Shareholder rights

Next steps? Be careful what you wish for

By Peter C. Clapman

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      Whether shareholders should have an advisory vote on compensation and at which companies — the so-called say on pay — also raises these concerns [about long term investor interests]. One approach, which I favor, would be for shareholders to utilize the shareholder proposal process in selective cases at companies that have demonstrated poor practices. The other approach would be to require such a vote at all companies, as is the practice in the U.K. Congressional legislation to require such votes at all companies has been introduced.

Problems with say on pay

     In my view, universally applied say on pay is more problematic than helpful. For all practical purposes, a shareholder right to say on pay already exists, since the option of withholding votes from compensation committee members is not only available but is being widely exercised. Thus, there is a link between this issue and majority vote. Compensation disclosure under recent SEC rules is increasingly complex and lengthy. Considerable work is needed to intelligently assess such disclosure in individual company proxy statements. There is a fair likelihood that companies would begin to standardize pay practices for ease of disclosure, rather than to exercise appropriate judgment as to the particular factors that should best apply to their compensation practices.

     If applied to a universe of 10,000-plus public companies in the U.S. (in contrast to far fewer companies in the U.K.), most shareholders simply will not devote the necessary staff resources to vote intelligently as individual shareholders and will outsource the voting decision. The inevitable consequence would be to transfer considerable discretionary power over individual company compensation practices to the proxy advisory firms. I question that such an approach will serve the long-term best interests of shareholders.

     My conclusions on current-day issues of corporate governance stem from my beginning premise that “good corporate governance” means working to achieve the right balance among management, boards, and shareholders. That balance may mean that adding new shareholder powers does not necessarily equate to advancing shareholder interests. For long-term shareholders, adding new shareholder powers that go too far may actually be contrary to good corporate governance. At some point, by eroding the authority of boards, we risk lessening rather than enhancing boardroom accountability.

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The author can be contacted at pclapman@optonline.net.

This article appeared in the Annual Report 2008 special edition of Directors & Boards.