The Advisors' Blog

– Tim Smith, Walden Asset Management

The discussion about the value of holding an advisory say-on-pay vote has grown enormously since the seeds were first planted in the United States through a small number of AFSCME sponsored shareholder resolutions several years ago. Investor support rapidly escalated with 2009 resolutions urging this reform averaging 46-47% and 22 receiving over 50% votes to date. In addition to the over 300 companies receiving TARP funds that are required to hold an advisory vote, 27 companies have stepped forward and agreed to implement the vote themselves, in their 2009 or 2010 proxies. Other companies, especially those with high votes are deliberating when they will institute SOP.

And Congress has been actively pursuing SOP with the strong support of the Treasury, SEC and the President, leaving most observers to expect that legislation will empower the SEC to adopt rules resulting in all large cap companies being required to have annual Advisory Votes by their 2011 proxies. Thus, it is curious to see, in this 11th hour, the alternative of having an Advisory Vote every three years emerging. This variation on the theme surfaced when the Carpenters Union, led by Ed Durkin, filed 20 or so resolutions seeking both a triennial vote and expanded communications between investors and management and the Board.

This last point urging expanded investor communications is a welcome echo of the appeals of proponents for SOP. Indeed a vote without communications to help interpret the message sent has very real limits. It is wise and timely to stress that the two go together. However, it is curious that the Carpenters now emerge as a supporter of any form at all of advisory voting since during the last 3 years they are frequently quoted criticizing the idea. Now, as it seems to be on the verge of being institutionalized, they propose a variation on the theme. And unfortunately they seem interested in enlisting allies among corporate secretaries to water down any SOP legislation before Congress.

However, this testing of the triennial waters has real drawbacks that make it a mistake to consider as a public policy alternative. First companies with pay for “non-performance,” questionable perks such as Golden Coffins or Gross-ups, spiraling pay or a host of other compensation problems would love to avoid annual accountability and only face their shareowners every three years. Perhaps we could call this a proposal for “occasional accountability.” Yet with the problems with pay still front and center and covered daily in the media, it seems like this is not the time to propose weaker measures.

On a parallel issue a majority of investors vote regularly for annual elections of directors and not staggered boards with elections every three years. And likewise, they wish to vote annually to ratify the auditors. Accountability on these issues should be an annual exercise they reason.

Recently, Microsoft announced that they would implement a management sponsored advisory vote for their upcoming annual meeting. They made a number of supportive comments about the utility of the vote twinned with expanded investor communication. The Calvert Group and Walden Asset Management had sponsored the resolution on this topic and were pleased to withdraw our resolution in response. Microsoft in its blog announcing the decision stated its preference for a triennial vote. As investors we reasoned that the Senate would act to institute an annual vote thus rendering the triennial approach moot so gladly accepted this vote of confidence in shareowners being able to send a message on compensation via SOP.

One argument raised supporting the triennial vote is that is protects investors from a deluge of work every year when voting their proxies. Indeed an additional annual vote does add a new voting discipline. However many institutional investors have voted for exactly this reform providing a clear mandate for action. They acted similarly over the last years supporting majority votes for directors, a reform launched by the Carpenters Union. This helped spark rapid market reform as companies moved with dispatch to adopt majority voting policies.

And investors generally feel comfortable with processing an annual vote. Of course, extra work is involved – but intelligent investors will set up a system whereby urgent comp issues are put on the top of the pile for review and action just as we look at election of board members selectively when we vote. They will get priority attention as needed. And of course many votes on comp will be routine just as voting on directors and auditors or option plans often may be run of the mill.

Thus, a proposal for a triennial vote on pay is not necessary to protect investors and certainly is a step backwards in corporate accountability on compensation.