Alarm Bells at Waddell & Reed

Shareowners of Waddell & Reed Financial Inc. will soon receive a troubling letter from CEO Henry Herrmann in advance of the company’s April 7 annual meeting.  In a special solicitation filed alongside the company’s proxy statement, Mr. Herrmann claims in bold print that giving shareowners an advisory vote on his compensation and that of other executives could put the company “at a serious competitive disadvantage and could erode the value of your investment.”  Mr. Herrmann further exclaims that an advisory vote could “reduce executive compensation below competitive levels,” “lead to the loss of executive talent” and that a vote of disapproval on the company’s compensation policies and practices “creates the risk of unintended consequences and negative publicity.” He also sent an alarm to his own employees.

It is hard to reconcile the alarmist picture painted by Mr. Herrmann with reality.  To date, over 60 companies have pledged to implement say on pay including financial leaders such as Goldman Sachs, JPMorgan Chase, Capital One, Ameriprise Financial, Morgan Stanley, Wells Fargo, State Street, Bank of New York Mellon and hundreds of other financial institutions that received TARP funds, many of which voluntarily agreed to continue the advisory vote after their TARP obligations ended.  Furthermore, in 2009, Waddell & Reed announced that 50.6% of its very own shareowners supported an advisory vote on executive compensation.  The company later reported that just under 50% of shareowners supported the reform after the company took the extraordinary step of asking the Delaware Chancery court to re-open the polls and count missed votes it identified as being cast against the reform.

Dawn Wolfe, Associate Director of ESG Research at Boston Common Asset Management, the firm leading the advisory vote initiative at Waddell & Reed for the past three years issued the following statement:

Mr. Herrmann’s letter contradicts the positive responses from companies that have implemented an advisory vote. In addition to the numerous companies that have implemented say on pay, rejecting the notion that it will erode shareholder value, institutional investors actively involved in promoting good governance publicly support this reform, including the State of Connecticut, CalSTRS, CalPERS, TIAA-CREF, and the Council of Institutional Investors. Waddell & Reed is one of the outliers in its aggressive campaign against this important reform, and that concerns us as shareowners.

California State Teachers Retirement System (CalSTRS) and Calvert Asset Management are co-proponents of the advisory vote proposal at Waddell & Reed Financial, Inc. this year. Anne Sheehan, CalSTRS director of corporate governance, said:

CalSTRS has a long history of promoting responsible compensation policies that link pay to performance and align shareholder and management interests and that is one reason we support an advisory vote on pay. We view say on pay as a way to help improve long-term returns and as shareowners of Waddell & Reed Financial we are asking the company to adopt this important reform.

Waddell & Reed Financial’s 2010 Annual Meeting of Stockholders will take place at 10:00 a.m. CDT on Wednesday, April 7, 2010 in Overland Park, Kansas. “Financial services companies such as JPMorgan Chase and American Express have voluntarily adopted say on pay.  Waddell & Reed’s position on this reform is clearly out of line with its peers and general public opinion on executive pay,” said Aditi Mohapatra, Sustainability Analyst at Calvert Asset Management.

The Waddell & Reed letter goes on to argue the proposal would not “result in meaningful dialogue with stockholders.”  Experience simply proves this false.  “Scores of companies that have implemented an advisory vote on executive compensation are demonstrating that it can and does stimulate dialogue, especially when the company reaches out and seeks investor advice and input,” stated Tim Smith, Senior Vice President of the Environment, Social and Governance Group at Walden Asset Management and a primary organizer of the say on pay campaign with the American Federation of State, County, and Municipal Employees (AFSCME) union. See their January letter to 17 financial institutions.

“Waddell & Reed is attempting to manipulate its shareholders through scare tactics,” said AFSCME President Gerald W. McEntee. “The time has come to implement an advisory vote on Say on Pay. Sixty companies have made the commitment already. It’s time that Waddell & Reed did the same.”

Despite growing investor support for this reform, Mr. Herrmann’s alarmist letter is just the latest in a string of actions by Waddell & Reed Financial to undermine say on pay.

In February, Boston Common, CalSTRS, and Calvert submitted a letter to the SEC arguing that the company’s proposed statement formally urging a vote against say on pay in the proxy was materially false and misled shareowners in stating that none of the company’s peers had adopted a similar reform.  Waddell & Reed later altered its statement.

At the 2009 annual stockholder meeting, Waddell & Reed announced that the say on pay proposal received over 50 percent support from investors.  Over 3 months later, the company filed its 10-Q with the SEC, stating that the proposal did not receive majority support.  Investors were left in the dark about why the result changed between the annual meeting and the quarterly report.  During that period, Waddell & Reed Financial argued to the Delaware court that it should be allowed to retroactively count approximately 3.2 million additional votes, more than 2 months after the close of the polls.

Henry Hermann claims that “the company supports the goal” of letting stockholders provide feedback on compensation practices by directly contacting the Board or Compensation Committee.  Shareowners tried that method as well, only to receive correspondence from the company’s legal department on March 3, 2009 that “management does not desire, nor see any need for, further discussion.”  It appears painfully obvious that Waddell & Reed has no interest in communicating with shareholders on executive compensation in any form.

Coming on the heals of Apache’s SLAPP suit against John Chevedden, we’re beginning to see something rear guard action by desperate CEOs afraid of working in partnership with owners.  It took until 1987 for shareowners to finally win their first resolution. By 2007 shareowners were winning 24% of those taken to a vote. That has since gone up to 30% in 2008 and 37% in 2009. Last year, “say on pay” proposals averaged 46% support. The tide is turning toward more democratic forms of corporate governance. What could be more reasonable than giving shareowners some say, in the form of an advisory vote, on pay?

Mr. Herrmann earned almost $10 million dollars last year, according to Forbes. I notice he didn’t include that information in his letters to shareowners or employees. However, a recent issue of Proxy Governance Spotlight said: “Company has reasonable pay.” Additionally, The Ontario Teachers’ Pension Plan announced it won’t support shareholder proposals for “say on pay” advisory votes at companies, arguing that “say on pay” is new to many companies: “We do not wish to unfairly burden companies that are making efforts to involve shareholders in compensation matters by voting against management advisory compensation proposals.” (RI round up – 3/26/10) Although reasonable people can differ, Waddell and Reed’s opposition still appears a little over the top.

For further background on say on pay, see Say on Pay Facts and Background (compiled by the AFSCME Office of Corporate Governance and Investment Policy),  Say on Pay: Where Are We Heading in North America? (from 3XCD) and  The Herrman doth protest too much, methinks (The Corporate Library). Thanks also to the Shareholder Forum.

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