'Say-on-Pay' Movement Loses Steam
Tuesday, May 6, 2008
NEW YORK, May 5 -- The movement to give shareholders greater say on executive compensation marked a watershed Monday. At its annual shareholder meeting, Aflac, the large insurer, became the first major American company to give investors a vote on how senior managers are paid. Pay packages for the top five executives passed resoundingly.
But some corporate governance experts and activist shareholders said there might not be too many more moments like it. They said the "say-on-pay" campaign, which seemed to be catching fire as recently as six months ago, had lost some of its momentum.
More than halfway through the annual shareholder-meeting season, proposals aimed at giving stockholders an advisory vote on executive pay packages have failed to win widespread support. So far this year, just two such resolutions have garnered majority support, at Apple and at printer manufacturer Lexmark International. Neither has agreed to give shareholders a formal say.
To the surprise of advocates, these measures have received less support than they did last year at most financial companies, despite anger over handsome executive payouts made as share prices plunged. At Citigroup, Merrill Lynch, Morgan Stanley, Wachovia and U.S. Bancorp, support for such proposals declined this season.
"I thought we'd have a couple of more majority votes earlier on," said Richard Ferlauto, director of pension-investment policy at the American Federation of State, County and Municipal Employees, which is sponsoring many of the more than 90 say-on-pay proposals. "There hasn't been an across-the-board breakthrough yet."
The proposals generally call for an up-or-down vote on executive compensation packages and are non-binding. Last year, more investors voted for these measures than voted against them at eight companies. But so far, only three of those -- Verizon, Par Pharmaceuticals and Blockbuster -- have agreed to accept the outcome. Aflac decided to give shareholders the authority to approve pay before the measure was ever put to a vote.
The campaign is now in its third year. In 2006, seven proposals came to a vote, receiving average support of 40 percent. Last year, investors voted on 51 proposals, which drew an average of 43 percent support. The movement appeared to make headway during the public outrage over outsize executive pay, such as the $210 million golden parachute awarded to former Home Depot chief executive Robert L. Nardelli. Congress chimed in with legislation calling for a shareholder vote on pay. It passed in the House, but the Senate bill, proposed by Democratic presidential candidate Barack Obama (Ill.), has stalled.
So far this year, about 30 proposals have been voted on, and support has averaged only 42 percent, according to RiskMetrics Group, which tracks shareholder proposals.
Ferlauto and others pointed to several reasons for the leveling off of support. They said new e-proxy rules, which allow companies to send out proxy materials and collect shareholder votes online, have caused voter participation to fall. At some financial firms, the shareholder base has been diluted by sovereign wealth funds that have taken large stakes at the invitation of management.
Investor groups said they also did not count on aggressive campaigning against the measures by companies, which have appealed to shareholders in letters and phone conversations to reject them. Companies argued that the marketplace for executive talent, not shareholders, should determine how executives are paid and that shareholders have other ways of registering their dissatisfaction, including withholding votes from directors.
But some shareholder activists and corporate governance experts said the lukewarm support highlighted say-on-pay's shortcomings. Critics said a simple up-or-down vote makes it hard for corporate directors to understand what shareholders find objectionable in often complex compensation packages.
"I think it's a half step. It doesn't get us ultimately to where we need to be," said Charles Elson, director of the Center for Corporate Governance at the University of Delaware.