Comments on SOP Advice: Rolling In

Sometimes the comments are as informative as the original post. The United States Proxy Exchange asked for comments on their/our draft say-on-pay voting guidelines aimed at retail investors.

So far, that plea for help has attracted comments from growing list leading thinkers in the investment community. Thanks to each of you for taking the time to offer your advice. I’ll post some juicy tidbits to get readers thinking that no one should miss out on this opportunity to be heard. I encourage each of you to read the paper, the comments and to submit your own thoughts on the topic.

Please keep in mind, we are looking for guidelines that can help retail shareowners make intelligent decisions in a reasonable amount of time, such at 10 to 20 minutes. Second, while many of us agree with the principle of pay for performance (some don’t), we are also concerned that CEO pay keeps ratcheting up nearly every year because many boards think their CEO is above average and should be paid accordingly. If most boards think their CEO should be paid more than average, the average rises each year. We will read every comment and consider how we might use it to create better guidelines.

Affiliations for commentators below are provided for identification purposes only.  As I sometimes say, “The opinions I express are not necessarily those of or even my own… I’m simply attempting to provoke thoughtful dialogue.”

John Harrington of Harrington Investments “… institutional investors are their beneficiaries’ worst enemy and if fiduciary duty, including ERISA, were truly enforced, lots of trustees, directors, administrators and managers would be in jail.”

Alexandra R. Lajoux of NACD “NACD appreciates the symbolic value of say on pay. However, we believe that it is a poor substitute for dialogue. It is much more valuable to have shareholder communication well in advance of plans or votes on plans…”

Jesse Fried of Harvard Law “…I am not sure that benchmarking CEO pay to average worker pay in the economy is necessarily a good idea — it just does not have the 2 problems associated with benchmarking CEO pay to average worker pay in the firm, over which the CEO has control…”

Anonymous, (insiders with the most suggestions) “…GAO found that 40 executives for 10 companies received approximately $350 million in pay and other compensation in the years leading up to the termination of their companies’ underfunded pension plans…” “…You should go directly after the institutions if you think they aren’t doing the job but the adviser issue is a red herring in my view…”

Stephen Davis of Yale “…Of course most retail investors may only devote a couple of minutes to the decision, so your benchmarks might not even be quick enough…”

Rick Hausman of Clean Yield “…Personally, I like the ratchet-down proposal–vote no on compensation unless it is below, say 90%, of last year’s comp. This compensates for the Lake Woebegone effect…”

Doug Chia of Johnson & Johnson “…To reduce the entire Say On Pay decision to two simplistic ratios without regard to anything else seems to go against the principles of robust disclosure and meaningful analysis. Is this really what you are striving for?…”

John Richardson of Global Investment Watch “…As a simple exercise, look at your next proxy statement and count the number of pages in the document addressing executive pay issues. I have found that this subject consumes somewhere between 70% and 80% of most proxy statements. Companies bear the responsibility for obfuscating any reasoned assessment of pay by shareholders…”

Nell Minow corpgov’s most famous Movie Mom “…I don’t support ratio tests. I support guidelines that look at the return on investment of every dollar spent on pay, clawbacks, the clarity and difficulty of targets, the appropriateness of peer groups used for comparison, and the mix of long- and short-term compensation. I do support tying votes on comp committee members to no votes on pay…”

Heather Booth, the lifetime social activist “…the growing inequality in this country, in itself, is a cause of instability, less democracy (because voices with such inequitable financial backing speak so much louder than others) and hardship for most people–and a fraying of the social fabric..”

Chuck O’Neil, voting reform activist, “…Birkshire Hathaway didn’t create any real wealth. They just purchased other companies that had the potential to do well. Are we really better off because one person was skilled at buying and selling companies. One thing they did was to close down plants that were only marginally profitable. People were put out of work for the benefit of a few rich shareholders. I don’t think large salaries are justified for those who destroy the lives of workers. Perhaps they do what was necessary but putting people out of work doesn’t deserve huge salaries…”

Mark Rome of the Business Integrity Alliance “…At some point, institutional investors need to step up and ask, “is your performance legal, ethical and sustainable,” and hold the C-Suite and Board accountable and culpable; e.g., BP, Massey Energy, Johnson & Johnson, AIG, Lehman Brothers, Goldman Sachs, etc.”

Leslie Levy of the Institute for Research on Boards of Directors  “…since the SEC ruled that all compensation must be reducible to dollar terms, we have lost the ability to provide non-dollar incentives that are often more powerful than dollar ones. Think about how far you get with your kids when you use “bribes” to get them to do what you want. Research has demonstrated over and over that monetary compensation is weak, compared to other forms, except to a certain sector of the population. So, by emphasizing or restricting ourselves to monetary compensation, we get CEOs who adore money. I don’t think it’s a great idea for a bunch of Gordon Geckos to be running our corporations…”

Andrew Shapiro of Lawndale Capital Management “…in a company that lacks pay equity and a high multiple (lower cost of capital) we seriously ask the question why a company is public and should a change of control and/or take private transaction be the optimal sought after outcome. Presumably a private equity or managerial owner would more appropriately balance pay equity and the company’s overall performance than a group of comp committee members delegate powers from a highly decentralized powerless public shareholder base…”

Sarah Wilson of Manifest proxy advisory “…more shareholders need to make the connection between governance decisions and investment decisions and not depend on auto-pilot voting as a substitute for thinking…”

Ron Freund of the Social Equity Group “I would echo those who have pointed out the potential futility of advisory votes. I think the energy should also be spent on placing binding by-law resolutions on the proxy ballots. If this cannot be done with this type of resolution, then possible SEC or legislative remedies should be pursued (probably after the 2012 election if the House reverts to sanity.)”

Adam Foulke of Motley Rice …”I’m not a proponent of using a fixed ratio to determine a vote, but strongly agree that pay should correlate with performance. That’s going to be different strokes for different folks, so shareholders are going to have to flex analytical muscles. If it’s deemed that executive compensation is excessive, I absolutely agree that compensation committee directors should be voted against. That’s good old fashioned accountability…”

Please share your thoughts as well.

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