Financial Times, January 26, 2007 article and commentary

Leading global investors yesterday launched an unprecedented campaign to curb outsized executive pay, urging regulators and companies to give shareholders the right to vote on compensation.

The campaign brings together fund managers such as ABP, Europe's biggest pension fund, with US pension funds including the New York City Employees' Retirement System.

A dozen international shareholder groups, managing more than $1,500bn in assets, have written to US regulators, politicians and stock exchanges pressing for a UK-style non-binding shareholder vote on executive compensation packages.

The letter, sent yesterday, coincided with a similar one sent by the Association of British Insurers, representing a fifth of UK investors, and a move by US pension funds and religious groups to file motions asking for a vote on pay at 44 companies, including ExxonMobil, GE and Citigroup.

The actions underline the fact that executive pay and shareholder scrutiny of management will be the key battlegrounds in this year's "proxy season", the annual round of companies' shareholder meetings.

"Institutional investors are fed up with the unbridled excesses of executive compensation in the US," said William Thompson, New York City comptroller, who manages the city's $93bn-plus pension fund. "It is time for American companies to adopt this important policy for improving transparency and disclosure, and board accountability for executive pay."

Shareholder anger at excessive executive compensation has been rising amid evidence that many US chief executives receive big pay packages regardless of their companies' performance.

Bob Nardelli resigned as chairman and chief executive of the retailer Home Depot this month with a $210m severance package despite a slump in the share price in his six-year tenure.

Many companies and business groups oppose giving shareholders a greater say on matters such as executive pay, arguing that it could encourage activist hedge funds and other investors with short-term horizons to hold companies to ransom.

In the letter to Christopher Cox, chairman of the Securities and Exchanges Commission, the international investors said a non-binding vote on pay would encourage pay-for-performance practices that would align the interests of executives more closely with shareholders.

Signatories welcomed the SEC's recent moves to enhance disclosure on pay but fear that new rules could, on their own, lead to greater increases in pay by enabling chief executives to see how much money their peers are receiving.

UK shareholders have been able to cast advisory, non-binding votes on remuneration reports since the end of 2002 as part of wider moves to improve corporate governance and avoid the kind of corporate scandals - such as Enron - that have dogged US companies.

The yawning US trade deficit could soon be augmented by a new and unusual import: corporate governance rules.

After decades as the paradigm of good corporate citizenship, American regulators and companies find themselves in the unusual position of being told what to do by foreigners.

A Who's Who of international investors yesterday took the rare step of writing to authorities ranging from the top US regulator to one of its most influential politicians to demand greater say in how American corporate executives are rewarded.

A few years ago such moves would have been dismissed as an attempt by foreigners to meddle in America's healthy and entrepreneurial capitalism.

However, after a spate of scandals that rocked the public's belief in regulatory supervision and recent examples of chief executives rewarded with princely pay packages in spite of mediocre performance, the US authorities are likely to listen.

"There are a lot of highly developed aspects of the UK governance system," said Keith Johnson, a corporate governance specialist at Milwaukee law firm Reinhart Boerner Van Duren, who helped with the letter.

"It is healthy for the US to get input from non-US investors. The US is no longer the centre of the universe," he said.

Anita Skipper, head of corporate governance at Morley Fund Management, one of the signatories, said: "The current US system has allowed an unhealthy environment to develop, without effective accountability or control. It is time the share owners got to have a say."

The push from overseas investors was compounded by moves from domestic pension funds to file motions at 44 large companies asking for a vote on executive pay.

The US rules giving shareholders no say on executive compensation contrasts with the system in Australia, the Netherlands, Sweden and the UK.

In those countries, shareholders have had the right to vote on such matters.

The dozen or so signatories of yesterday's letter argue that the system forcing companies to disclose pay plans and allowing investors a non-binding vote on remuneration reports has worked well in the UK since its introduction in 2003.

Peter Montagnon, director of investment affairs at the Association of British Insurers, which has lent its support to the campaign in a letter of its own to the US Securities and Exchange Commission, said: "We all want to reward success. Shareholders can play an important part in making sure the overall system has integrity so that we continue to reward success."

Opponents of the import of such a system into the US, especially among business representatives, argue that it would be cumbersome to introduce, as such issues are governed by state-by-state law, rather than federal legislation or SEC actions.

But legal experts say that those problems could be resolved by inserting the non-binding vote in the listing rules of the New York Stock Exchange and Nasdaq.

Alternatively, it could be done by getting legislators in Delaware, the state where most US companies are incorporated, to pass a law on the issue.