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Bess Joffe, whose comments are presented below, is a member of the Forum’s Program Panel for reconsidering “Say on Pay” and had also been a member of a previous Forum program's Advisory Panel that had initiated the 2006 Advisory Voting project.  She is responsible for relationships with US companies at Hermes Equity Ownership Services Ltd, which had supported the organization of the Forum's 2006 program addressing executive compensation issues.

It should be noted that while Ms. Joffe continues to prefer that companies adopt advisory voting individually, on a voluntary basis, her observations of US conditions have led her to believe that Hermes must now consider supporting a legislated process.

For links to the referenced draft and other comments, see



Comments of

Bess Joffe

September 2, 2008


Hermes Equity Ownership Services


Comments on Jeff Gordon’s paper “Say on Pay:” Cautionary Notes on the UK

Experience and the Case for Muddling Through


I am pleased to respond to the request for comments regarding Professor Gordon’s paper.


By way of background, Hermes Fund Managers Limited is owned by the British Telecom Pension Scheme, the UK's largest. Hermes manages the portfolios of over 200 other clients including many major pension schemes. In total, Hermes manages approximately US$70 billion. Hermes Equity Ownership Services (EOS) also advises clients on governance and corporate engagement matters in respect of about US$120 billion of assets.


Based in the UK, representing clients from around the globe, we have experience engaging with issuers on an international basis on compensation matters.  As such, we are well-placed to provide insight regarding the advisory vote on compensation, how it works in the UK, how it may work in the US and other markets, and how other jurisdictions have still different versions of it (e.g. Binding votes on pay in many continental European countries).


Since the advisory vote rule was introduced in the UK in 2002, it has successfully provided shareowners with a basis for dialogue with remuneration committees and boards of companies where there are concerns regarding compensation.  We note that the purpose of the advisory vote in the UK was to enhance the link between pay and performance – not primarily to address issues of quantum – and more importantly, to limit the potential of pay for failure.  As Professor Gordon points out, this goal has largely been achieved.


It is true that both disclosure and governance regimes differ significantly from the UK to the US.  The UK has a principles-based approach to both disclosure and governance requirements.  UK-based investors adopt a pragmatic approach in evaluating what companies do.  This is largely driven by the disclosure regime which does not require incredibly detailed information to be provided by companies on issues including compensation.


As a result of this more flexible disclosure requirement, companies provide, on an annual basis, a narrative explaining the rationale of the compensation committee that underlies the final decisions they make.  The Directors’ Remuneration Report tells the story of the committee’s decision-making process and, in most cases, clarifies that the directors have taken the company’s long-term strategic objectives into account and have structured executives’ pay in such a way so as to incentivize the executives to achieve these objectives.  This explains how pay is linked to performance. 


The narrative and comparatively brief nature of this disclosure allows investors – both institutional and retail – to review remuneration plans and render a decision as to whether or not to support it.


The complication in the US context derives in part from the SEC’s very complex disclosure rule that requires so much detail, making it next to impossible for a shareowner to evaluate properly whether there is a link between pay and performance.  The average CD&A is now about 50 pages in length.  Moreover, the SEC neglected to require the disclosure of objective performance measures and corresponding targets, to the extent that either exist, which further impairs shareowners’ ability to determine whether there is pay for performance at a given company.


As such, even if shareowners know what to look for – and can sift through the plethora of rather detailed information that the SEC requires – in many cases it still does not exist.


This difficult task has resulted in shareowners turning to proxy advisory firms to look for digestable information regarding compensation.  The trouble is, these advisory firms don’t tend to look for the important narrative disclosure either – they put numbers into formulas and produce a voting recommendation.  Now, this is understandable because these advisory firms have a particular mandate:  establish a clear-cut policy and implement it.  They are not shareowners, they do not represent shareowners – they are merely service providers to shareowners.  The advisory firms do not – and cannot properly be expected to – evaluate compensation on a company-specific, pragmatic basis.


But it is precisely this sort of evaluation on a case-by-case basis which companies deserve and which owners should be prepared to give them.  At the moment, because they feel constrained by the limitations of the SEC’s detailed rule-making, companies do not give their owners the information necessary to make company-specific decisions.  Where companies do not provide the level of disclosure we require to evaluate whether there is a link between pay and performance, investors need to engage with them in an attempt to find out if this does exist.  When we do this, we also press for improved disclosure and explain why that is so important to shareowners.


Professor Gordon also points out other structural governance distinctions between the US and the UK.  Shareowners of UK companies are considerably more empowered at law than those of US companies.  To us, this further highlights the utility of an advisory vote in the US context.  Withhold/vote no campaigns against compensation committee directors, in electoral regimes where shareowners still do not have the final say as to whether or not someone is elected to a board, are of limited value.  More concerning for companies and their owners, these campaigns may not target the right people on the board.  It is difficult for shareowners to know who sat on a particular committee when various pieces of complex compensation plans were approved.  Moreover, shareowners are not given sufficient information to know which directors on a committee came down on which side of an issue so withholding support from all directors on a particular committee is a blunt sword.


Shareowner proposals are also inefficient mechanisms for the most part for a variety of reasons, including strict wording limitations, expense, and the sometimes destructive effect they can have on relationships between companies and their owners.


With respect to the issue of whether or not to legislate an advisory vote in the US, we would prefer to see companies voluntarily empower their owners with this right.  That being said, discussions with several companies have led to the conclusion that issuers are generally unwilling to adopt an advisory vote without everyone else following suit.  Legislation thus seems to be the realistic answer to this problem. 



Bess Joffe
Associate Director
Hermes Equity Ownership Services Ltd





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