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12 Mar. 2010 | Comments (0)

Executive compensation continues to be a hot topic in the board room and among shareholders. In the beginning of the 2010 proxy season RiskMetrics reports that four of the Top 10 governance shareholder proposals are compensation-related with advisory vote on compensation, or Say on Pay, ranked first with 46 proposals on the ballot. The other three compensation proposals include having a retention period for stock awards (13 proposals), establishing anti-gross-ups policy (six proposals) and limiting the number of CEOs on compensation committees (three proposals). [By the way No. 2 on RiskMetrics list is shareholders’ right to call special meetings with 42 proposals.] While Say on Pay has been considered by the SEC and included in several financial regulatory reform bills on Capitol Hill, momentum for advisory votes on compensation has picked up steam in the past year following the requirement for TARP (Troubled Asset Relief Program) recipients to hold such a vote. As of March 2, a coalition of investors reports that more than 70 Say on Pay shareholder proposals have been filed for this proxy season. And more than 50 public companies have voluntarily adopted advisory votes for compensation. “Pay practices are being guided differently among companies and across industries,” Valerie Ho,  of the compensation team in the U.S. Research Group at RiskMetrics, said during a RiskMetrics Webcast March 9. “Last year, there was 86 percent support for this [Say on Pay].” She expects about 300 Say on Pay proposals this proxy season. A coalition of institutional investors reported last week that more than 50 companies have voluntarily adopted such a practice. [Read press release] While that may seem like a drop in the bucket considering how many public companies there are, consider that in 2008 that figure was only six. In 2009, it grew to 19. The coalition, which is made up of public pension funds, labor funds, asset managers and individual investors such as AFSCME Employees Pension Plan, Walden Asset Management, Interfaith Center on Corporate Responsibility, pointed out in its announcement that the 50 company milestone was reached in the midst of Wall Street’s $20 billion bonus payments. The number of Say on Pay shareholder proposals is an amazing figure when you consider that during the whole 2009 proxy season there were 255 shareholder Say on Pay proposals that received more than 59 percent affirmative votes, according to RiskMetrics. Of those, 160 received 90 to 100 percent approvals. “It’s been an evolutionary process for companies to embrace a relatively new idea like Say on Pay,” Timothy Smith, senior vice president at Walden Asset Management, said. “But now we are reaching the tipping point.” In a Feb. 9 post [Read here, Membership required] to the Wall Street Journal’s Deal Journal blog, Samuel Wolff, a partner at Akin Gump Strauss Hauer & Feld, told blogger Stephen Grocer he expects Say on Pay to be on the minds of many boards as they await Congress’ decision on financial regulatory reform. “A handful of companies have followed an alternative approach and provided biennial or triennial say-on-pay,” Wolff said. “I don’t think that’s the way the law is heading and generally, I think companies are waiting to see what’s going to happen with Say-on-Pay in Congress. “Right now it unclear how it’s going to come out on the Hill; but if there is a financial reform law it would not be surprising at all if it includes Say-on-Pay.” He goes on to say that boards should expect some pressure from shareholders on this issue. According to Ho, there are already some shareholder proposals related to the new SEC proxy disclosures, which went into effect Feb. 28. Some relate to the relationship of a company’s compensation policies and practices to risk management, known as “pay riskiness,” and stock and option awards to company executives and directors. The proxy disclosure enhancements, which went into effect Feb. 28, require disclosures in the proxy and financial statements on: •    The relationship of a company’s compensation policies and practices to risk management. •    The background and qualifications of directors and nominees. •    Legal actions involving a company’s executive officers, directors and nominees. •    The consideration of diversity in the process by which candidates for director are considered for nomination. •    Board leadership structure and the board’s role in risk oversight. •    Stock and option awards to company executives and directors. •    Potential conflicts of interests of compensation consultants as well as the fees paid to consultants and their affiliates. The SEC’s proxy disclosure enhancements would require a narrative disclosure about a company’s compensation policies and practices for all employees if the compensation policies and practices create risks that are reasonably likely to have a material adverse effect on the company. In order to better provide boards, management and shareholders with more intelligence for the proxy season, The Conference Board Governance Center is publishing The Shareholder Activism Report, a 400-plus page directory of activist investors, profiles of the top 50 activists, proxy contest facts, voting policies for shareholder groups and sample documents from activist campaigns. As part of the project, the Governance Center is also setting up a Web portal that will provide up-to-the minute information. (To receive information about this report and Web portal, e-mail me at gary.larkin@tcb.org)
  • About the Author:Gary Larkin

    Gary Larkin

    Gary Larkin is a research associate in the corporate leadership department at The Conference Board in New York. His research focuses on corporate governance, including succession planning, board compo…

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