The Corporate Library Blog

Financial Executive Magazine: The Year of the Shareholder

Paul Sweeney has an excellent article in Financial Executive Magazineas a part of its special issue on what's ahead for 2010.  Provocatively entitled "Will 2010 Be the Year of the Shareholder," it opens:

A constellation of forces is coalescing to give investors more clout over such thorny issues as executive pay, the composition and election of corporate boards, board transparency and responsiveness to shareholder concerns....In addition, continued shareholder outrage at overly generous pay packages to top executives — often at poorly performing companies — is further tilting the balance of power.

While Sweeney predicts some pushback from corporate executives, who argue that these pay packages are necessary for retention and to provide incentives,

even a respected source such as the executive search firm Spencer Stuart urges boards of directors to recognize that much governmental and shareholder scrutiny is deserved. “The perceived — or, in some cases, real — disconnect between company performance and executive compensation is fanning the flames of shareholder discontent,” Spencer Stuart notes in its comprehensive 2009 survey on the state of corporate boards. “In light of these pressures,” the report adds, “boards need to be sure they are operating as effectively as possible and have good governance practices in place.”

Sweeney quotes Hye-Won Choi, the head of corporate governance at TIAA-CREF, on the impact of the rule change that eliminates automatic votes in favor of board candidates.  “The end of discretionary broker voting means that management can no longer expect elections to be routine. It will level the playing field. Now the vote will be a clearer expression of shareholder sentiment.”  And he notes that even before this rule change went into effect, the percentage of votes against directors has been rising. 

Through August 2009, 9.8 percent of unopposed director nominees had at least 20 percent of shares voted against them or withheld, a 78-per- cent increase above the 5.5 percent figure in 2008.  The percentage of directors with a majority of shareholders registering opposition to their candidacy tripled, to 0.6 percent in 2009 compared with 0.2 percent in 2008. It may seem a tiny number, but amounts to 84 director nominees at 49 companies.

Sweeney predicts a rise in shareholder resolutions on compensation, governance, and climate change. 

The proxy season, in combination with significant congressional legis- lation and additional SEC rule making, could make the year 2010 among the most historic in the annals of corporate governance. The consultancy Spencer Stuart puts it this way: Events this year “could potentially reshape the corporate governance landscape as dramatically as Sarbanes-Oxley. And just as with SOX, it may take several years before the full impact of the changes becomes apparent.”

Nell Minow - Editor

US sees outbreak of ‘legislationitis’: could it be catching?

 This piece, by Senior Research Associate Paul Hodgson, appeared in the September 2009 issue of IDS Executive Compensation Review's Speaker's Corner.

‘When America sneezes Europe catches a cold’ is one of those maxims intended to show how developments on the other side of the Atlantic impact on the UK. One area where the influence has been especially evident is executive remuneration, with much UK practice closely following the US lead. But as over here, pressure has mounted to reform board pay and Paul Hodgson of The Corporate Library explains how the US is witnessing an outbreak of ‘legislationitis’.

It all started back on the campaign trail at the height of the economic crisis, when investment banks were falling like dominos, and both candidates for the presidency indicated they would support legislation to introduce a shareholder advisory vote on executive remuneration. That, and the worsening economic crisis, seemed to open up a flood of legislation. It started even before the new President took power, when the Democrats tried to insist that pay limits accompany government bailouts coming from the Troubled Assets Relief Program (TARP). Eventually, in February this year, remuneration regulations put forward in the American Recovery and Reinvestment Act (ARRA) – better known as the ‘Stimulus Bill’ – introduced a series of rules going further than anything proposed in the UK (see margin). One of these regulations became effective almost immediately following a decision by US stock market regulator, the Securities Exchange Commission (SEC), to mandate TARP companies to introduce a ‘Say on Pay’ vote for the 2009 proxy season.

But this has not been the end of it and since then the desire to legislate has spread like a rash. In May this year, for example, Senator Charles Schumer introduced the Shareholder Bill of Rights Act of 2009 to the US Congress. If the bill is passed, shareholders are going to have to come up with a whole new set of ideas for shareholder proposals as the bill requires companies to implement almost all of the most popular shareholder activist ideas of the past 10 years. These are: introduce a non-binding vote on executive remuneration (a Say-on-Pay vote); introduce a vote to approve golden parachutes; provide shareholder access to the proxy for the purpose of nominating directors; split the roles of chairman and CEO; make all director elections annual; and introduce majority voting for directors. And the bill would also require all of the above to be an exchange listing requirement.

Other pay bills abound

Following Schumer’s bill, Congressman Gary Peters introduced The Shareholder Empowerment Act, and all of a sudden it seemed like everyone, the Senate, the House of Representatives, the Treasury, the President, the SEC, was queuing up to support shareholders’ rights . Congressman Peters’ act attempts to codify into law some of the proposals made by the Secretary to the Treasury (see below). It also expanded on Senator Schumer’s bill while covering a lot of the same ground. Proposals include: majority voting for directors; independent chairman of the board of directors; shareholder approval of executive remuneration; independent remuneration advisers; clawbacks of unearned pay; no severance payments for poor performance and improved disclosure of performance targets.

There are several other remuneration-related bills up for consideration as well. Other key bills currently in committee in Congress include the Excessive Pay Shareholder Approval Act which seeks to cap the multiple of a company’s average salaried employee that can be used to determine CEO pay and the Corporate Governance Reform Act of 2009 introduced by Representative Keith Ellison that calls for, among other things, an SEC study to consider director certification.

Treasury proposes…

In July, the US Treasury added its voice and issued two sets of proposals. The first on ‘Say-on-Pay’ runs along the same lines as the other legislative initiatives and the second on greater independence for remuneration committee members mirrors the post-Enron audit committee reforms. New, tougher rules for board
remuneration committee members seek to give them the authority to hire independent consultants and legal advisers. While this looks like a necessary reform, it would seem unlikely to make a great deal of practical difference. While it is possible to legislate for independence, legislators cannot actually force directors to act independently.

Both measures take on more significance, however, if coupled with proposals the SEC issued a few days previously that aim to give shareholders easier access to corporate proxies. Given that any shareholder vote on pay is likely to be nonbinding, there remains a further opportunity for shareholders to effect changes or influence if they can get their own directors on the board.

…and the SEC gets in on the act

At the same time as issuing its proposals for shareholder access to the proxy statement, the SEC also issued another 137 pages of proposals on risk, remuneration, directors, boards, remuneration consultants, and proxy voting. In the area of executive remuneration and risk the SEC is looking for better disclosure about the relationship between a company’s overall remuneration policies and its risk profile. It also wants changes to
published summary compensation tables, wanting the grant date value of stock and stock option awards included rather than the ‘expensed value’. The fact that this continues to mix real and imaginary pay, apples and oranges, appears not to have occurred to the SEC. Under this change, the table contains apples and a different kind of orange, mandarin, rather than Seville, perhaps. A single table with actual realized pay would be the most effective way of communicating the wealth acquired by executives and the real associated costs.

The SEC’s proposals on director nominations and qualifications go well beyond those put out by the Treasury on increased independence for remuneration committee members. Under the SEC guidelines, a company will have to provide a great deal of evidence to persuade a shareholder to vote for the director, including risk assessment skills, past experience and what use it might be, the nominee’s area of expertise, and what benefit he or she would bring to the board. With all the discussion about splitting the chairman and CEO positions, the commission is also asking companies to explain why they combine or do not combine the roles, or why they have a lead independent director and what benefits this decision might bring for shareholders. As part of this, a much more comprehensive description of the board’s role in the risk management process is likely to be required.

In response to much shareholder activism, a raft of additional disclosures surrounding the hire of remuneration consultants by the board are also being proposed, including the disclosure of other work they do for the company, what each of these services cost, the involvement of management in the hiring decision and the board’s involvement in approving other work.

House passes legislation

Finally, on July 31, 2009, the House of Representatives passed legislation mandating public companies to hold annual non-binding shareholder votes on executive remuneration. The legislation, known as the Corporate and Financial Institution Compensation Fairness Act, was introduced by Representative Barney Frank, chair of the House Financial Services Committee, to obtain ‘Say on-Pay’ rights for shareholders. A summary of the main provisions can be seen in the margin.

Some form of ‘Say-on-Pay’ vote would now seem to be almost an inevitability, and likely for the 2010 proxy season. It is to be hoped that the fact this has come through legislation rather than affirmative action from corporations – who were given ample opportunity to adopt this voluntarily – will not impair the effectiveness of the legislation.

Will anything change?

As all this legislation and reform pressure builds shareholders continue to wait for additional rights and additional power, but in the meantime they must also endure the spectacle of Wall Street returning to its former habits. Many investment houses are now registering the same level of remuneration expense in the first half of 2009 as was seen in the first half of 2007 – one of the US economy’s supposed boom periods. This hardly indicates that a major change in corporate behavior is underway, despite some recognition from the banks
themselves that former remuneration policies were in part to blame for the economic crisis.

But not only do banks appear to be gearing up for another boom year for bonuses, it would appear from disclosures forced by New York City’s Attorney General that they never stopped. Even during 2008, as the U.S.
economy collapsed around them, banks were paying out billions of dollars in bonuses. Not only that, but as soon as remuneration rules came into play, those covered immediately began to design ways around the rules. The ban on termination payments was evaded by re-classifying golden goodbyes to anything from consultancy payments to non-compete arrangements. Guaranteed bonuses proliferated, underwater stock options were replaced with new mega-grants, a ban on bonuses was trumped by increasing salaries, or even quintupling salaries and ‘paying’ the excess in stock. In the face of this kind of behaviour, it would seem difficult for any kind of legislation, or even yet more increased shareholder scrutiny, to begin to tie remuneration closer to performance.

So now that America has sneezed on executive remuneration will the UK catch a cold? In one sense, all the legislative proposals show just how far ahead of the US Britain and much of Europe has been in terms of corporate governance, where much of what is proposed is already common practice. But in another sense, some of the latest proposals leap ahead of previous UK codes and US bodies seem far more willing to legislate to rein back executive excess than their British counterparts. Such would be the revolution in US governance were all
the proposed bills to become law that the only thing left for shareholders to do would be, well, vote.

Lining Up for Shareholder Rights

Shareholder Bill of Rights, Shareholder Empowerment Act, Treasury, President Obama, SEC, looks like everyone’s lining up for the shareholder all of a sudden. Some might say it’s a little too late since they lost all their money anyway, but better late than never.

The latest of these – The Shareholder Empowerment Act– is being brought forward by Congressman Peters to codify into law some of the proposals made by Secretary to the Treasury last week. It also expands on the Senator Schumer’s Shareholder Bill of Rights. It covers a lot of the same ground though, including this:

• majority voting for directors
• uninstructed broker votes in uncontested director elections
• independent chairman of the board of directors
• shareholder approval of executive compensation
• independent compensation advisers
• clawbacks of unearned pay
• no severance agreements for poor performance
• improved disclosure of performance targets

Let’s see where this takes us. Like I said about Schumer’s Shareholder Bill of Rights, what the heck will shareholders be able to carp about if it goes through?!

Paul Hodgson — Senior Research Associate

A 'Real' Board for Exxon

Exxon has long had its own way of doing things – from exploration policy to public, government and shareholder relations. Exxon invites comparison with other companies based on its record. The company says simply – we are better than everyone else according to every system of measure, why should we listen to anybody telling us to do anything different. This line of argument compels the ancient wisdom – he who knows what he knows knows, he who knows not what he knows not knows not. The experience of participating in Exxon’s Annual Meeting is a classic of people talking past each other – Exxon management simply does not comprehend what its shareholders are trying to tell them. And, here’s the rub – lack of understanding results in failure to try to understand and that is why I persist.

The Yale School of Management has recently concluded that best practice for American corporations is to have a separate individual as Chairman of the Board from the Chief Executive Officer. Senator Schumer of NY has recently introduced legislation that would require as a matter of federal law that all corporations should separate Chair and CEO. There is, therefore, much current wisdom learning and agreement on this subject – enough that I will not attempt anything beyond the very simple question – how can you have a “real” board without having an energy separate from the management to compile its agenda, assure availability of appropriate information, conduct the meetings? How can you monitor CEO conduct? One size does not fit every company, but American publicly traded companies universally are required to have boards of directors in order to represent the interests of owners. Does this not necessarily mean a “real” board?

Robert A.G. Monks — Co-Founder

"Shareholder Bill of Rights": Official Press Release and Bill

For those of you who haven't seen it, Download The press release announcing Senator Schumer and Senator Cantwell's "Shareholder Bill of Rights". Download A copy of the bill itself here. From the release: "The legislation, which incorporates some proposals already being considered by the Securities and Exchange Commission (SEC), is aimed at empowering shareholders in order to curb the types of excessive risk-taking and runaway executive compensation that contributed to the nation’s economic recession."

Schumer's Bill: What the heck are shareholders going to gripe about now?

If Senator Charles Schumer’s bill – Shareholder Bill of Rights Act of 2009 – is passed, shareholders are going to have to come up with a whole new set of proposals. The bill requires companies to:

1. Introduce a non-binding vote on executive compensation (a say-on-pay vote)
2. Introduce a vote to approve golden parachutes
3. Provide shareholder access to the proxy for the purpose of nominating directors
4. Split the roles of chairman and CEO
5. Make all director elections annual
6. Introduce majority voting for directors

And the bill also makes all the above a listing requirement.
I mean, what’s left?
Sure the bill says that a Say on Pay vote won’t preclude other compensation-related proposals, but if shareholders have just approved the pay package, are they really going to vote in favor of banning golden coffins? Or approve a ban on any further grants of stock options? Or require the compensation consultant to do no other work for the company?
In fact, the only thing that will be left for shareholders to do is, well, vote….

For additional insight, J.W Verret at Conglomerate wrote about the proxy access and say-on-pay provisions of the Schumer Bill in a post this morning. His analysis is hilarious, and he might be quite right. Except, as Verret points out, given RiskMetrics’  dominance of the market already, I don’t know that another set of proposals to advise on is going to make that much difference to its stock price. Hewitt and Watson Wyatt… they’ve been taking a beating since the “independence” of their advice – seeing as it is often to the same firm that often pays them millions of dollars in benefits consulting fees – has been called into question by certain activist shareholders. Might this be enough to cause a rebound in their fortunes? Possibly.

Paul Hodgson — Senior Research Associate, Executive and Director Compensation