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Forum Report
Projects Discussed at Second Open Meeting
The discussions at Thursday’s open meeting
focused on the definition of several practical projects that may help both
corporate managers and investors benefit from “Say on Pay.”
Objectives for the projects were developed in exchanges of views among
meeting participants, establishing a common understanding of the various
concerns raised by or in response to the recent
Gordon,
Johnson, Nowak and
Summerfield comments. Some of these views
were reported in an article
distributed on Friday. The resulting observations of marketplace
conditions included the following foundations for our consideration of what
would be needed:
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Based on the reported experiences of several very large institutional
investors with significant research resources, attention requirements to
compensation issues can be expected to vary significantly among portfolio
companies, with some portion of them requiring meaningful commitments of
high-level professional resources to analysis, engagement and
decision-making. These more intensive situation requirements cannot be
satisfied by the existing marketplace resources that are designed to provide
cost-efficient compliance with routine voting duties.
►
Fund managers generally encourage governance analysts to allocate
attention to a company based on the importance of either a voting proposal
or a performance problem. This practical triage has not encouraged
attention to the examination of practices that appear to support enterprise
success, and that might provide valuable examples of positive,
marketplace-tested compensation policies.
►
Finally, the current economic disorder is at least partly
attributable to executives doing exactly what they were paid to do,
supported by shareholder votes for compensation policies that were endorsed
by self-appointed accreditors of “good governance” expertise. We must
accept the fact that both the compensation policies and the system of
corporate governance that evolved over the past couple of decades have
clearly failed, and need to be fixed.
Following is a summary of the projects that will be progressing in this
context, in the order they were addressed:
A. Ten Questions
The previously reported “Ten Questions” developed by TIAA-CREF
are now a thoroughly tested means of focusing both investor thinking and
corporate reporting on the essential issue of what a company’s
executives are being paid to do, rather than on whether a company is
complying with a set of bureaucratically defined rules. Meeting discussions
clearly supported the Forum’s commitment to a project for expanding the use
of this approach, either with a broadly accepted standard set of questions
or by providing a model for individual investor adaptation.
Observing the mutual benefits of this approach, one of the meeting’s
participants suggested that her large, prominent company might want to
consider initiating public reporting of its responses to a broadly accepted
standard set of questions in its proxy statement or other filings, so that
all investors could benefit equally from the information [see
note, below]. With indications
that there could be widespread interest in this kind of voluntary supplement
to SEC-mandated reporting, the Forum will proceed with corporate and
investor workshop volunteers to determine what, if any, refinements of the TIAA-CREF “Ten Questions” might be appropriate to (1) satisfy broad investor
interests, and (2) allow efficient responses by a broad range of companies.
B. Investor Research Exchange
Several different models for investor sharing of research were discussed
during the meeting, including current UK experiments with investor
controlled research managers, proposals for US investor collaborations to
share costs of consultants, and the establishment of dedicated funds for
research support. There appeared to be consensus interest in continuing
explorations of these and other possible forms of research sharing, while
proceeding with the development of the “research exchange” approach
initiated with TIAA-CREF and Hermes leadership at the first open meeting of
the “Say on Pay” program.
The Forum is willing to provide the independent administrative functions
required to support an investor “research exchange.” Suggested conditions
of the project included a widely appreciated provision that investors
contribute at least one positive report addressing an example of successful
corporate practices for each negative report addressing concerns about
unsatisfactory performance.
C. Regulatory Alternatives
Following up on the continuing debate about legislated “Say on Pay,” Jeffrey
Gordon introduced a new idea for a regulatory alternative that would simply
allow shareholders to vote for an individual company’s adoption of advisory
voting, possibly with a less-than-majority percentage of votes to be set by
Congress or the SEC. Meeting participants who favored universally mandated
SOP were naturally disinclined to support this, but generally recognized the
idea’s merits of allowing ready imposition – assuming a relatively low
voting threshold – for companies that need it without burdening everyone
with voting requirements for companies that don’t need it.
Professor Gordon offered to provide a written summary of the idea, possibly
with other observations relating to issues that might be considered by
Congress or addressed in the SEC’s adoption of rules to implement any
legislation. His draft, expected in a week or two, will be presented to
Forum participants for comment.
D. Compensation Database
Running out of time, there was only a brief summary of the Forum’s project
to develop a marketplace-defined, communally controlled database of
compensation information. The purposes of this important project are to (1)
provide a standard, reliable set of primary facts on which compensation
research can be based, and (2) reduce the costs of data to lower the
threshold for research, encouraging the development of qualitatively
differentiated competition as well as expanded user analysis.
It was a disappointment to many Forum participants, including me, that we
were unable to discuss this project at the meeting. The members of its
workshop have actually made considerable progress in reviewing examples of
other professional and industry databases, considering processes for open
marketplace participation in the definition process, analyzing XBRL and
other technology applications, and considering integrity control processes.
Anyone interested in the database project is encouraged to request more
information.
E. Investor Surveys
We were also unable to discuss investor surveys at the meeting before
running out of time. It was briefly reported that the Forum plans to
observe the independent Schering-Plough experiment with a proxy-related
shareholder survey, and that we expect to be working with at least two large
companies and possibly investors during the next couple of months to develop
processes for determining shareholder views.
♦♦♦
Please let me know if you have any questions about what was
discussed, or about the progress of any of the projects. Remember that the
Forum is open to anyone who wants to participate, either to be informed
about your decisions or to offer your views to other decision-makers. There
are important decisions to be made now, and important opportunities to guide
the development of viable marketplace practices.
GL – December 9, 2008
Gary Lutin
Lutin & Company
575 Madison Avenue, 10th Floor
New York, New York 10022
Tel: 212-605-0335
Email:
gl@shareholderforum.com
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