A Say on Pay Holdout
Even with nearly 400 companies having voluntarily adopted Say on Pay in light of shareholder pressure following the financial crisis, there are still some companies that are holding out. One is Waddell & Reed Financial Advisors, which was successful in its bid to beat back a shareholder Say on Pay proposal by a vote of 43.68 million to 32 million at its annual meeting April 7. [Read Corporate Governance Network blog
and the actual SEC 8-K filing
.] CEO Henry J. Herrmann’s reasoning for including a letter
seeking votes against the proposal? Adoption of the proposal would put Waddell & Reed at a competitive disadvantage.
He writes: “…any such vote of disapproval creates the risk of unintended consequences and negative publicity for your company. Our peers who did not subject themselves to this kind of vote would not be exposed to this risk.”
“Adoption of Proposal 3 [an annual advisory vote on the compensation committee report and executive compensation policies and practices] could lead to the loss of executive talent by creating the impression among the company’s executive officers that their compensation opportunities could be limited or negatively affected by this practice.”
Suffice it to say, Waddell & Reed’s actions angered many shareholder groups who had seen great momentum in their favor following the mandatory Say on Pay votes for those financial firms accepting funds from the Troubled Asset Relief Program (TARP) in 2009.
The Conference Board Governance Center, in its recent publication The Shareholder Activism Report and Resource Portal
spells out the details of the “Shareholder Vote on Executive Compensation in TARP Companies.” It points out that since the adoption of the TARP act, more than 300 financial firms held Say on Pay votes during the 2009 proxy season.
Since this topic is still quite germane this proxy season, here is a compilation of articles, papers and blog posts on Say on Pay that I think are worth reading:
- Say on Pay with Teeth: Important New Provision in Senate Finance Reform Bill, Eric W. Hilfers, The Tally Sheet, Boardmember.com, April 8, 2010. www.boardmember.com/blogIndividual.aspx?blogid=474. Summary: Putting it all together, the Dodd bill may create a situation where companies will face much greater pressure to bow to ISS’s compensation policies, or else risk losing a say on pay vote (thanks to the new broker voting rules) and then risk losing their director elections thanks to majority voting. The more general point is that mandatory say on pay, standing alone, is not necessarily a game changer. The Dodd bill may, however, make say on pay something much more problematic, with its combination of majority voting for directors and broker voting rules.
- A Closer Look at Dodd Bill’s Governance Provisions, Stephen Davis and Jon Lukomnik, Compliance Week, April 6, 2010. www.complianceweek.com/article/5878/a-closer-look-at-dodd-bills-governance-provisions (subscription required). Summary: Shareholder advisory votes on the compensation committee report are already standard in many markets around the world. They have been adopted on a company-by-company basis here in the United States for several years and were required for the 400 or so corporations covered by the various federal financial sector emergency relief programs. Clearly investors are campaigning boardroom by boardroom to install say-on-pay.
- Boards’ Response to Shareholders’ Dissatisfaction: The Case of Shareholders’ Say on Pay in the UK, Walid M. Alissa, Smeal College of Business, The Pennsylvania State University, May 2009, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1412880. Summary: In the United Kingdom, a recently adopted regulation provides shareholders the opportunity to cast non-binding (advisory) votes on firms’ compensation reports during annual meetings. This study of a regulation in the UK that allows shareholders to cast non-binding votes on compensation reports examines how the regulation affected the behavior of shareholders and boards. The author finds evidence that shareholders use the vote to convey their dissatisfaction with excessive executive compensation practices and reduce the excessiveness of certain CEOs’ compensation or forcing them out of office.
- Giving Shareholders a Say on Pay: A Measure Leading to Better Governance, Yvan Allaire , Institute for Governance of Private and Public Organizations (IGOPP), Quebec, Canada, March 8, 2010. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1580071. Summary: Measures that would institute a Say on Pay will likely be adopted by U.S. politicians, who appear to regard them as a panacea cure against the compensation abuses that were seen in the financial sector, or failing that, as an astute political move that would appease popular anger by providing the impression of major changes. However, the results of empirical research regarding the efficiency of such initiatives are ambiguous. Say on Pay has made shareholders more sensitive to issues of executive compensation. It should have brought about more moderation and rigor in the setting of compensation. Yet, the implementation of consultative votes did not prevent the compensation of British senior executives from rising by more than 70 percent between the time it came into effect in 2002, and 2007.
Sen. Chris Dodd has added an amendment to the proposed financial regulatory reform bill that could be problematic for company boards seeking approval of Say on Play proposals. Meanwhile, at least one company has a compelling argument for not allowing Say on Pay.
Dodd’s amendment would deem all votes regarding executive compensation plans, policies and procedures to be non-routine. If approved, that would mean that under the change in the broker voting Rule 452 (which went into effect earlier this year) brokers holding “uninstructed” shares (mostly retail investors) could not vote those shares. Instead, each investor would have to. Under the revised Rule 452, brokers can only vote uninstructed shares if the matter is routine.
Eric W. Hilfers, who blogs The Tally Sheet for Boardmember.com and who is a partner and the head of the executive compensation practice at Cravath, Swaine & Moore LLP, wrote, “With the change in broker voting rules, however, it will be harder to obtain that majority support because the retail vote will essentially not exist (the SEC would like the outcome to be that retail investors spend the time to instruct their brokers, but many observers think this is unlikely.”