I’ve never been one to let the paint dry on something before playing with it and today is no exception. The object of my attention today is the Financial Reform bill passed by the Senate yesterday. What has me picking at the corners of this freshly painted piece of legislation are three provisions addressing corporate governance reform: Proxy Access, majority voting standards for uncontested director elections and Say-on-Pay.
What I am most interested in here are two things. Read more »
A series of posts on Race to the Bottom this week has made much about the likely prospect of “Say on Pay” becoming the law of the land if the Dodd bill addressing financial reform passes in the coming weeks, which it is likely to do. However, the practical effect of this provision of the Dodd bill on executive pay seems negligible.
For those unfamiliar with “Say on Pay,” this is a concept first put forth by shareholders that calls on companies to submit all executive pay decisions to a vote of the company’s shareholders prior to going into effect. Like the provision in the Dodd bill, this shareholder approval ritual is advisory. Thus, directors can ignore the wishes of shareholders if they so choose.
In the short-term, it is unlikely that this provision will have any impact on the vast majority of public companies. Race to the Bottom notes that only a few companies that have submitted pay plans to shareholder approval have experienced any blow back from their investors. Citing the situation at Occidental Petroleum, shareholders voted down a compensation plan for the company’s CEO Ray Irani, a perennially overpaid executive who has been a lightening rod for investors for many years. Undoubtedly, when Say on Pay becomes the law of the land, there will be a few more of these votes getting majority status.
While shareholder approval of executive compensation is a good thing for some obvious as well as less obvious reasons, as a practical matter, very little will change in the short-term. What remains unchanged is the fact that institutional investors largely give companies a pass when it comes to pay practices. Despite the railing of pitchfork capitalists that things must change, those major investors “pulling the lever” at proxy voting time have no incentives to change their voting practices. There are several reasons for this.
First, a substantial percentage of institutional investors – investment managers, corporate pension funds, insurance companies and some pension funds – have policies when it comes to executive pay that I would characterize as “but for the grace of God go I.” By tackling the executive pay head-on as large investors, these institutions risk impacting their very own pay practices. While most of these investors would not admit to this practice, as a practical matter, this is the consequence
Second, institutional investors defer to their professional proxy voting advisors – ISS/Risk Metrics, Glass Lewis, et al. – in order to untangle the complicated mess that is designed to obfuscate the executive pay setting process. A quick glance at any company proxy statement will confirm the fact that 60 to 80 percent of proxy statements are devoted to executive pay discussions.
The proxy advisors have responded in an equally complicated fashion both to analyze these complicated pay setting processes as well as justify their own existence to their paying clients by demonstrating their intellectual prowess on the subject. For instance, ISS/Risk Metrics employs multiple regression analysis and a two stage assessment of just one aspect of company executive pay setting. While this approach gets the job done, the entire process from both the issuer and investor perspectives only obscures the problem.
The good news in all of this is that the question of executive pay will now be addressed head on by shareholders. A procedural barrier preventing meaningful discussion about pay practices has been removed. What now must be done is to address excessive corporate pay practices and their underlying causes in a meaningful manner. This will require a better informed corporate electorate that can decipher the the arcane data that currently obscures greater understanding of the matter.
The 2011 proxy season should be an interesting test of shareholder mettle on this subject. While some executives may fear a firing squad of sorts from shareholders, as a practical matter, their investors will most likely miss their targets. However, in time, investors may become better shots.
The Journal Editorial Board at work
So I was lining my birdcage this weekend and happened upon an op-ed in Saturday’s Wall Street Journal. Entitled, “Mary Shapiro’s Say on Pay,” the editorial was classic WSJ character assassination-as-editorial commentary. Basically, the piece boiled down to the fact that the Journal took great umbrage with the SEC Chair’s attempt to force Bank of America to adopt compensation disclosure rules that no other company currently must adhere to.
Basically, the company is now required to have a non-binding say on pay proposal, which shareholders can now vote on. (Yawn) A tragedy for managers no doubt.
Of course, the Journal apparently missed the fact that quite a few of these say on pay proposals are currently in place at a number of public companies not to mention that under TARP regulations, such say on pay advisory votes are required. No worries. This didn’t stop the Journal editors from launching into a tirade about another sore subject for company executives: Proxy access.
So what is proxy access anyway? As the Council of Institutional Investors (CII) notes on this subject “[it] allows share owners to place their nominees for director on the company’s proxy card. In the United States, unlike most of Europe, public companies are not required to provide share owners with access to the proxy to nominate directors. The only way that share owners can present alternative director candidates at a U.S. public company is by waging a full-blown election contest. For most investors, that is onerous and prohibitively expensive.”
This isn’t the stuff of a Bolshevik Revolution by any means but the Journal and its management allies are understandably threatened but such prospects.
As the CII notes further on in describing why proxy access is important, they make a simple but important point about why this shareholder right is important: “Permitting share owners to nominate candidates for director on the company’s proxy card would invigorate board elections and would make boards more responsive to share owners, more thoughtful about whom they nominate to serve as directors and more vigilant in their oversight of companies.”
Getting back to the WSJ tirade, they spent the balance of the article building conspiracies by organized labor and calling Ms. Shapiro a hypocrite for not disclosing executive compensation at FINRA when she served at the helm of that organization. Deflecting the question at hand, should shareholders (that’s holders of 2% or more of a company’s stock) be entitled to put forth a candidate for the board of directors that all shareholders can then vote on an unreasonable proposition?
There is considerable consensus that some form of proxy access should be allowed. Giving shareholders a right to vote on a choice of directors is a good idea. As citizens, we would find it abhorrent if we were only allowed to vote on the presidential candidate selected by the political party in power in Washington. Yet that is what we as shareholders do every time we vote our proxies since we have no real choices today.
For a more complete discussion on proxy access, take a look at the N.Y. Times Dealbook article “The Proxy Access Debate” by Steven Davidoff.
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