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AGENDA
Boards Prepare for
Say-on-Pay Era
Article published on
December 22, 2008
By
Kristin Gribben
In anticipation of
congressional action on a say-on-pay bill, boards are starting to lay the
groundwork to ease the implementation of such a policy.
The changing of
the guard in Washington makes a say-on-pay bill all but inevitable, say
experts. With legislation looming, the issue is increasingly being raised in
director education courses. And some directors are asking for the advice of
boards that have voluntarily adopted say on pay. Of course, at this point,
boards with experience in this area are still rare: Only nine known public
companies give their shareholders a nonbinding vote on executive pay.
Claire Gaudiani,
a member of the compensation committee at
MBIA, which adopted say on pay in
February, says directors on other boards have expressed apprehension to her
about the policy. “I think some of the concern [among board members] is just
old-time nervousness and the fact we have more investors than we’ve ever had
in the marketplace,” she says.
Gaudiani
recommends that directors get to know their shareholders better, especially
their thoughts on executive compensation. A couple months before MBIA
adopted say on pay, the board, CEOand
the head of investor relations invited the company’s top shareholders to a
meeting to get their thoughts on allowing them to vote on executives’ pay
packages. While “some shareholders are less sophisticated” than MBIA’s,
Gaudiani says, “that just requires more investor education.”
In fact, some
experts say there is an opportunity for say on pay to bridge the divide
between boards and the investor relations team.
“If there’s a
silver lining to all of this, it’s [that] the IR community and boards are
more willing to talk,” says Deborah Lifshey, managing
director of Pearl Meyer & Partners.
Say on pay
prompted some changes in the way MBIA’s comp committee conducts business.
For example, the committee spends more time explaining its compensation
philosophy in the proxy statement: “We thought more deeply and went through
more drafts,” Gaudiani says.
A congressional
say-on-pay bill will probably not specify how boards should phrase the
policy in their proxy statements, says Lifshey. The House bill last year was
broadly worded, and it would be harder to pass a bill that was too specific.
That leaves an
important question for boards if say on pay is mandated: How do they want to
draft the wording of the policy on their ballots? The approaches of the
companies that have adopted say on pay so far vary. Aflac
asks its shareholders to vote on the compensation of its five
highest-earning executives, while
RiskMetrics Group— which went public at the beginning of
2008 — asks shareholders to cast an advisory vote on three separate items
regarding compensation: the company’s overall executive compensation
philosophy, policies and procedures; whether the principles were executed
appropriately; and whether the principles were applied to 2008 objectives.
Most corporate
governance observers say it is likely Congress will pass say on pay this
time around because the political environment has changed in the wake of the
financial crisis. Congressman Barney Frank(D-Mass.) and
other Democratic lawmakers wanted say on pay to be included in the Troubled
Assets Relief Program. Although it didn’t make its way into the final
specifications, the push to have it included is an indication there will be
support for a broader say-on-pay bill under the new Congress.
A say-on-pay
bill passed the House in 2007 but a companion bill never made it out of the
Senate. Despite that, Pat McGurn, special counsel at
RiskMetrics, expects the Senate to pass it this time around. Last year,
President-elect Barack Obama introduced the Senate bill
that was referred to the banking committee chaired by Senator Chris
Dodd(D-Conn.), who was running for president against Obama at the
time. The politics of the situation made it so the bill was unlikely to get
carried out of the committee, McGurn says. But the presidential election is
over and there is more Republican support for limits on executive pay this
time around.
As corporations
are preparing for a say-on-pay bill, so, too, are investors. One of their
concerns is that the policy would give proxy advisory firms too much
influence. Indeed, say on pay would put RiskMetrics’s business in even more
demand. The policy would mean a lot more work for investors, many of whom
don’t have the capability to analyze all of the CD&As in their portfolio. So
they would turn to the advice of proxy advisory firms.
Responding to
these concerns, McGurn says his firm issues recommendations based upon good
governance, not upon its pocketbook.
A say-on-pay
forum that includes both investors and corporate representatives is trying
to circumvent the need for proxy advisory firms by exploring alternatives.
Some of the ideas up for debate include adopting a standard set of questions
similar to the 10 questions TIAA-Cref adopted as a template
for asking whether shareholders should approve a particular compensation
package. Investors are also looking into sharing research, including the
cost of consultants and a research database of compensation information.
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