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Program Reference - The Advisors' Blog, January 16, 2009 posting


The Advisors' Blog

January 16, 2009

Pat McGurn on Say-on-Pay

- Broc Romanek,

Earlier this week, Pat McGurn, Special Counsel of RiskMetrics’ ISS Division, participated in a webcast: “Forecast for 2009 Proxy Season: Wild and Woolly.” The excerpt below was culled from the webcast transcript and it deals with "say-on-pay” (Pat also discussed a number of other "hot" compensation issues):

Issue number four is last year's number one issue, which is say-on-pay. I think it's going to go from what I call “stagnation” to “legislation” over the course of the year. I think it's pretty clear right now that Rep. Barney Frank is going to follow through very quickly by reintroducing the say-on-pay legislation, which he passed through the House with a 2/3 vote back in 2007.

The big question, of course, is when will the mandate become effective? I think it's pretty clear that you're not likely to see a federal mandate playing a major role in the 2009 proxy season. By the time the regulations would get written, I think we're looking more at impacting public companies in 2010.
As a result, say-on-pay is going to remain a top shareholder proposal topic in 2009. I think we will see a huge increase in voting support this year, as more and more investors figure this is a fait accompli due to the likelihood of legislation being adopted.

I think last year support stagnated in the 42% range, although we did see a bump up in the number of companies with majority votes on the topic, including a couple of strong votes at Apple and Sun Microsystems. Apple's meeting will be coming up shortly and we may get a good feel on how the issue is going to fare this year.

Suffice it to say, we're likely to see some of the mutual fund complexes that have held out and continue to vote against say-on-pay perhaps flipping this year and supporting the resolutions given the likelihood of a legislative solution on this issue. I think management votes have already been promised by more than ten firms. We saw very strong support at Aflac, the first company in the US to have a management-proposed say-on-pay vote, and the resolution on the ballot was supported by 95% of the votes cast range.

We've also seen the first major significant “thumbs down” on a say-on-pay resolution offered by a board this past season at Jackson Hewitt Tax Services, where nearly 40% of the votes cast were cast “thumbs down” on that management proposal. Clearly Jackson Hewitt has not sunk into the sea, so the naysayer's notion that this will cause corporate calamity if there's a high “no vote” on a management proposal did not come to bear. I think this will eliminate one more argument that's been used to urge people to vote against say-on-pay.

Board members still don't appear to be warming up to the concept of say-on-pay. Even though it is looking highly inevitable at this point in time, we do expect to see a number of boards break ranks this season and become early adopters on management proposals, if for no other reason than it gives them some discretion at least for 2009 to design a management proposal on say-on-pay in the fashion that they'd like to see it designed. In doing so, they could actually have some impact perhaps on how the SEC finally writes regulations that will mandate these annual advisory votes for all public companies.


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