A vote this week by the Securities and Exchange Commission finally acknowledged that shareholders are entitled, at least once every three years, to cast an advisory vote on a company’s pay policies.
President Obama had lots of company as he signed the Dodd-Frank Wall Street Reform and Consumer Protection Act last July. Two months later the U.S. Chamber of Commerce sued to overturn a provision allowing dissident directors to be listed on proxies.
Finally, shareholders get a more meaningful say on executive pay.
They can't vote a pay package down, and they can't alter its components. But a vote this week by the Securities and Exchange Commission finally acknowledged that shareholders are entitled, at least once every three years, to cast an advisory vote on a company's pay policies.
It may not sound like much of a victory, but progress in matters of shareholder rights is best measured against the size and strength of the opponent. And this win for shareholders comes after nearly a decade of pleading, cajoling and fierce lobbying with and against Corporate America.
The prospect of letting shareholders weigh in on corporate pay policies has always rattled the occupants of the C-suite, who've typically responded to shareholder concerns about compensation practices with a tone of paternalistic disregard. Matters this weighty, they say, should be left to directors who are much more familiar with the topic. And, after all, don't we tell you every year how much we make?
True, we know much more today about the hows and whys of a company's executive pay practices than we ever have. In 2000, Best Buy's compensation section filled eight pages of its annual proxy. In 2010, it consumed almost 40 pages, including a wondrous array of charts, graphs and explanations of everything from compensation philosophy to incentive performance yardsticks.
This model of clear writing and disclosure -- no other financial system in the world embraces it like we do, by the way -- emerged over the years, usually over the objection of companies and at the express behest of regulators, who were often goaded by activist shareholder groups, who were in turn responding to yet another outrage. Think fraudulent Enron accounting, backdated stock options, or compensation programs that rewarded the inordinate risk-taking that led to the collapse and bailout of the U.S. financial system.
It's no surprise that companies did whatever they could to kill efforts that would allow shareholder votes on pay practices. And if a resolute investor actually succeeded in bringing a measure to a vote, a company could ignore the outcome. That's what Supervalu did in 2009, for example, after shareholders adopted a resolution requesting that the company give them the right to a non-binding vote on executive pay. The proposal, the company said, was "unnecessary and would be harmful to Supervalu and our stockholders."
A year later, Supervalu itself brought the measure to shareholders for a vote. The company's decision, which it characterized as "an opportunity to advise the Board ..." had less to do with a change of heart than acceptance of political reality. The Dodd-Frank Act, a month from being signed into law by President Obama, included say-on-pay rights for shareholders.
While say-on-pay has gotten the most attention, it may not end up being the most meaningful shareholder right to emerge from Dodd-Frank. Proxy access rules adopted by the SEC in August would allow activist shareholders to use the company proxy to submit the names of rival nominees for the board. Currently, any shareholders who want to challenge a company's slate of directors must print and distribute their own proxy material to shareholders. The Corporate Library, a shareholder rights group, estimates that the cost of such a campaign against a large company can run as high as $15 million.
"That rule has teeth and is potentially more significant," said Steve Quinlivan, a Minneapolis attorney who specializes in corporate governance issues. "It could make it much easier for a shareholder to put someone on your board, and that could be very disruptive."
Shortly after the SEC passed the measure, the U.S. Chamber of Commerce and other groups sued to overturn it. The SEC agreed not to implement the new rules until the lawsuit is resolved.
Tuesday's vote by the Securities and Exchange Commission approving say-on-pay may have been a long time coming, but for a company's owners -- its shareholders -- it was long overdue.
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