G-20 Summit in Pittsburgh
, there is one issue gaining traction as companies and governments deal with the fallout from the financial crisis: executive compensation.
In the past week alone, U.S. Federal Reserve officials told several news outlets it plans to start requiring the 5,000 bank holding companies and financial institutions it regulates to submit their compensation policies for approval in order to rein in risk-taking. While the plan is still weeks away from being formally submitted to the Federal Reserve Board for its approval, the central bank’s seems determined to respond to global pressure and take action at U.S. banks.
The G-20 Summit in Pittsburgh on September 24 and 25, following up on London and Washington summits over the past year, will focus on executive compensation at banks as well. In a communiqué
following the London summit in April, summit members agreed to endorse “compensation principles for significant financial institutions that ensure compensation structures are consistent with firms’ long-term goals and prudent risk-taking.”
The Conference Board Task Force on Executive Compensation
[caption id="attachment_58" align="alignright" width="75" caption="Executive Compensation Task Force Report"]
On Monday, The Conference Board
released the long-awaited final report
of its Task Force on Executive Compensation. The task force, which was convened in March, is a coalition of high-level business representatives and was co-chaired by Robert E. Denham, a partner at Munger, Tolles & Olson LLP Partner, and Rajiv L. Gupta, former CEO and chairman of the board of Rohm and Haas Co. The coalition issued five guiding principles
it believes corporate institutions need to abide by to restore credibility and trust in pay practices.
“Real – and perceived – abuses in executive compensation have contributed to this loss of trust,” Denham and Gupta said. “And the Task Force report provides a practical set of guidelines that, if appropriately implemented, can make significant progress in restoring credibility in our corporations.” (See CNBC Sept. 21 interview here
The Guiding Principles recommend public companies should:
SEC Advisory Committee
- Establish a clear link between pay, strategy and performance;
- Provide compensation that is fair, affordable and clearly aligned with actual performance;
- Eliminate controversial compensation practices that conflict with the notions of fairness and pay for performance – such as excessive golden parachutes, overly generous severance arrangements, gross-ups of parachute payments or perquisites, and golden coffins – unless specific justification exists;
- Demonstrate credible board oversight of executive compensation; and
- Foster transparency with respect to compensation practices and appropriate dialogue between boards and shareholders.
The SEC and investor groups are working to create a better relationship between shareholders and public companies regarding executive compensation. In addition to a plethora of proposed rules regarding such areas as “say on pay,” shareholder proxy access and enhanced risk disclosure, the market regulator has created an Investor Advisory Committee
(IAC) to address such issues as investor education, investor protection, shareholder voting and corporate governance.
Stephen Davis, executive director of the Millstein Center for Corporate Governance at Yale, is the chair of the Investor as Shareholder Subcommittee of the new IAC. He believes executive compensation is a “central pillar of corporate governance because it is very often the case that investors get what they pay for.” Before heading out to a conference in Mexico City Monday, Davis told me investors have a better chance of gaining value on their shares if executive pay is aligned with real long-term performance.
“On the other hand, if a board steers investor capital toward pay for failure, or excessive risk taking, then shareowners are at risk of losing — and, by the way, so are stakeholders such as employees and communities, and sometimes the nation as a whole, as we’ve seen in the financial crisis,” he said. As for the subcommittee’s progress, Davis hopes to better define the agenda at an Oct. 5 meeting. He expects executive compensation to be a big part of the subcommittee’s focus.
KPMG ACI Webcast
The topic du jour continued to be executive compensation as KPMG’s Audit Committee Institute
and the National Association of Corporate Directors
held its Quarterly Audit Committee Webcast Monday morning. When discussing governance reform proposals, Ann Yerger, executive director of the Council of Institutional Investors,
and Ken Daly, NACD president and CEO, chimed in on the need for some executive pay reform.
“Regulatory reform alone isn’t sufficient,” Yerger told the Webcast audience of 2,300. “Many corporate governance failures contributed to the [financial crisis] results we saw. … The U.S, has fallen short when it comes to corporate governance issues.” The CII believes there are four actions that should be taken: establish majority voting for directors; create true shareholder proxy access; institute executive pay reforms, including independent compensation consultants; and mandate independent board chairs.
Of the seven pieces of legislation being considered by Congress, Daly expects the so-called Sen. Charles Schumer “Shareholder Bill of Rights”
and Rep. Barney Frank’s “Compensation Fairness Act”
will get the most traction. He expects Frank’s bill, which was approved by the House in late July, to be acted on in the Senate by the end of next month or November. He thinks the Schumer bill will see some action in the first or second quarter of 2010.
Worth Reading ...
Here are some recent articles on the subject of executive compensation:
HBS Working Knowledge Excessive Executive Pay: What's the Solution?
Audit Committee Compensation and the Demand for Monitoring of the Financial Reporting Process,
(Paper by Ellen Engel,
University of Chicago Booth School of Business; Rachel M. Hayes,
University of Utah - David Eccles School of Business; Xue Wang,
Emory University - Goizueta Business School).
Whether it’s the offices of the Federal Reserve or the SEC or even at this week’s