Say on Pay: The ayes have

In the May 2009 issue of Governance, the leading international monthly newsletter on issues of corporate governance, boardroom performance and shareholder activism, Senior Analyst Paul Hodgson looks at the differences between the UK and the US in the say-on-pay debate.

"The most recent votes on executive remuneration show a marked difference between the UK and the US. ‘No’ votes at RBS and Shell versus ‘yes’ votes at Verizon and Bank of America? In the US it would certainly seem that the ‘ayes’ have it.

Admittedly, RBS’s current woes are significant. And Shell’s decision to pay out its performance shares even though the company didn’t hit the targets it had set itself is not one to garner much support. So perhaps it is no surprise that shareholders revolted there. But with all the talk of pitchforks, torches, and angry mobs on Wall Street, what happened at Verizon, where the pay package received a 90 per cent shareholder support at a company that is hardly the doyen of remuneration best practice? And Bank of America, where support topped 70 per cent? Surely the Merrill Lynch bonus fiasco would have been enough to provoke some protest. Higher
still, Goldman Sachs’ remuneration plan received a 98 per cent support rate, perhaps because total remuneration dropped from more than $70m to a ‘mere’ $26m. And around 85 per cent of Citigroup’s shareholders backed its pay proposal even though the company’s CEO and chairman were hauled in front of a congressional committee earlier this year to answer questions about their involvement in the financial crisis.

Why is the furore over pay so much louder in the UK than it is in the US at the moment? Perhaps with six years of voting on executive remuneration under their belt, UK shareholders felt it was time to exercise their rights in larger numbers, while in the US shareholders are so surprised at having the right in the first
place that they don’t seem quite to know what to do with it.

So where is the US with ‘Say-on-Pay’, the name given to the campaign to have a non-binding management proposal to approve executive remuneration on the agenda at every company’s annual general meeting?

Management proposals to approve pay
During the 2008 proxy season, only two companies subjected themselves to a shareholder vote on pay, insurance company Aflac and risk management firm RiskMetrics, both voluntarily. Both had their executive remuneration packages overwhelmingly supported by shareholders.

Until March this year, that figure of two was going to be swelled to around ten, with further companies reacting to shareholder pressure to add the vote to their proxy ballots. But then in March the Securities and Exchange Commission (SEC) reacted to legislation in the American Recovery and Reinvestment Act
(ARRA) that would require all companies receiving funds from the US Treasury to place a say on pay vote on their ballot, confirming that roughly 400 additional companies – mostly financial –would have to have such a vote. This rule applied to all proxy statements filed after 17 February 2009.

Shareholder proposals
Say-on-pay has been the subject of more than 200 shareholder proposals over the three proxy seasons 2007–2009, with support for such proposals waxing and waning. Some companies, like Apple and Motorola, have reacted to majority support for such resolutions by introducing or promising to introduce a say on pay
vote. Others, such as Ingersoll-Rand, have ignored the majority of their shareholders and made no such moves.

But the various legislative acts appear to have taken the wind out of the sails of the shareholder campaign, with support levels for shareholder say-on-pay proposals in the current proxy season remaining on average at the 40 per cent level seen in 2007 and 2008.

Legislative change
For the present, only TARP companies (those companies that received financial assistance from the Troubled Asset Relief Program fund) must propose a vote, and then only during the period when they are in receipt of Treasury funds. But this may soon change.

A bill put forward by Senator Charles Schumer – the Shareholder Bill of Rights Act of 2009 – includes say on pay among a larger set of governance proposals. Support for the idea from the current administration is clear, as President Obama had already sponsored a say on pay bill while he was a senator during 2008.
If the Shareholder Bill of Rights Act were to be signed into law then say on pay would become a universal requirement for all listed companies."

Paul Hodgson — Senior Research Associate