public companies give their shareholders a nonbinding vote on executive pay.

Claire Gaudiani, a member of the compensation committee at MBIA, which adopted say on pay in February, says directors on other boards have expressed apprehension to her about the policy. “I think some of the concern [among board members] is just old-time nervousness and the fact we have more investors than we’ve ever had in the marketplace,” she says.

Gaudiani recommends that directors get to know their shareholders better, especially their thoughts on executive compensation. A couple months before MBIA adopted say on pay, the board, CEOand the head of investor relations invited the company’s top shareholders to a meeting to get their thoughts on allowing them to vote on executives’ pay packages. While “some shareholders are less sophisticated” than MBIA’s, Gaudiani says, “that just requires more investor education.”

In fact, some experts say there is an opportunity for say on pay to bridge the divide between boards and the investor relations team.

“If there’s a silver lining to all of this, it’s [that] the IR community and boards are more willing to talk,” says Deborah Lifshey, managing director of Pearl Meyer & Partners.

Say on pay prompted some changes in the way MBIA’s comp committee conducts business. For example, the committee spends more time explaining its compensation philosophy in the proxy statement: “We thought more deeply and went through more drafts,” Gaudiani says.

A congressional say-on-pay bill will probably not specify how boards should phrase the policy in their proxy statements, says Lifshey. The House bill last year was broadly worded, and it would be harder to pass a bill that was too specific.

That leaves an important question for boards if say on pay is mandated: How do they want to draft the wording of the policy on their ballots? The approaches of the companies that have adopted say on pay so far vary. Aflac asks its shareholders to vote on the compensation of its five highest-earning executives, while RiskMetrics Group— which went public at the beginning of 2008 — asks shareholders to cast an advisory vote on three separate items regarding compensation: the company’s overall executive compensation philosophy, policies and procedures; whether the principles were executed appropriately; and whether the principles were applied to 2008 objectives.

Most corporate governance observers say it is likely Congress will pass say on pay this time around because the political environment has changed in the wake of the financial crisis. Congressman Barney Frank(D-Mass.) and other Democratic lawmakers wanted say on pay to be included in the Troubled Assets Relief Program. Although it didn’t make its way into the final specifications, the push to have it included is an indication there will be support for a broader say-on-pay bill under the new Congress.

A say-on-pay bill passed the House in 2007 but a companion bill never made it out of the Senate. Despite that, Pat McGurn, special counsel at RiskMetrics, expects the Senate to pass it this time around. Last year, President-elect Barack Obama introduced the Senate bill that was referred to the banking committee chaired by Senator Chris Dodd(D-Conn.), who was running for president against Obama at the time. The politics of the situation made it so the bill was unlikely to get carried out of the committee, McGurn says. But the presidential election is over and there is more Republican support for limits on executive pay this time around.

As corporations are preparing for a say-on-pay bill, so, too, are investors. One of their concerns is that the policy would give proxy advisory firms too much influence. Indeed, say on pay would put RiskMetrics’s business in even more demand. The policy would mean a lot more work for investors, many of whom don’t have the capability to analyze all of the CD&As in their portfolio. So they would turn to the advice of proxy advisory firms.

Responding to these concerns, McGurn says his firm issues recommendations based upon good governance, not upon its pocketbook.

A say-on-pay forum that includes both investors and corporate representatives is trying to circumvent the need for proxy advisory firms by exploring alternatives. Some of the ideas up for debate include adopting a standard set of questions similar to the 10 questions TIAA-Cref adopted as a template for asking whether shareholders should approve a particular compensation package. Investors are also looking into sharing research, including the cost of consultants and a research database of compensation information.







This Forum program is open, free of charge, to anyone concerned with investor interests relating to shareholder advisory voting on executive compensation, referred to by activists as "Say on Pay." As stated in the posted Conditions of Participation, the Forum's purpose is to provide decision-makers with access to information and a free exchange of views on the issues presented in the program's Forum Summary. Each participant is expected to make independent use of information obtained through the Forum, subject to the privacy rights of other participants.  It is a Forum rule that participants will not be identified or quoted without their explicit permission.

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