Shareholders Seek More Say on Pay
By Heather Landy
Special to The
Sunday, December 21, 2008
So you're a shareholder in a company you believe pays its top
executives far too much. What can you do about it?
Well, not much -- for now.
But the deepening financial crisis -- and the growing outrage
over executive pay packages and the arrival of a new White House
administration -- are breathing new life into the "say on pay"
movement, which aims to give shareholders a stronger voice on
Companies adopting say-on-pay policies agree to hold annual
shareholder votes on executive compensation packages. The votes
would not be enforceable -- boards would still have the ultimate
responsibility for setting pay -- but advocates of the policy
say it gives shareholders an important venue for voicing their
Say on pay has been gathering momentum slowly. In the 2008 proxy
season, shareholders filed more than 75 say-on-pay resolutions,
averaging 42 percent support and winning majority votes at 10
companies, according to RiskMetrics, which researches corporate
governance trends. That was up from a 41.7 percent average
support level the previous year, when say-on-pay resolutions
passed at eight companies.
Activist funds suspect they'll find broader support going into
the 2009 proxy season, when say-on-pay resolutions are expected
to be filed with more companies, and in some cases re-filed with
companies where the measures failed in previous years.
Skeptics question the effectiveness of say on pay when it comes
to restraining runaway compensation. Like many of the matters
shareholders take up at annual meetings, say-on-pay votes are
nonbinding, meaning boards can simply take shareholders'
sentiments under advisement without carrying out reforms.
And opponents of say on pay argue that it undermines the
authority of boards and could steer talented executives into
private companies where their compensation would be subject to
But now that the deepening financial crisis has turned executive
pay into a potent rallying cry, corporate governance experts are
predicting a growth of support for say-on-pay initiatives.
"Clearly there's something crazy going on with executive
compensation. Is it going to be fixed by say on pay? My sense is
that just the mere discussion of it has already had some
impact," said Jay Lorsch, a professor at Harvard Business School
and chairman of its Global Corporate Governance Initiative.
"People in boardrooms are realizing that the growing criticism
of the business community is a thing to be concerned about, and
that to get back into the public's good graces, they've got to
The pressure to reform pay also is playing out on Capitol Hill,
where debate over the government's role in the issue has been a
key part of the discussion over the bailout of the financial
industry and the federal loans sought by automakers. The public
furor over pay practices could clear the way for legislation
requiring say-on-pay votes at public companies, governance
It's a remarkable turn of events for say-on-pay proponents.
The fledgling movement was nearly written off six months ago, as
legislative efforts to force companies to implement say-on-pay
policies stalled in the Senate and failed to win several closely
watched shareholder votes. But the Illinois Democrat who
introduced the Senate bill, Barack Obama, is now headed to the
White House. And Rep. Barney Frank (D-Mass.), who helped get a
say-on-pay bill passed in the House in 2007, plans to
reintroduce the issue in the next Congressional session.
Meanwhile, many of the say-on-pay shareholder resolutions that
came up short at annual meetings in 2008 appear likely to
resurface in 2009.
New York City Comptroller's Office spokesman Michael Loughran
said the city's employee retirement system, which oversees about
$95 billion of pension money, resubmitted a say-on-pay proposal
to Home Depot after garnering 42.1 percent of the vote at the
company's last annual meeting.
"Given the widespread negative impacts of corporate greed, it is
indisputable that excessive executive compensation must be
reigned in," Loughran said. "Shareholders must be afforded a
fundamental right to cast an advisory vote on the executive
compensation proposals of public companies."
Critics of corporate compensation practices point to frequent
disconnects between pay and performance. The Corporate Library,
a governance research firm, found that only six of last year's
30 highest paid chief executives had a better five-year track
record than their peers when it came to delivering shareholder
The recent carnage in the stock market may help level the
playing field, as many executives who rely on stock option
grants for the bulk of their compensation find themselves unable
to exercise their awards at a profit. Even before this year's
slump, executives at one in three companies were holding
out-of-the-money stock options in 2007, according to consulting
firm Watson Wyatt. But the market's decline may work to the
advantage of say-on-pay advocates. Efforts to fix what some
would call a broken compensation system resonate with
Boston Common Asset Management, a fund at the vanguard of the
say-on-pay issue, failed to find enough support from fellow
investors this year for its proposals to adopt say on pay at IBM
and Waddell & Reed Financial, where only 43.3 percent and 49.5
percent of the respective votes were cast in favor of
implementing the policy. But Boston Common has refiled
say-on-pay resolutions with both companies for their 2009 annual
"With the new administration coming in and the economy in the
state it's in, this is an issue that's not going away," said
Dawn Wolfe, a researcher at Boston Common. Other major
proponents of say-on-pay policies include the California Public
Employees' Retirement System and the American Federation of
State, County and Municipal Employees. Say-on-pay laws allowing
foradvisory votes by shareholders have been on the books for
several years in countries including
Britain and Australia. But
it is still a relatively young concept in the United States.
In May, shareholders in Aflac, the first American public company
to agree to an advisory vote on pay, cast their ballots. Only
2.5 percent voted against the compensation granted to the
insurance company's top executives -- not that Daniel P. Amos,
Aflac's longtime chief executive, was worried.
Say on pay "gives shareholders an opportunity to express how
they feel," Amos said. "I think in life people want to be heard,
and I think what has happened in recent years is there's a
feeling out there that they are not being heard. Well, our
shareholders are being heard. And if they had voted no on our
pay, then we would have changed going forward because it would
have sent us a signal that we need to evaluate what we're
Pharmaceutical giant GlaxoSmithKline, which in 2003 became the
first big British company to have its pay plan rejected by
shareholders, replaced the head of its compensation committee
that year and hired a consulting company to review its policies
and listen to investors' concerns. Soon after, the $28 million
severance promised to the chief executive if he were to lose his
job was reduced to $5.6 million. The next year, the company's
pay plans were approved by a vote of 82 percent.
There's no guarantee that
companies that adopt say on pay would be as responsive. While
nonbinding votes frequently spark boardroom discussions, they
don't always lead to reform. But it's that type of ambiguity
that makes weighing in on say on pay a relatively easy call for
Congress, said Steve Balsam, a professor at the Fox School of
Business at Temple University in
Philadelphia. "It's a way for politicians
to do something, or say they're doing something, about executive
compensation without actually mandating anything," Balsam said.
"It just sounds good."