How Five New
Players Aid Movement to Limit CEO Pay
Mainstream Figures Mix With Activists; A Fix 'From Within'
By Joann S. Lublin and Phred Dvorak
The Wall Street Journal
Tuesday, March 13, 2007
Meredith Miller, a low-key state official with a lot of clout,
is helping rev up the movement to limit executive pay. Charged
with helping protect Connecticut's $24-billion public-employee
pension fund, she recently prodded financial powerhouses such as
Morgan Stanley into making changes to their compensation
Ms. Miller, 51 years old, is part of an unusual new movement
that has turned executive-pay activism into a potent mainstream
force, and not just the redoubt of gadflies. It now counts as
members academics, mutual-fund trustees, foreign institutional
investors, union leaders and politicians.
Last year, mutual-fund companies withheld votes to re-elect
directors at Pfizer Inc. and Home Depot Inc., whose chief
executives enjoyed big pay packages despite their companies'
poor share performance; both have since resigned. This year
through March 9, investors had submitted 266 shareholder
proposals related to executive pay, almost double the
year-earlier period, according to proxy adviser Institutional
Rep. Barney Frank, meanwhile, held a hearing last week on a bill
that would require companies to give shareholders an advisory
vote on executive-pay deals. Mr. Frank, chairman of the House
Financial Services Committee and a Massachusetts Democrat,
previously introduced legislation to give shareholders a veto.
He says he made the change to gain congressional Republican
support and improve the chances that President Bush will sign
"Heck, even the president says there's a problem," says Mr.
Frank, referring to a speech given by President Bush in January
urging boards to guard against oversized CEO paychecks.
These activists sometimes form loose networks to share
strategies and lobby for each others' causes. A few are
uncomfortable with the "activist" label. John A. Hill, chairman
of the board of trustees at mutual-fund giant Putnam Funds, says
he joined the debate partly because he didn't "want to cede the
terrain" to traditional activists with little business
Some are driven by professional motives, others by political
ones. Uniting them all is distaste for large exit packages given
to ousted chief executives and recent revelations about rigged
stock options. Executives who collect sky-high pay despite poor
corporate performance are a particular target. Unlike the public
grandstanding common to some activists in the past, this crowd
prefers to work behind the scenes, often through persuasion
rather than confrontation.
Recent regulatory changes reflect the movement's clout, and have
also helped stoke its fires. Under new federal disclosure rules,
companies have to give investors more information about
executive pay, perks and retirement benefits in their proxy
statements. The tallies, which are slowly being released, could
It's hard to say whether the new activism will curb pay. Past
efforts have fallen short, sometimes because companies found new
ways to compensate executives, and sometimes because regulations
had the perverse effect of pushing pay higher. Mark Reilly, a
partner at 3C Compensation Consulting Consortium, estimates that
under the new disclosure rules, nearly half of the 500 biggest
public companies will reveal CEO pay packages of around $100
million -- including 2006 compensation, stock-option exercises
and accumulated pension benefits.
Here are five people who represent the new, mainstream activism.
In late 2003, Berkeley, Calif., lawyer Jesse Brill received an
email from a compensation consultant urging directors to "tally
up" what they would owe a departing CEO. The message followed
Dick Grasso's resignation as CEO of the New York Stock Exchange
amid a furor over his $187.5 million compensation package.
Mr. Brill, who has been publishing newsletters about corporate
law since the 1970s, seized the idea. He suggested directors
include current and future compensation, and dubbed the result a
"tally sheet." Then he aggressively promoted the notion to the
30,000 readers of his newsletters and Web sites, who include
corporate lawyers, pay consultants and directors.
Mr. Brill, 64, says he didn't want to retire without addressing
the issue of soaring executive pay. He made little headway at
first. "People thought it was Jesse's little fixation," says
John Olson, a senior partner at law firm Gibson, Dunn & Crutcher
LLP, who advises corporate boards.
After Mr. Olson saw support for the idea grow, he urged a board
he was advising to develop a tally sheet. Mr. Olson won't name
the company. Directors were shocked at the numbers. They trimmed
the amounts executives would receive if the company changed
hands and cut perks, recalls Mr. Olson. Compensation consultant
Pearl Meyer says Mr. Brill prompted her to add pension benefits
and perks to the pay summaries she presents to clients.
In October 2004, Mr. Brill hosted a conference whose speakers
included Alan Beller, then an attorney for the Securities and
Exchange Commission, who had begun drafting new rules to expand
disclosure of executive compensation. When those rules were
issued last year, they required companies to list
executives' "total compensation" -- a concept similar to Mr.
Brill's tally sheet. Mr. Beller says Mr. Brill was "one of the
people who was influential in our thinking" about compensation.
Mr. Brill talks and emails constantly with compensation
consultants and corporate lawyers before publicizing the good
ideas and the pitfalls. These days, he's advocating an analysis
that would help trim the pay gap between the CEO and other
executives. Starbucks Corp. and MDU Resources Group Inc., an
energy and construction company, discussed the idea for the
first time in their 2007 proxies.
"I don't view myself as being one of the reformers," says Mr.
Brill. "I want to fix the system from within."
Harvard Law School Professor Lucian Bebchuk is one of the
intellectual engines of the pay-restraint movement, producing
studies arguing that weak boards are paying executives without
regard to company performance.
Mr. Frank has cited Mr. Bebchuk's research showing executives
claiming a growing share of corporate profits. SEC Commissioner
Roel Campos says Mr. Bebchuk's pension research was "very
influential" in crafting the new disclosure rules.
In 2000, Mr. Bebchuk, who holds doctorates in both law and
economics, began working on compensation issues, using as a base
his previous work on boards' lack of accountability during
takeovers. In 2004, he co-wrote a book, "Pay Without
Performance," which criticized boards for offering CEOs sizable
"I view the problem of executive pay as being partly the product
of excessive insulation of boards from shareholders, and the
weakness of shareholder rights," says the Polish-born,
Israeli-raised academic, whose gold-rimmed glasses perch halfway
down his nose.
Mr. Bebchuk, 51, is playing a pivotal role in promoting a tactic
for curbing compensation: revising corporate bylaws, the rules
that govern companies' internal affairs. Last year, he submitted
amendments at two companies, including Home Depot, that would
have required more disclosure about pensions. Each received more
than 40% of votes cast, a significant tally, albeit a losing
one. This year, he proposed bylaws at four companies to require
that CEO compensation packages be approved by at least
two-thirds of independent directors.
Home Depot's board adopted his proposal Jan. 4, two days after
CEO Robert Nardelli resigned amid complaints about his pay. A
spokesman calls the change "a reasonable extension" of Home
Depot's prior policy.
Some corporate advisers aren't sold. Theodore Mervis, a partner
at Wachtell, Lipton, Rosen & Katz in New York, calls Mr. Bebchuk
"the Elvis Presley of executive compensation," a reference to
the academic's fondness for the media spotlight. Bylaw
amendments "create legal gobbledygook without understanding the
underlying issue," Mr. Mervis contends.
Ms. Miller is an assistant treasurer for the state of
Connecticut. In October, she drafted a letter to 25 large
companies seeking information about whether compensation
consultants hired by the board had conflicts of interest.
Activists worry that a consulting company won't give the board
impartial advice on pay packages if the firm is also advising
executives. The new SEC disclosure rules don't address such
The letter was signed by 12 other big pension funds, including
those of several unions, representing in total about $850
billion in assets.
As a result, Morgan Stanley directors dropped Hewitt Associates
Inc. as their compensation consultant because Hewitt also
advised the bank's management about pensions. A Morgan Stanley
spokesman calls the letter the "primary reason" for the change.
Morgan Stanley's board says it will choose a new consultant with
no ties to the firm. Hewitt declines to comment.
Ms. Miller later sent to the same companies responses from the
10 who she thought had the best practices. At Wachovia Corp.,
directors already had a policy to use independent pay
consultants. But Ruth G. Shaw, chairman of the bank's
compensation committee, expects the panel to put the policy in
writing after Ms. Miller highlighted other boards that do so.
"My hat is off to Meredith Miller," Ms. Shaw says. "She is
having some real impact here."
Ms. Miller says she has drawn on Mr. Bebchuk's writing about
potential conflicts. She traces her interest in shareholder
activism to the late 1970s, when, as a Cornell University
graduate student, she heard a campus speaker suggest that unions
invest solely in pro-labor businesses. She worked for organized
labor and gave her daughter a middle name of "Debs," after union
leader Eugene V. Debs.
In 1999, Connecticut Treasurer Denise Nappier hired Ms. Miller,
then a Clinton-administration pension official, to spearhead
corporate governance advocacy for the state pension fund. She
recalls that her "heart was racing" when she addressed the
annual meeting of Office Depot Inc. in 2001. She urged
shareholders to recommend the company adopt tighter ties between
compensation and performance.
The measure won just 18% of voting shares. Shortly before a 2002
vote on a similar proposal, Office Depot revamped its practices
to include performance-based stock options, among other things.
The change "wasn't a response to Connecticut," says David
Fannin, the retailer's general counsel.
The Mutual-Fund Trustee
One line in Bank of America Corp.'s 2005 proxy statement
galvanized Putnam's Mr. Hill to action on executive pay. The
bank said it paid CEO Kenneth Lewis about $25 million in part as
a reward for the "success" of its recent merger with FleetBoston
Financial Corp. Mr. Hill, who has been a Putnam trustee since
1985, was skeptical.
"I'm in the buyout business," says Mr. Hill, vice chairman of
First Reserve Corp., Greenwich, Conn. "You don't know whether
something's going to be good for several years." Putnam's
trustees protested Mr. Lewis's pay package by withholding votes
to re-elect him to Bank of America's board in 2005. Bank of
America declines to comment.
Mr. Hill and the Putnam trustees, who oversee the firm's $123
billion in mutual-fund assets, represent an important new voice
for restraint in executive pay. Big institutional investors have
traditionally sided with management on governance and pay
issues, and tended to sell shares rather than protest if they
disagreed. In 2006, 29 mutual-fund companies surveyed by
governance tracker Corporate Library supported, on average, 92%
of management resolutions and 91% of management-backed director
Mr. Hill, 65, a former federal energy official and avid big-game
fisher, says Putnam became more assertive following the 2001
collapse of Enron Corp. Suddenly, it was clear the governance
issues, in particular ensuring that directors were independent
and watchful, had become a subject of vital importance for
Last year, Putnam was among the firms that withheld their votes
to re-elect directors at Pfizer and Home Depot. Mr. Hill
followed up with personal letters to the CEOs.
"You have been paid exceedingly generous cash and equity
compensation" despite Home Depot's declining share price, Mr.
Hill wrote to then-CEO Nardelli in June last year. Mr. Nardelli
telephoned Mr. Hill, recalls the Putnam trustee, saying he
didn't agree with Mr. Hill's views but was sure the compensation
committee would "consider" them. "I hope so," Mr. Hill recalls
saying. "Because I don't want to be writing you this letter
again next year." A lawyer for Mr. Nardelli didn't respond to
requests for comment.
The Union Leader
In 1995, Edward Durkin, an official of the United Brotherhood of
Carpenters and Joiners, rose to speak at the annual meeting of
Archer-Daniels-Midland Co. Then-CEO Dwayne Andreas cut him off,
banging the gavel and yelling, "This is my company, my meeting,"
recalls Mr. Durkin.
These days, Mr. Durkin, 53, who oversees governance issues for
the union's pension fund, says he's more effective when lobbying
corporate executives in private. He spends hours on the phone
discussing the minutiae of pay plans and exploring compromises.
Mr. Durkin often withdraws shareholder resolutions the union has
backed when companies agree to make changes, or even to talk.
He calls the process "mind-numbing and labor intensive," but
necessary to enhance the value of the union's $40-billion
pension fund. "Compensation is clearly the most demanding and
frustrating area of advocacy," he says.
The union is currently pursuing shareholder proposals relating
to executive compensation at 43 companies, including Johnson &
Johnson and Yahoo Inc.
Mr. Durkin has used similar tactics in past campaigns. In 2000
and 2001, the union won roughly 100 shareholder votes urging
companies to treat stock options as an expense.
Mr. Durkin then pushed to give shareholders a bigger voice in
electing directors by bringing together representatives of 15
companies and three other unions. Intel Corp., a participant in
the talks, adopted a rule requiring director nominees to win a
majority of votes to be elected. Typically, directors can be
elected by a plurality.
This year, the carpenters union withdrew a shareholder proposal
at American Express Co. after the company said it would reduce
executive retirement benefits. Mr. Durkin also withdrew a
resolution at Norfolk Southern Corp. after CEO Charles W.
Moorman called and promised to discuss the railroad's
Mr. Durkin is a third-generation union leader whose grandfather,
a steamfitter, served briefly as Labor Secretary under Dwight D.
Eisenhower. A summer job doing electrical work convinced Mr.
Durkin his talents "lay elsewhere." He got a law degree and
joined the carpenters union in 1983, jumping into shareholder
activism soon after.
Mr. Durkin says he hopes to ease the "hand-to-hand combat" of
negotiating separately with each company. Last year, he
suggested that his union and the U.S. Chamber of Commerce
co-sponsor a study group on executive pay. The group met for the
first time in late February, with six companies and five unions
represented. Mr. Durkin is "a thoughtful guy," says David
Chavern, the chamber's chief operating officer.
Write to Joann S. Lublin at
Phred Dvorak at