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Corporate governance
Companies owners are slowly beginning to hold bosses to account, starting with
closer scrutiny of their pay
THE nuns who are challenging Goldman Sachs s claim to be doing God s work , by
bringing a shareholder resolution questioning the bank s executive-pay
policies, are but the tip of an iceberg. Thanks to a say on pay clause in
last year s Dodd-Frank financial-reform law, the pay of every senior executive
of an American public company is now subject to a shareholder vote. So far in
this spring s corporate annual-meeting season, the management has lost such
votes at four firms, the most prominent being Hewlett-Packard, a computing
giant. Given the current mood of banker-bashing, it will be no surprise if
there are similar results at Goldman Sachs and other financial institutions:
all eyes will be on the first of the big banks to hold its vote, Citigroup, on
April 21st.
A new study by the Corporate Library, a research body, finds plenty for
shareholders to vote against. It looks at those big companies that had, by
March 20th, reported their bosses pay about a fifth of the S&P 500. Almost all
reward them for long-term performance without considering whether similar firms
are doing better. More than 75% of chief executives still have golden
parachute severance deals worth at least twice their annual pay.
In the past year things have got worse in three main respects, argues the
Corporate Library. The difference between the chief executive s pay and that of
other executives has grown. The dilution of other shareholders by awards of
shares to executives has increased. And retirement benefits have become even
more excessive.
It remains unclear how managers will respond to losing a vote on executive pay,
as these votes are not binding. Occidental Petroleum, one of three firms that
were defeated in the far smaller number of say on pay votes held last year,
is rumoured to be working on big changes in its pay policies, following
criticism of the bounty enjoyed by its chief executive, Ray Irani.
However, says Robert McCormick of Glass Lewis, a firm that advises shareholders
on how to vote, some managers are already trying to avert defeat by giving in
to shareholder pressure before the issue goes to a vote. Disney, for example,
issued a new proxy form (the document describing what shareholders will vote
on) that cut the size of its bosses golden parachutes, after investors
grumbles.
Experience from Britain, which introduced say-on-pay in 2002, suggests that
American shareholders can expect more improvements in the responsiveness of
executives. Although few pay packages have been voted down by shareholders,
that is because it is now routine for British executives to consult investors
on pay policy long before it goes to a vote. Colin Melvin of Hermes Equity
Ownership Services, which advises institutional investors on such matters, says
the overall result has been much better communication between managers and
shareholders. In contrast, he says, American bosses still seem disinclined to
have such a dialogue.
That is certainly true of this year s other hot topic for American shareholder
voting: resolutions pressing companies to disclose their political donations.
Such resolutions have proliferated since a Supreme Court decision last year to
overturn restrictions on corporate political spending. Citigroup s bosses, for
example, will oppose a motion from some shareholders calling on them to
disclose the bank s donations.
Although the signs of progress are clearer in Britain, institutional
shareholders there are coming under pressure to do more to hold company bosses
to account. Last month FairPensions, a lobby group, issued a report calling for
a tightening of the fiduciary-responsibility law for pension funds, insurers
and other big investors who manage people s money. The group wants to force
these to play a fuller role in corporate governance and to disclose how they
vote their shares. A similar change is said to be under discussion in America,
including within the Securities and Exchange Commission.
Further reforms would be welcomed by activist investors such as Nelson Peltz,
who has a long record of battling entrenched managers at firms as varied as
Heinz and Tiffany. Speaking to America s Council of Institutional Investors
this week, Mr Peltz said that say-on-pay and other recent improvements to
corporate governance will help shareholders like him take on previously
untouchable corporate giants. Martin Lipton, a lawyer who has often defended
managers against shareholder attacks, worries that activists like Mr Peltz
would be able to use the new rules to embarrass big institutional investors
into backing their campaigns. Would that be such a bad thing?