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Corporate Governance: What's New
Dispatches from the staff of the Dow JonesCorporate Governance newsletter
The Wall Street Journal
Monday, October 9, 2006

More Work, More Pay

Director pay reached a new high in 2005.

Mercer Human Resource Consulting found director compensation grew 6.1% in 2005, a significant cooling from the 18% rise in 2004.  "A lot of what drove the prior year's increase in fees was the amount of work to be done," stemming from the Sarbanes-Oxley Act of 2003, says Peter Oppermann, a senior executive-compensation consultant at Mercer.  Now, Mr. Oppermann adds, "that post-Sarbanes-Oxley work has settled down."

A separate study by compensation-consulting firm Steven Hall & Partners LLC found total remuneration rose between 8.1% and 12% in 2005, depending on which committees directors served on.  The study cited "growing oversight, higher visibility, increased accountability, and heavy demand for a limited pool of qualified candidates" for the increase in compensation.

Even so, director pay was targeted for the first time in the 2006 proxy season, and governance-consulting firm Corporate Library says it will add director pay as a factor in its governance ratings.  "We believe that the compensation for directors has increased significantly and it's definitely an indication of how the company governs itself," says Alexandra Higgins, senior compensation analyst at Corporate Library, which is based in Portland, Maine.

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Don't Show Me the Money

The push for greater transparency on executive pay apparently hasn't touched the Delaware bankruptcy court, one of the favorite places for filings.  Judges in several recent cases have gone into secret session, closed the records, or both, when issues of executive pay were being discussed.  Such secrecy is a new development at the court and follows a change last year in bankruptcy rules that required judges to see proof that bonuses are necessary before approving them.  In recent cases such as those involving Nellson Nutraceutical Inc., Werner Co. and Pliant Corp., judges have gone along with arguments from company attorneys that executive pay is confidential.

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The Paper Trail

Greater openness on executive pay comes with a cost to the public:  more to read.

Starting with annual reports covering results for this year, the reports will carry more information, in compliance with updated rules from the Securities and Exchange Commission.  Annual reports and proxy statements will be 50% to 100% fatter once the new disclosures are included, predicts Jonathan Ocker, chairman of compensation and benefits practices at the law firm of Orrick Herrington & Sutcliffe in San Francisco.

Thicker reports will give investors a much better understanding of how a company rewards its top executives, but may not be easy to digest.  One reason:  A compensation-committee report explaining the philosophy of the company's compensation structure is out, to be replaced by a management report providing details on how compensation plans work.  "It's going to be drier reading," says Ron Mueller, a partner with the law firm of Gibson Dunn & Crutcher LLP, in Washington, D.C.

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Battle Over Ballots

Shareholder activists are awaiting the outcome of an Oct. 18 meeting at which the SEC will decide its stance on allowing holders to nominate competing candidates for board seats on a company's ballot.  Currently, shareholders have to file a separate ballot if they want to run a competing slate of directors, which is a costly process.

If it sides with the activists, the SEC would radically change the face of the director election process, making it cheaper and easier for shareholders to nominate their own board candidates.  But if it decides the other way, the SEC could kill off a "proxy access" campaign.  The agency's move to revisit the issue comes after the Second Circuit U.S. Court of Appeals called the SEC's past interpretations of this rule "at odds" with each other.

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Keen on Green

Shareholders are giving more backing to proxy proposals on social issues such as requirements that companies produce "sustainability reports" on how their activities affect the environment and that they disclose political contributions.

Proxy Governance, a Vienna, Va., shareholder advisory firm, found that of 179 social-policy resolutions filed through August 2006, 38% got more than 10% support, up from 29% of proposals receiving that level of support in the same period of 2005.  Environmental issues generated the most proposals, with 48 of them going to a vote, while proposals on sustainability reporting drew the most support, on average.

Michael Pryce-Jones, social research analyst at Proxy Governance, says shareholders also appear to be holding companies to their commitments.  For example, "once companies have responded to shareholders and produced a sustainability report, shareholders have come back and said that it didn't meet their expectations," he says.  "A lot of investors scrutinized it and said, 'That's not the kind of sustainability report we were looking for.' "

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Old News Gets Older

Delayed earnings reports are another worry for investors in companies where options-backdating scandals have come to light.  Proxy advisory firm Glass Lewis & Co. found that among companies with market capitalizations above $75 million, a record 138 companies filed late reports for the second quarter, with stock-option reviews a major cause of the delays.

"Some [investors] may not feel it's a significant concern," says James Allen, a senior policy analyst at the CFA Centre for Financial Market Integrity, in Charlottesville, Va.  "But others may be worried it's the start of an avalanche of other bad news.  When you delay reporting, it's nothing to sneeze at."  Harvey Pitt, SEC chairman from 2001 to 2003, says it is crucial that filings arrive on time because a company's net income and other important investor data are already weeks old when reports are filed.

--Compiled by Nicholas Elliott, managing editor of Dow Jones Newsletters (online at, based on contributions from reporters Tiffany Kary, Peg Brickley, Judith Burns, Kaja Whitehouse and Greg Wright. Mr. Elliott can be reached at