The Media is No Friend of Corporate Directors, writes T.K. Kerstetter. That’s right, and it is time boards took action to avoid giving shareowners good reason to vote against directors or the pay packages they authorize. Kerstetter is upset because after talking to the press about the appointment of former Governor and one-time Nashville mayor Phil Bredesen to a directorship at Vanguard, they only focused on his pay.
So after finishing the call and picking up the paper the next morning you can imagine my surprise when the top headline of the business section read “Vanguard To Pay Bredesen $270,000” Not “Bredesen joins the Vanguard Board” or “Vanguard lands Top Director Prospect.” I understand that in these “Occupy Whatever” times, this looks like a ton of money or a possibly a political favor, but the tone is the typical reflection today of what the media thinks about board members and their contribution to companies: Not Much!
I’m sorry but I can’t share Kerstetter’s anger and the press; mine too is focused on directors. Yes, $270,000 is a lot for a part-time job. In these days of “Occupy Whatever,” high unemployment and people loosing their homes it is not surprising the focus is on those who enable what many would consider outrageous pay, not on “their contributions to companies.” Vanguard is largely an indexed fund. What tough decisions will Bredesen be making for is $270,000 a year? Vanguard isn’t exactly known for its activism in corporate governance, so I doubt we can count on Bredesen for reigning in pay. See Vanguard’s activism rating on ProxyDemocracy or Jackie Cook’s analysis of pay enablement at FundVotes.com.
When average Americans read “the golden parachute is evolving into the platinum kiss,” they have every right to be outraged.
The latest execs who will cash in as they step aside: Nabors Industries‘ former CEO, Gene Isenberg, due $126 million when he exits as chairman, and IBM CEO Sam Palmisano, due $170 million. They follow Google’s Eric Schmidt, who received $100 million in stock after leaving as CEO.
USA Today quoted consultant Eleanor Bloxham of The Value Alliance, “While the contracts and performance of these CEOs differ, they do nothing to serve public opinion at times like these.”
Several other lucky CEOs are in for big paydays, based on mergers that trigger golden parachutes. Motorola Mobility CEO Sanjay Jha could pocket more than $65 million after the company’s buyout by Google. Temple-Inland CEO Doyle Simons is due $61.4 million if shareholders approve the company’s merger with International Paper. And as chairman of newly merged Stanley Black & Decker, Nolan Archibald gets $43 million this year and a bonus of up to $45 million in 2013. (CEOs’ golden parachute exit packages pass $100 million, 11/7/2011)
And who authorizes these pay packages? Boards of directors. Is it any wonder people are not pleased with board members as a class? And what if you are one of the fortunate few members of the American public that actually owns shares in a corporation directly, not through a mutual fund in your 401(k) plan; what can you do?
You can vote against your company’s pay plan. Less than 2% of such plans were voted down last year. See USPX’s Shareowner Guidelines For Say-On-Pay Voting. You could vote against director incumbents and in favor of challengers.
No, wait, at the vast majority of companies there is no opposition. And why is that? One reason is that although the SEC finally got off the dime and enacted a proxy access rule last year that would have allowed challengers from a very select group of shareowners (those who held 3% of the company for 3 years… certainly not your average member of even the elite), the rule was shot down in court by US Chamber of Commerce and the Business Roundtable (a sort of union of top CEOs). Why was a little democracy in corporate governance killed? The plaintiffs argued the SEC failed to properly estimate the economic impact of proxy access. It turns out companies would be willing to spend a fortune under proxy access to keep their directors entrenched.
Members of the United States Proxy Exchange will be filing proxy proposals at several companies this year, seeking to empower retail shareowners in nominating directors who will actually represent the average shareowner. Thresholds will be lower than those enacted by the SEC but overturned in the courts. Still, it won’t be easy. The USPX will focus on the need to bring shareowners together to make changes. The key to change won’t so much depend on a few shareowners owning several percent. Instead, the key will be hundreds of retail shareowners willing to come together to coordinate their actions.
When average shareowners come together to nominate and elect directors, those they elect are unlikely to approve tens of millions of dollars for platinum parachutes or even $270,000 for part-time board members. When shareowners actually nominate and elect directors we might actually see Kerstetter’s dream headline, “Vanguard lands Top Director Prospect.” Even better would be, “Bredesen, Nominated and Elected to Vanguard Board by Shareowners, Vows to Downsize CEO Pay Packages.” It would be much easier to find friends if the disparity of incomes between the 99% and the 1% was shrinking, instead of rapidly expanding. It would be much easier to be friends if the average investor knew their proxy wasn’t just a throwaway set of electrons, interrupting their normal e-mail once a year.