Shareholders are becoming downright feisty
Just ask Ken Lewis. Bank of America
's (NYSE: BAC) CEO was recently dumped as head of the company's board
when stockholders backed a proposal to split the chairman and CEO
roles. He's not the only executive feeling considerable heat, and darn
little love.
Shareholders of Royal Dutch Shell (NYSE: RDS-B) may
well vote down the company's latest compensation plan since it
abrogates the policy previously set out by the board. The board is
awarding management a bonus even though Shell lagged the performance of
rivals ExxonMobil (NYSE: XOM), Chevron (NYSE: CVX), BP (NYSE: BP), and Total (NYSE: TOT) -- the comparison explicitly meant to determine pay.
Stoking outrage against CEO compensation has been the widening gap
between wages for the assembly-line worker and those in the corner
office. According to The Economist, in 1980, executives were
being paid on average 40 times more than an average production worker.
By 1990, the ratio had doubled, and by 2003, the comparison was 400 to
1.
To a large degree, this divergence reflects the impact of a shift
toward greater use of common shares and stock options to reward
executives -- a practice meant to align the interests of management and
investors -- and a buoyant stock market. Clearly, the market collapse
last year will have shifted these trends.
Here to stay
Still, shareholder anger about
former excesses, and the demand for say-on-pay, is not likely to
disappear. Since May 2008, when shareholders of Aflac
(NYSE: AFL) become the first group to vote on compensation, the number
of companies offering investors a non-binding vote on compensation has
risen rapidly. Moreover, the practice is likely to become law.
Senator Charles Schumer sent a letter to colleagues on April 24
saying he would soon introduce a bill requiring that investors be
allowed to vote on executive compensation and golden parachutes, and
also demanding that the roles of chairman and CEO be split. There is no
doubt that President Obama supports greater shareholder involvement. In
2007, he introduced a similar bill in the Senate.
Will shareholders have increasing clout in the management of publicly owned corporations? Should they? Do they care?
Maybe, maybe not
Critics of say-on-pay argue
that shareholders are not in a position to judge the merits of
compensation agreements, which are complicated and often misconstrued
in the press. The media tends to report a single number, whereas pay
often reflects awards from prior years that are finally vested or that
were originally deferred.
Some managers argue that in any case, the current approach is too
blunt an instrument. What does it mean if shareholders vote against a
particular company's policy? That pay was too high? That perks were too
generous? They don't like the golden parachute? Perhaps this is irrelevant, in that the message investors want to send is simply dissatisfaction with management. Still, as the compensation process has become more complex, the simple "up or down" vote is not seen as particularly useful.
Opposition to say-on-pay
from the business community also focuses on the inability of
shareholders (or their advisors) to judge the subtleties of how
compensation is determined, not being privy perhaps to competitive
issues or to the alternative opportunities available to individuals.
For instance, RiskMetrics , a prominent advisory
firm, opposes multiyear contracts. Realistically, though, if a company
wants to hire sought-after talent from across the country, you can bet
he or she's going to demand more than a one-year contract. Detractors
also point out that revealing increasingly detailed information about
how compensation is awarded can weaken a company's competitive
position. Further resistance stems from the notion that once emboldened
to vote on pay, shareholders may press for influence in other realms,
such as hiring policies or outsourcing. The bottom line, according to
some executives, is that shareholders already have two means to express
dissatisfaction: They can vote against directors, and they can sell
their shares.
This Fool's view
Shareholder activism has
already effectively eliminated the old "buddy boards" that were often
behind excessive remuneration. It seems to me that boards today are
already on notice that compensation must be based on performance.
The threat from say-on-pay is that it could (ironically) exacerbate
an unhealthy focus on short-term results, a preoccupation that is
already promoted by the growing marketplace power of hedge funds.
Though board compensation practices will theoretically be based on
multiyear trends, (and indeed the Calstrs guideline emphasizes
"long-term thinking") shareholders will just as surely respond to the
last year's results and vote accordingly.
Managing for short-term objectives, as we have seen with the auto companies, hurts not only companies but society at large.
It also seems to me that boards, and compensation committees, are
required today to spend so much time checking boxes and seeing to the
increased governance required by Sarbanes-Oxley and other measures
seeking to correct past errors that they end up having little time to
focus on the big picture. Maybe if AIG 's board had been paying attention to the build-up in its CDS portfolio, the company would not be in today's drastic condition.
One thing is for certain. Say-on-pay is coming, and it will be a
bonanza for advisory companies like RiskMetrics. Shareholders will be
expected to make sense of the increasingly complicated compensation
arrangements; many, no doubt, will seek help. It is not, in my view,
good news when legislation fuels a boom for companies whose job it is
to unravel legalese.
For more compensation Foolishness:
When "Say on Pay" Is a MustJust Say No to "Say on Pay"?Corporate Boards Need to Wake UpAIG Bonus Outrage Is Bogus
© 2009 UCLICK, L.L.C.
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