‘Say on Pay’ Gathers Steam Heading Into 2009
Are we the only ones wondering why the daily sight of Wall Street and Detroit execs begging for bailouts while making off with millions hasn’t incited rioting in the streets? Consider just one case. Former Merrill Lynch CEO Stanley O’Neal walked away with $161 million dollar exit package shortly before the company’s high stake bets in the mortgage market unraveled, revealing losses that exceeded all the profits the firm had earned over the past 20 years. Investors tallied their losses, taxpayers subsidized the takeover of Merrill, and thousands of employees joined the ranks of the unemployed.
How did we arrive at this point? The recipe included convoluted pay structures, short-term incentive bonuses, increasingly complex padded stock options, cronyism and complicit shareholders. The result was a poisonous stew that decoupled pay and performance. It’s been labeled the tails-you-win, heads-you-win-even-more scheme, and as we are seeing, it insulates CEOs from the consequences of disastrous risk-taking.
Investors share the responsibility for the environmental, social and financial crises that short-termism and shoddy corporate governance practices have invited. We can no longer afford to tolerate pay packages that encourage short-termism. The issue begs regulatory and legislative reform. But until or unless government action solves the problem, we must continue to promote greater shareholder oversight of executive compensation.
Trillium is part of a broad coalition of investors pressing companies to give shareholders non-binding advisory voting responsibility on executive pay. If corporate boards knew, the theory goes, that shareholders were to vote on pay packages, then the board would provide better disclosure and dialogue with concerned shareholders ahead of time, and those packages would become better linked to performance. The vote is designed to discourage rubber-stamping.
It is more than theory. ‘Say on pay’ voting as been tried and tested for the past six years in the U.K. Researchers at Yale University’s Millstein Center for Corporate Governance & Performance examined the impacts of the London Stock Exchange’s experience with ‘say on pay’ votes since 2002. They concluded ‘say on pay’ is a “demonstrated propellant” of healthier relations between management and shareholders. It is also building a stronger link between performance and CEO compensation. At a recent U.S. House Committee hearing, lead author Stephen Davis recounted the jarring 2003 defeat handed GlaxoSmithkline’s Board by shareholders who refused to support the top executive pay packages. Davis said the defeat, “produced a virtual overnight increase in the level of dialogue between companies and shareowners.” A former board member said the Glaxo loss “concentrated the mind wonderfully. Now the board must base renumeration on performance and be scrupulous about it.”
‘Say on pay’ alone won’t be the silver bullet that stops oversized pay packages, but it provides a healthier framework for communication. Roughly 100 ‘say on pay’ proposals will be filed in 2009. Trillium Asset Management Corporation has co-filed ‘say on pay’ resolutions at Citigroup, Intel, and Unitedhealth Group.1
Legislation could help move ‘say on pay’ closer to reality. In 2007, the House voted 2 to one in support for ‘say on pay’ legislation in 2007, and then-Senator Obama’s co-sponsored the accompanying Senate bill. Confident of victory, labor activists are upping the ante by filing nearly four dozen resolutions that press for new compensation models better linking pay with performance and longer term measures. Some would extend the minimum period senior executives must hold on to stock options to two years beyond their termination or retirement. Other filers are seeking stricter compensation limits than those required by the government’s Troubled Asset Relief Program (TARP), and up to 20 proposals are expected to be filed asking for a shareholder vote on “golden coffin” agreements that provide generous death benefits to families of CEOs and other top executives.
Some companies have gotten the SEC to omit a newest resolution relating to TARP, but given an estimated 215 governance proposals being tracked by the advisory firm RiskMetrics, investors are emboldened to keep the heat on top management to enact real corporate governance reform in 2009.
1. The lead filers of these resolutions are, respectively, the American Federation of State, Count, and Municipal Employees, Walden Asset Management, and the Nathan Cummings Foundation.