MANAGEMENT   |   SEPTEMBER 2, 2009, 12:59 P.M. ET

Investors Say 'Yes' on Pay at TARP Firms
The yes votes call into question the value of say-on-pay resolutions, some say

By CARI TUNA

Shareholders this year approved executive-pay packages at every public company that received funds from the Treasury Department's $700 billion Troubled Asset Relief Program and disclosed the results of the vote, according to a recent analysis.

The findings call into question the value of such "say-on-pay" resolutions, says David Wilson, a securities lawyer and author of the study. They come as the U.S. Senate prepares to vote this fall on a bill that would give shareholders of all public companies advisory votes on executive compensation, following the passage of a similar measure by the House of Representatives in July.

"Such legislation would have little if any teeth," writes Mr. Wilson – who represents companies at Waller Lansden Dortch and Davis LLP, in Nashville, Tenn. -- in the report. "In the midst of unprecedented public outcry … shareholders of every TARP recipient gave a 'thumbs up' to the executive compensation structure."

Charles Elson, head of the Weinberg Center for Corporate Governance at the University of Delaware, agrees. "I don't think that 'say on pay' is the solution to the problem" of runaway executive compensation, says Mr. Elson, who's also a director at HealthSouth Corp. "The real solution is to replace the directors, not to have a pointless vote."

Of the 282 public companies that took bailout money, 237 reported the results of the say-on-pay votes, required for TARP recipients by the stimulus bill. Shareholders at all of these firms approved the pay packages, though approval rates varied widely.

At the Bank of Commerce Holdings annual meeting in May, 100% of shareholders who voted approved the firm's executive-compensation packages, according to a regulatory filing. President and Chief Executive Patrick Moty says the vote shows that shareholders backed management for "doing an exceptional job of guiding the bank through these trying times." (The Redding, Calif., firm's stock price fell by more than half in 2008 – to $4.23 from $8.50 – but has since recovered to around $5.50.)

But at MB Financial Inc. in Chicago, shareholders narrowly approved a similar resolution, with 51% signing off on the firm's pay packages – the lowest approval rate at any public TARP recipient, according to Mr. Wilson. A third of its shareholders opposed the resolution and 16% were represented by brokers and did not cast a vote. Vice President and Chief Financial Officer Jill York says, "We think it's unfair…to assume that those non-votes would be no's."

Some firms that awarded big bonuses last year despite poor stock performance also won approval from shareholders for their pay plans. For instance, Flagstar Bancorp Inc. paid CEO Mark Hammond a $1.5 million cash bonus in December "on account of 2008 performance," according to a regulatory filing, though its stock price fell 90% in 2008, to 71 cents from $6.94. Still, 99% of shareholders who voted at the Troy, Mich., bank's annual meeting in May approved its executive-pay structure. A spokesman for Flagstar declined to comment.

Many companies allow brokers to vote on their clients' behalf, says Richard Ferlauto, head of corporate governance and pension investment at the American Federation of State, County and Municipal Employees and a proponent of 'say on pay.' In those cases, he argues, the votes don't truly indicate what shareholders want, because brokers tend to side with management.

"You don't get a fair view of the shareholder perspective unless the broker votes are excluded," says Mr. Ferlauto, who recommends that Congress add a provision in the say-on-pay bill to explicitly exclude such votes.

Patrick McGurn, special counsel for proxy adviser RiskMetrics Group Inc., says he thinks shareholders have been slow to vote against executive-pay plans at TARP recipients because there was little organized opposition to the plans this year and many of the firms had "fairly benign pay practices." He adds that "it usually takes several years for shareholders' voting policies and practices to emerge on new issues" and "investor voting support tends to build over time."

Write to Cari Tuna at cari.tuna@wsj.com