by Robert Kropp
Companies adopting say-on-pay include many in the financial industries, and all TARP recipients mandated to do so last year; in the absence of legislation or regulations, activist shareowners file more than 70 resolutions on the issue this year.
The adoption by companies of policies allowing annual shareowner votes on executive compensation, or say-on-pay, has been a hotly contested issue, especially in recent years, as links between excessive risk-taking by financial institutions and excessive executive compensation have been decisively outlined by social investors and shareowner activists alike. That the Obama administration made it a requirement of companies receiving funds through the Troubled Asset Relief Program (TARP) to provide an annual shareowner vote on say-on-pay underscores the validity of those links in the eyes of regulators.
A recent press release, issued jointly by Walden Asset Management and the American Federation of State, County and Municipal Employees (AFSCME), illustrates further the mainstream acceptance of say-on-pay. According to the release, “More than 50 companies have now voluntarily adopted giving their shareholders an annual advisory vote on executive compensation.”
Timothy Smith, Senior Vice President of the Environment, Social and Governance Group at Walden Asset Management, told SocialFunds.com, “The number of companies that have adopted say-on-pay has grown since the announcement, to more than 60.”
The companies that have voluntarily adopted say-on-pay include many financial institutions, which have come under increasing scrutiny for their compensation policies in the aftermath of the financial crisis, especially given the widespread outrage expressed in response to reports that many TARP recipients intended to return to their pre-crisis policies of awarding bonuses that many regard as outrageously high.
“With all the pressure now on Wall Street for reasonable pay, adopting say-on-pay policies does not seem an unreasonable request,” Smith said.
He continued, “Many of these financial companies had to allow a vote last year, because they were TARP recipients, and simply agreed to continue it this year. I don’t know of any TARP recipients that are not adopting say-on-pay resolutions this year.”
Noting in a January letter to financial companies that “approximately 40 companies to date, have voluntarily adopted the advisory vote on executive compensation,” Smith and the letter’s other signatories described shareowner advisory votes on executive compensation as “a timely and needed corporate governance reform,” specifically urging Bank of America, a TARP funds recipient, to adopt the measure. The recent press release from Walden and AFSCME indicates that Bank of America has indeed voluntarily adopted an annual advisory vote on executive compensation.
Regarding the increase in voluntary adoption of the measure—in 2008, six companies adopted it, and in 2009 the number rose to 19—Smith said, “I don’t want to overstate the impact of shareholder input. Everybody is watching this issue, and companies that adopt are getting ahead of the curve.” But, he added, “Shareholder input and pressure are very important for defining the issue for the company. Seventy-five resolutions were filed last year, and most companies are doing it now because they’ve been asked to by shareholders.”
Smith said that of all the financial companies contacted about the issue, every TARP recipient has agreed to shareowner advisory votes on executive compensation. The only financial company currently opposing such a request is Waddell & Reed Financial, where average total annual compensation for four of the five top executives increased by 25% in 2009, while the company’s net income increased by only 9.7%. The shareowner resolution that Waddell & Reed is opposing was filed by Boston Common Asset Management.
The resolution filed by Boston Common Asset Management quoted a 2009 report from the Conference Board Task Force on Executive Compensation, which stated that “in order to restore trust in the ability of boards to oversee executive compensation,” compensation programs which are “transparent, understandable and effectively communicated to shareholders” should be adopted.
“In the absence of legislation or regulations mandating a market wide rule,” the press release from Walden stated, “The investor coalition announced the filing of additional Say on Pay shareholder proposals at more than 70 US corporations for 2010 votes.” In 2009, the 75 resolutions gained more than 46% support, with 24 majority votes.
The marked shift in the approach to shareowner resolutions by the Securities and Exchange Commission under Obama appointee Mary Schapiro has helped the cause of advocates for say-on-pay and other important corporate governance issues. Unlike the SEC under the Bush administration, whose Division of Corporation Finance routinely disallowed shareowner resolutions on the grounds of ordinary business exceptions, the SEC under Schapiro has been consistent in its support for the interests of investors.
“There are a few companies that are fighting vigorously against the right of shareholders to put the issue up for proxy vote,” Smith said, “And they’ve gone to the SEC to try to get the resolution omitted. One such company is EMC, the computer company, which is fighting a resolution filed by the Unitarians.”
“A bright side is we’re winning the challenges at the SEC,” Smith continued. “A number have been ruled on and we’ve been successful in every case.”
Progress on the legislative front is less clear at present. Legislative efforts to mandate say-on-pay passed the House of Representatives last year, and Sen. Charles Schumer of New York introduced a Shareholder Bill of Rights Act for consideration by the Senate.
By now, however, many of the proposals in Schumer’s proposed legislation have been dropped by the Senate Banking Committee in its deliberation on financial overhaul legislation. A letter sent to Sen. Christopher Dodd, Chairman of the Senate Committee on Banking, Housing and Urban Development, urged the Committee to retain three essential components of corporate governance in its draft legislation.
In the letter, Lisa Woll, CEO of the Social Investment Forum (SIF), urged the Committee to support the authority of the SEC to go forward with proxy access, which would allow shareowners to nominate directors. She also urged support for a majority voting standard for the election of directors, as well as annual advisory votes on executive compensation.
The challenge to adoption by the Senate of meaningful financial reform that will take into consideration the rights of shareowners was highlighted by a remark made by Republican Sen. Judd Gregg of New Hampshire, who described the shareowner provisions of the proposed legislations as “classic socialist industrial policy, which seems to be the basic mindset of some of my colleagues these days around here that don't believe in markets, capitalism, profit, or individual entrepreneurships.”
However, as Smith told SocialFunds.com, “Shareholder votes on say-on-pay are not going to go away as an issue.”