Schafer: Shareholder grumbling over TCF execs' pay is justified

  • Article by: LEE SCHAFER , Star Tribune
  • Updated: April 29, 2014 - 8:35 PM

Here’s the way it’s supposed to work — when shareholders in large numbers vote against the way you pay your executives, you change the way you pay your executives.

That clearly isn’t the TCF way.

After waning support from shareholders over the past few years on TCF Financial’s pay practices, the company’s independent board of directors did nothing of substance to restore investor confidence.

The result of this thumb in the eye was utterly predictable, as holders representing nearly 73 million shares voted against TCF’s executive compensation in the so-called “say on pay” advisory vote, or more than 54 percent of the stock that voted.

As is common when this vote goes against a company, the two big proxy advisory services firms, Glass, Lewis & Co. and Institutional Shareholder Services, both recommended that shareholders vote no. While both had serious complaints about the way TCF pays its executives, one could also detect frustration in their reports at how little seems to change.

“The continued lack of responsiveness calls into question the board’s commitment to addressing shareholders’ concerns,” ISS noted.

Shareholder grumbling about TCF’s executive pay goes back awhile. When shareholder advisory votes on compensation went into effect, the result for Wayzata-based TCF was support from 65 percent of shares in 2011, 76.5 percent in 2012, and then less than 62 percent at last year’s annual meeting.

A point to remember is that companies don’t lose these things when the support falls below 50 percent, they “lose” when the support falls below 70 or 75 percent. That’s about the threshold that signals poor corporate governance.

As these votes are not binding, there’s a temptation to see an embarrassing no vote like TCF’s as irrelevant to the real world of stock prices. That would be a mistake.

In the most recent report from Georgeson, a proxy solicitation firm, a look at 20 companies that last year lost these votes showed that they trailed their peers in total shareholder return over one-year, three-year and five-year periods.

That’s why companies generally try to win shareholder support, so much so that it’s exceedingly rare for a company to actually lose a vote.

So far this season, 83 percent of the Russell 3000 public companies received more than 90 percent support from their shareholders, according to the Semler Brossy Consulting Group. Just 1.3 percent of the companies got a result like TCF’s.

Even 62 percent in favor of the board’s pay practices should be a wake-up call that something has to be fixed. Last year, both TCF and Life Time Fitness, the fitness club operator, got that result. Only one of them actually did something about it.

Life Time’s directors instructed management to go talk to shareholders, and they had “meaningful discussions” with holders of about 52 percent of the company’s shares.

The compensation committee then adjusted some of the corporate performance targets used for compensation and this year disclosed more details about a 2012 stock grant. It adopted such provisions as a “double trigger” on an executive’s stock-based pay, meaning that if the company is ever acquired, the grants now immediately vest only if the new owner subsequently lets the executive go.

The compensation committee also rewrote its statement on how much it wants its CEO to make, compared with how much other companies pay. Its report once stated that CEO Bahram Akradi should be paid “at the highest levels of the highest-paid executives” among his peers, and now it just reads “appropriately rewarded, even when the target opportunity is greater than the opportunity of our peers’ CEOs.”

These changes were enough to persuade ISS to recommend “yes,” and last week about 80 percent of Life Time’s shares voted in favor of its pay proposal.

TCF didn’t do any of these things Life Time did, although that’s not to say it was completely uninterested in winning the vote. It wanted to win the argument that its practices were just fine as is.

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