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Comments of
Douglas K. Chia
February 17, 2009
What follows are some thoughts on Professor
Gordon's paper and the comments of others on the same paper. These are my
own personal views being shared for the purpose of discussion among Forum
participants, and, according to Forum rules, should not be quoted without
explicit permission:
1. I applaud Professor Gordon's work on the
subject of say on pay ("SOP"). This is a significant contribution to the
larger discussion and one that I hope will attract the attention of the
legislators and regulators who may be on the verge of implementing some kind
of SOP regime. In particular, I appreciate Professor Gordon's multi-layered
analysis of the much thrown-around, but not universally-defined phrase "pay
for performance" and his overview of the UK experience with advisory votes
on executive compensation.
2. Professor Gordon's proposal for an
"opt-in" system is an interesting one. It would create a Federalized,
two-step process for SOP to be enacted at any public company. However, I'm
not sure we really need this, as what we currently have--rules under which
any shareholder who has held at least $2,000 worth of a company's stock for
over one year can submit a proposal for the company to implement SOP and
effectively force the company to ask its shareholders whether they would
like to "opt-in" to a SOP regime--serves the same purpose and seems to have
the same outcome. When Federalizing particular aspects of state corporate
law, we always run the risk of further gutting the diversity of the laws of
the different states. In this case, would what we get in return be worth
this risk? This is a question that I think must be answered when
considering Professor Gordon's opt-in proposal, or, for that matter, any
other implementation of SOP by means of Federal law/regulation.
3. Professor Gordon's proposal to create
some kind of size requirement for companies to be subjected to SOP is one
with which I don't necessarily agree. I would think that the risk of having
broken executive compensation programs would be just as great, if not
greater, at smaller companies, especially ones that are run by a few
founders or those that are overly reliant on non-cash incentives due to the
absence of present cash flows and/or profits. And while creating a SOP
regime would result in additional costs to public companies, they clearly
would not be of the same magnitude as the SOX 404 regime, and thus not
something that would cripple a smaller company.
4. Contrary to some of the other commenters,
I don't think that most corporations' #1 argument against SOP is that they
don't "deserve" to be "punished" with SOP. Instead, I think the biggest
objections/fears coming from companies and their boards are: (1) Allowing a
SOP regime to be created could very well mark the beginning of a quick slide
into referendum-style corporate governance in the United States (It would
stand to reason that once they are successful in getting SOP, shareholder
activists would use similar strategies and arguments to force companies to
have "say on...[you name it]"); and (2) The outcome of annual SOP votes may
be effectively controlled by proxy advisory services that have no regulatory
oversight and no accountability to anyone except their own clients, and, in
some cases, significant conflicts of interest. At this point, the risk of
having the outcome of such votes determined based on the whims of these
for-profit entities may be too great given companies' past experiences with
these firms. (However, if we are all given a few years to observe how proxy
advisory firms approach SOP recommendations at the small number of companies
that have elected to implement SOP so far and the TARP companies that will
soon be subjected to SOP, this particular fear may be somewhat allayed.
TARP has effectively created a sort of involuntary pilot program for SOP.
Perhaps we should all observe how that pilot program plays out for a few
years before expanding it to other industries?)
5. For those who say that SOP will create
some kind of check on management and the board in the same fashion as
independent auditor ratification votes, let's remind ourselves just how
routine and meaningless those auditor ratification votes have become. While
shareholder ratification of the appointment of independent auditors may be a
good governance practice, is it really one that has had a game-changing
effect on the auditing/accounting industry or the relationships of
independent auditors with their clients? If one of the goals is to change
the culture in c-suites and board rooms surrounding executive compensation,
I don't think an auditor ratification type of SOP vote is going to be the
catalyst.
6. I have many more thoughts about SOP, and
could go on at greater length about them. But, instead of doing so, I'll
end with these final thoughts. When contemplating SOP, I think we all need
to ask ourselves, "What are we trying to accomplish with this?" In my mind,
what we are trying to accomplish is to create a mechanism whereby a company
can extract intelligible information from its shareholders that will be
useful to investors, management and the board in improving the company's
compensation programs so that they directly or indirectly contribute to the
creation of sustained, long-term shareholder value (which I believe
necessitates a focus on doing what's good for business instead of an
obsession with stock price). Some feel that an advisory vote in one of the
forms already proposed would accomplish that. I don't share that view, but
I do think that something can be created (or may even already exist, but has
thus far been utilized in the wrong way) that will meet the needs of
investors, managements and boards alike, and I hope that the political storm
clouds will at some point part for long enough for there to be an
opportunity for us to create such a thing, which I think will be more worth
our while in the long run.
Douglas K. Chia
Senior Counsel & Assistant Corporate Secretary
Johnson & Johnson
New Brunswick, New Jersey
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