Forum Report: Yale-Deloitte Report on Communications about Executive Compensation

Stephen Davis, the Project Manager of Yale’s Millstein Center for Corporate Governance, has asked me to invite comments from Forum participants on the draft of a paper that continues his examination of issues initiated two years ago as part of our “Advisory Voting” project:

Participants in the original Forum project should note that the advisory voting process addressed in the Yale-Deloitte paper is an “activist” variation of what we’d considered as a process for cooperative communication about common interests. The reasoning of advocates for this transformation into a confrontational “Say on Pay” proposal, to be imposed by regulation on all companies alike, is explained in the following section of the paper (pages 5-6, heading emphasis in the original):

Compulsion, through crisis or other acute events, is the foundation under most current US corporate initiatives to foster governance dialogues with institutional owners.

Evidence suggests that scandals over executive compensation³ − whether payouts for failure or backdating stock options − were key contributors in 2007 in motivating certain boards to increase their interaction with shareowners. Exercises in board dialogue on governance have generally not come about in the United States as a product of proactive, long-term strategic outreach by untroubled corporations. This reality has contributed to growing investor conviction that regular dialogue will not spread widely in the absence of compulsion, even where companies are troubled. As a result, many funds back a UK-style annual advisory vote on executive pay policies, a measure that helped open channels of communication between UK boards and their equity owners.

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³ See, for instance, USA Today, Home Depot shareholders blast CEO over pay; Nardelli cuts criticism short, May 25, 2006.

Dr. Davis has also encouraged consideration of Forum programs to address the issues raised in his paper, concerning advisory voting as well as the processes for investor communication. Your thoughts on all of these subjects will be appreciated.