Just last week, I blogged how Motorola became the first US company to fail to get majority support for say-on-pay. Now, Occidental Petroleum becomes the second company, as shareholders voted on this measure at its annual meeting on Friday according to this WSJ article. The actual numbers weren’t announced at the meeting nor has the Form 8-K been filed yet with the voting results.
Two rejections of pay in a week is a lot. In the United Kingdom, I believe it took over five years to reach two after say-on-pay was mandated for all of its companies…
As we await mandatory say-on-pay’s fate on Capitol Hill, here are a few recent developments worth noting:
– RiskMetrics’ Ted Allenreports that Motorola received just 46% support during the company’s May 3rd annual meeting, marking the first time that a US company has failed to earn majority support from shareholders during a non-binding vote on compensation (here is Motorola’s Form 8-K). Mark Borges just blogged about this as well.
– Remember that brokers still get to cast discretionary votes on management say-on-pay proposals (although one of the sections of the Dodd bill would eliminate this, as I noted in this blog). Thus, Motorola’s level of support would have been even lower if these broker votes were not included. As an example, see Ted’s notes about American Express’ recent meeting (and see AmEx’s Form 8-K) – he quotes someone from the AFL-CIO who estimates that the company’s 63% level of support would have been reduced to 58% (and Wells Fargo’s level of support would have dropped from 73% to 67% without the broker votes).
– Ted reports that say-on-pay shareholder proposals received 51% support at EMC, a 47.9% vote at Johnson & Johnson, and 45.3% support at IBM. The number of votes exceeded the support levels for the same resolutions at the three companies last year. Note these are proposals from shareholders to put say-on-pay on the ballot going forward; they are not management say-on-pay agenda items like the situations noted above.
– Ted also reports that SuperValu received no-action relief – under the (i)(9) “conflicts with management’s proposal” basis – from Corp Fin to exclude a say-on-pay shareholder proposal because the company had already adopted a “triennial” approach to say-on-pay. The proponent wanted an annual vote instead of every three years.
In this follow-up podcast, Greg Taxin of Soundboard Review Services discusses the latest developments for Soundboard Review Services (here is the first podcast), including:
– Soundboard has been quoted in its first proxy this year, for DuPont. Can you tell us what the DuPont board engaged you to do?
– How are investors using the information provided by DuPont in its proxy about your review services? Have investors contacted you?
– Having now done a number of these reviews, can you share any surprising practices you have seen or best practices that are perhaps uncommon?
In recent weeks, Corp Fin has begun to comment on the absence of disclosure regarding a company’s compensation policies and practices that create risks that are reasonably likely to have a material adverse effect on the company. Corp Fin Director Meredith Cross has noted during speaking engagements that the comments were designed to ensure that the company’s risk evaluation process was “robust.”
Based on feedback from members on the SEC comments they have received, there appears to be a standard comment – but sometimes there are variations. It’s also believed that the Staff is just looking for a supplemental response and not necessarily “negative” disclosure (ie. disclosure that there are no material risks, etc.).
On Friday, Towers Watson announced that a small chunk of its advisors who serve compensation committees have decided to split off into its own independent, non-affiliated consulting firm – called “Pay Governance LLC.”
After conducting an extensive study, Towers Watson decided it will continue to maintain its own compensation committee practice, with safeguards to ensure independence from the rest of the firm are in place – and with the vast majority of its executive pay consultants remaining with the firm. As noted in its press release, Towers Watson acknowledges that the EC consulting market has changed in the US – but believes that companies will continue to seek out its consultants, either as board advisors or advisors to management.
Pay Governance LLC will formally launch on July 1st (a little strange for a new entity to be created, but not start functioning for a few months) and include notable advisors John England and Richard Meischeid. Ira Kay will also join this group – Ira had already split from Towers Watson earlier this year. Under the terms of the transaction, Towers Watson, – in consideration of certain payments by Pay Governance LLC – will transition a number of current and former Towers Watson associates to the new firm over the remainder of 2010, with additional staff transitioning after that based on market demand.
This blog celebrated its two-year anniversary earlier this week. It’s been fun and I hope you’ve enjoyed the ride. I’ve gotten into the habit of making most of the contributions lately – I’m more than happy to post your thoughts. A blog contribution only need be a paragraph or two – and it doesn’t have to cover a breaking development. It can share a story – or just your ten cents.
To celebrate, I thought I’d share a groovy video of a classic song circa 1970:
Below is an excerpt from this recent NACD press release:
Corporate board pay levels are flat or down compared to last year, according to the NACD’s annual Director Compensation Survey: 2009-2010. Created in partnership with consulting firm Pearl Meyer & Partners, the report examines director pay trends among public boards in four size categories, along with a fifth category of the Top 200 companies – ranging in revenues from $50 million to over $10 billion – across multiple industry verticals. Data is used as an important benchmarking tool for boards to review or establish effective and competitive compensation plans.
The report also shows a link between the composition of director compensation and the current economic environment. Cash compensation, consisting of annual retainers and fees for board and committee service, represented a greater proportion of total compensation. The percentage of director pay in the form of equity declined significantly, largely as a result of lower share prices. While stock compensation was generally below the 50% benchmark, there was also a significant shift away from the use of stock options in favor of full-value share grants.
Key Highlights:
Median total direct compensation:
– Companies with revenues of $50 million to $500 million — decreased 3% to $75,490
– Companies with revenues of $500 million to $1 billion — decreased 6% to $108,836
– Companies with revenues of $1 billion to $2.5 billion — decreased 2% to $131,054
– Companies with revenues of $2.5 billion to $10 billion — decreased 1% to $164,455
– Companies with revenues over $10 billion plus — increased 1% to $216,186
Compensation by industry:
– Highest compensated included: Pharmaceutical & Medical Products, Diversified Financial & Brokerage, Petroleum/Crude Oil Production & Pipelines and Computer Products & Services
– Lowest compensated included: Transportation & Distribution, Motor Vehicles & Parts and Banks/Savings & Loans
From an organizational perspective, the NACD report found that the work of corporate boards is being conducted increasingly at the committee level as directors seek to most effectively address the volume of issues they face. Virtually all companies in the survey maintained audit and compensation committees with the vast majority also having a governance/nominating committee. A sizeable majority of companies differentiate pay among committees in some way, reflecting the difference in relative workloads.
Continuing a practice begun in the wake of Sarbanes-Oxley, audit committee member compensation is highest, reflecting a significant rise in responsibilities and time commitment required as a result of regulation. Compensation committees follow, due largely to increased workloads and a more intense scrutiny of their decisions by all stakeholders.
In yesterday’s WSJ, Roger Ferguson, President and CEO of TIAA-CREF, contributed an op-ed, repeated below:
In his speech last Thursday at New York City’s Cooper Union, just a few blocks from Wall Street, President Obama called for reforms to provide shareholders a stronger say in the governance of companies in which they invest.
Institutional investors should support the president’s call enthusiastically. As stewards for the savings of millions of individual investors who have little ability to influence corporate practices on their own, these institutions have every incentive to throw their weight around, especially since they bear the ultimate cost when companies perform poorly or fail.
An example: Based on discussion with TIAA-CREF and other investors, Amgen, the international biotechnology company, provided shareholders with the ability to comment on its compensation program directly to the compensation committee of Amgen’s board. When investors and companies collaborate cooperatively, we can achieve outcomes that further the long-term interests of all shareholders.
Unfortunately, many institutional investors shirk their roles. There are many reasons. Some institutional investors are reluctant to spend resources on improving corporate governance. Others face conflicts of interest, particularly some mutual fund companies–for example, firms that manage 401(k) plans for large corporations could be called upon to vote against company management, the very client responsible for lucrative 401(k) plan fees.
Finally, some investors believe that the only way to hold companies accountable is “the Wall Street walk”–if you don’t like the company, sell the stock. It’s an elegant solution but one that doesn’t always work. Portfolios that aim to replicate the performance of a benchmark index can’t sell the shares of all underperforming companies. Besides, as disclosures about Lehman Brothers’ accounting show, it may be too late to advantageously sell once problems related to poor governance become apparent. Better to engage management on governance and strategy issues before problems arise and shareholder value plummets.
Institutional investors have a lot of clout if they choose to act. Pension funds, investment and insurance companies are the largest group of investors in U.S. companies, holding more than 40% of the outstanding equity of publicly traded firms. These institutions can and should do more to protect investors’ long-term interests. Specifically, they can:
• Talk with boards and management about the company’s strategy and risk management. When dialogue fails, investors need to have available the appropriate tools to bring companies to the table, including the right to nominate and remove board members.
– Exercise voting rights on matters such as director elections, executive compensation and other governance matters.
– Ensure that compensation policies fit the unique situation of each company, integrate with business strategy, and align managers’ incentives with shareholders’ long-term interests.
– Actively defend the integrity of accounting standards, because the quality of reported information is critical to investors’ ability to judge risk and allocate capital appropriately.
Institutional investors also need to examine their own practices and hold themselves to high standards of governance. For example, mutual fund companies should have more independent boards of directors, who can put shareholder interests ahead of those of the investment adviser.
Greater shareholder engagement may not have averted the financial crisis. But it can help to ensure efficient allocation of capital, connect company owners and managers in an ongoing dialogue about their common purpose, and reduce the risk of future failures.
Last week, the Council of Institutional Investors published this checklist of the “Top 10 Red Flags Investors Should Consider When Casting Say-on-Pay Votes.”
Here is something I recently blogged on Harvard’s “Corporate Governance Blog”: Peter Drucker, the revered management guru, deplored excessive CEO pay. He argued that CEOs should not be paid more than 20 to 25 times the average salary of company employees. While his approach is schematic, Drucker’s reasons for opposing high executive compensation resonate today even more than during his lifetime. Essentially, Drucker believed that the leadership, motivation and teamwork needed for a successful business are undermined when the CEO is overpaid. He maintained that business leaders should set an example of responsibility, not privilege. He defined the CEO’s role in terms of stewardship, not self-interest.
The financial crisis certainly validated Drucker’s concerns. A Who’s-Who of respected global business leaders have recently gone on record advocating changes in executive compensation. The list includes Paul Volcker, Bill Gates, George Soros, Warren Buffett, Jeff Immelt, Mervyn King — even Alan Greenspan.
Conspicuously absent from the list have been the leaders of Wall Street, and herein lies an important clue to what went wrong, what should be done and why the task is so difficult.
A case can be made for tracing the roots of both CEO pay abuses and the broader financial crisis all the way back to 1976 and the decision to end fixed commissions on Wall Street. That change triggered a chain of events that altered relations between Wall Street and corporate America, ultimately damaging both.
In a nutshell: During the 1970s, ’80s and ’90s investment banking devolved from a relationship business into one driven by transaction fees. Mutual trust between companies and bankers gave way to arm’s-length dealings. Hostile takeovers proliferated. Shareholder demographics changed. Relations between companies and activist institutions became increasingly adversarial. Independent sell-side analysts were displaced by captive research often in service of deals and underwriting. A further cascade of negative developments followed repeal of the Glass-Steagall Act in 1999: deregulation, construction of financial oligarchies, IPOs of Wall Street firms and stock exchanges, conflicted credit rating agencies, opaque derivatives trading, distorted accounting – all contributed to the now-familiar story of over-the-top executive pay, market volatility, speculative bubbles, fraud, Ponzi schemes, the debt crisis and financial system collapse.
One of the least-noted effects of these systemic changes was to unleash Wall Street’s specialized money culture and pay practices, which ultimately migrated to corporate America, infecting businesses via their boardrooms and ratcheting up CEO pay. The Enron Corp scandal showed us where the infusion of Wall Street practices into corporate America can ultimately lead. With its board asleep to the dangers, Enron decided to become a trading company and make money the same way Wall Street does. In so doing, it earned fortunes for its top executives while defrauding its employees, customers and investors.
The lesson: What makes sense for Wall Street can be problematic for corporate America. The converse is also true: Governance and pay standards appropriate for public companies don’t suit Wall Street’s high-risk, competitive environment. Recent post-TARP concessions limiting top investment bankers’ salaries and bonuses may represent a step toward best practice from a corporate governance perspective, but surely they are only temporary. Before long, competitive forces will compel investment banks to return to incentives and pay levels that match private equity firms, hedge funds and other private entities.
How can we bring rationality back to executive compensation at America’s public companies (and, for that matter, to Wall Street)? The answer ultimately depends on our ability to tackle the bigger problem: How can we restructure the U.S. financial system to disentangle Wall Street, corporate America and the federal government?
As Congress continues to grapple with these questions, here are five steps that should be considered:
1. Wall Street firms should voluntarily segregate speculation and proprietary trading and convert these activities back into private ownership structures, thereby reducing the risk exposure of long-term investors and keeping investment bankers’ compensation out of the public record.
2. Too-big-to-fail financial institutions should be restructured or broken up to reduce both systemic risk and moral hazard.
3. Congress should enact new legislation, building on the principles of Glass-Steagall, to segregate commercial and investment banking and to clarify fiduciary standards governing investment of long-term assets.
4. Regulatory and accounting reforms should compel both corporations and financial intermediaries to increase transparency.
5. Corporate boards should strengthen oversight of risk management and executive compensation and be fully accountable to shareholders.
These reforms would help reign in corporate pay, take some of the pressure off Wall Street and stabilize our financial system.
Even if these steps are taken, the U.S. must also face up to its underlying cultural and governance issues – the entitlement and celebrity status of CEOs, a tradition of boardroom acquiescence, flawed governance of institutional investors, truculence between companies and shareholders, pervasive short-term focus in investment and business management.
The solution to these long-term problems is not just a matter of legislation or public policy. Corporate CEOs and boards of directors will have to take a leadership role. As Peter Drucker might say, corporate America needs fewer overpaid managers and more responsible stewards.