Shareholders Seek More Say on Pay

By Heather Landy
Special to The Washington Post
Sunday, December 21, 2008

So you're a shareholder in a company you believe pays its top executives far too much. What can you do about it?

Well, not much -- for now.

But the deepening financial crisis -- and the growing outrage over executive pay packages and the arrival of a new White House administration -- are breathing new life into the "say on pay" movement, which aims to give shareholders a stronger voice on corporate compensation.

Companies adopting say-on-pay policies agree to hold annual shareholder votes on executive compensation packages. The votes would not be enforceable -- boards would still have the ultimate responsibility for setting pay -- but advocates of the policy say it gives shareholders an important venue for voicing their opinions.

Say on pay has been gathering momentum slowly. In the 2008 proxy season, shareholders filed more than 75 say-on-pay resolutions, averaging 42 percent support and winning majority votes at 10 companies, according to RiskMetrics, which researches corporate governance trends. That was up from a 41.7 percent average support level the previous year, when say-on-pay resolutions passed at eight companies.

Activist funds suspect they'll find broader support going into the 2009 proxy season, when say-on-pay resolutions are expected to be filed with more companies, and in some cases re-filed with companies where the measures failed in previous years.

Skeptics question the effectiveness of say on pay when it comes to restraining runaway compensation. Like many of the matters shareholders take up at annual meetings, say-on-pay votes are nonbinding, meaning boards can simply take shareholders' sentiments under advisement without carrying out reforms.

And opponents of say on pay argue that it undermines the authority of boards and could steer talented executives into private companies where their compensation would be subject to less scrutiny.

But now that the deepening financial crisis has turned executive pay into a potent rallying cry, corporate governance experts are predicting a growth of support for say-on-pay initiatives.

"Clearly there's something crazy going on with executive compensation. Is it going to be fixed by say on pay? My sense is that just the mere discussion of it has already had some impact," said Jay Lorsch, a professor at Harvard Business School and chairman of its Global Corporate Governance Initiative. "People in boardrooms are realizing that the growing criticism of the business community is a thing to be concerned about, and that to get back into the public's good graces, they've got to do something."

The pressure to reform pay also is playing out on Capitol Hill, where debate over the government's role in the issue has been a key part of the discussion over the bailout of the financial industry and the federal loans sought by automakers. The public furor over pay practices could clear the way for legislation requiring say-on-pay votes at public companies, governance experts said.

It's a remarkable turn of events for say-on-pay proponents.

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