Background. This was supposed to be the year when shareholders of public companies finally had their say about executive pay. As a result of the passage of the Dodd-Frank Act last July, shareholders for the first time can cast proxy votes on top executives’ compensation. Median pay of chief executives jumped 35 percent, to $8.4 million for Standard & Poor’s 500 CEOs in 2010. So shareholders’ say on pay votes, although only advisory, were widely expected to challenge companies where compensation didn’t reflect performance or was out of line with those at competitors. But now that most meetings have been held and votes tallied, what was the result?
ISS Shooting Blanks? Institutional Shareholder Services (ISS), which advises investor clients on proxy and shareholder issues and is the largest firm of its kind in the U.S., (and a thought leader that we follow closely) has recommended “nay” votes on pay for 293 companies so far this year. However, through June 14, shareholders by a majority vote objected to executive comp at just 32 of the nearly 2,000 companies that have held annual meetings this year. “Say on pay is at best a diversion and at worst a deception,” says Robert A.G. Monks, a corporate governance activist who founded ISS in 1985. “You only have the appearance of reform, and it’s a cruel hoax.”
ISS advises shareholders that may constitute a large minority in many public companies; so why weren’t its recommendations followed more often? Some credit the work of the Center on Executive Compensation, a recently formed offshoot of the HR Policy Association (a lobbyist on human resources issues for 300 of the largest U.S. companies). The center advised companies that received negative ISS recommendations to send rebuttals to shareholders. “We provided some guidance on how to tell their pay-for-performance stories,” says Charles Tharp, the center’s CEO. Many companies effectively countered ISS’s recommendations in letters to shareholders. Among major corporations which ISS criticized, Pfizer won 57 percent of the shareholder vote on executive pay. ExxonMobil and JPMorgan Chase received 67 percent and 73 percent shareholder support, respectively.
Separately, the center also produced a white paper in which it said ISS has published errors, holds excessive power, and has conflicts of interest because it both consults with some companies on corporate governance and issues proxy voting recommendations on them.
Game On! While the early returns on SOP suggest that it has had little impact, a closer look reveals a more nuanced result. Some companies that received negative ISS recommendations this year made changes and then won the firm’s blessing. These instances show how say on pay helps foster accountability by creating more “engagement” between management and shareholders.
In addition, shareholder advocates and some in the media have trumpeted a significant percentage of “nay” votes as a defeat for the company. Since the SOP vote was based on last year’s compensation, its primary impact will be on compensation decisions for the rest of this year and on next year’s disclosures.
Also, overall most companies have proposed (or received majority approval of) annual SOP votes (as recommended by ISS), although some smaller companies have preferred a vote every three years. The more frequent the vote, the more opportunities arise to register discontent.
Finally, as we noted in our April 26 Alert, while very few companies in the early going received negative votes on SOP, every one subsequently has been sued. Remember that plaintiffs’ lawyers will file an excessive pay lawsuit, naming the board, compensation committee members, and executives, against companies that fail to receive a majority vote “for” SOP.
Conclusion. While, to date, the fallout from SOP has been underwhelming, expect a more focused effort in the future as shareholder advocates refine their approach.
Robert L. Musick, Jr.
(804) 249-6027
Richard Deutsch
(804) 249-6026
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