Several interesting articles in the current issue of Corporate Board Member. Nice to see coverage there of the Proxy Disclosure blog by Mark Borges, part of the CompensationStandards.com group. Borges spend four years as special counsel at the SEC’s office of rulemaking before joining the Mercer consulting firm. Regarding the new pay disclosure rules,
In the first year especially, it benefits you to be a little bit more explicit. Presumably, if you establish a strong baseline it will keep things in check.
In an article on Best- and Worst-Paid Boards Among the S&P 500, interesting to see Republic Services paid the highest and total shareowner return was 17% in 2009, whereas Fastenal paid the least and shareowner return was 22%. Thankfully, most of the five high paid runner up boards did better for their shareowners than did the five runner up low paid boards.
That article was followed by one by Bruce Ellig who argues that most board members aren’t paid enough. At least part of the basis of his argument is that directors should be paid something close to the same rate per day worked as the CEO. Ellig also argues agains paying board members in stock options, in part because the
terms are either too short for a meaningful measurement or longer than the company might wan to tacitly commit to a director’s continuing on the board.
One answer to a series of questions caught my eye. Who should approve director pay?
Shareholders—but they don’t. Instead, boards typically approve their own compensation, possibly after an analysis by an outside consultant that the board itself paid for. Doesn’t this seem strange? The CEO doesn’t approve his pay package, nor does anyone else in the company. Why should the board members?
The situation wasn’t always like this. Until relatively recently, company insiders were the big majority on boards, and they didn’t collect retainers. But they did vote on how much to pay the few outsiders among them. Reforms have reversed this to where unpaid insiders are few and the paid outsiders set their own pay.
They shouldn’t, of course. Shareholders should be asked to approve the package of director retainers, annual incentives, and stock awards, along with the formulas used to calculate them. This kind of transparency, the same that’s demanded by advocates of a say on pay for executive comp, should include a narrative in the proxy describing how the board put together its compensation figures.
Giving shareowners a say over the pay or directors makes much more sense than giving shareowners a say over CEO pay. Directors in a sense report to shareowners, CEOs do not.
Also interesting to me is the article How’s Your Company Really Doing? I’ve been a long-time proponent of measures like economic value added, EVA. Now “EVA Momentum” addresses some of the problems inherent in EVA like ratios that can be gamed and turnaround situations where companies are or were losing money. Of course past momentum doesn’t necessarily reflect what investors expect about performance going forward but it looks like a useful measure for both board and investors to consider.
Julie Connelly argues Proxy Access: Worth Little More Than a Hill of Beans. I wouldn’t go that far buy it is clear that proxy solicitors, attorneys, public-relations counsel and even pay for director candidates may cost a whole lot more than writing, printing and mailing your own proxies. Maybe so, but I think shareowners will actually be less confused by proxies that list more than one candidate for some positions than they are when getting two proxies for the same company. I think that may up the retail vote. Connelly notes,
Nickolay M. Gantchev, an assistant professor at the Kenan-Flagler Business School of the University of North Carolina at Chapel Hill, studied 1,492 campaigns launched by 200 hedge funds between 2000 and 2007. He discovered that fewer than 5% turned into actual proxy contests. Either the dissidents went away or the warring parties reached some kind of agreement.
Will proxy access encourage a significant increase in worthy board candidates? It could, because some portion of their expenses will be defrayed by the company. But board-nominated directors will still have the edge. The board’s real challenge is to put together the best team it can. And to extol the value of that team in, yes, the proxy.
Finally, one tidbit in a side-bar surprised me. In Mind Your Manners in China’s Boardrooms, Craig Mellow notes it is sometimes tricky for foreigners serving on Chinese boards to avoid sounding bossy. On the other hand, he quotes something refreshing from Susan Wang, who sits on the audit committee of Suntech Power,
They may not like pushy foreigners, but they’re freewheeling in offering dissent. “They’ll actually commit to paper a remark like ‘I totally disagree with this strategy,’” says Wang. “Directors are far more cautious on U.S. boards.”
That’s behavior I’d like to see more of here in the US.