“More Holders Want Say on Executive Pay”

Posted by Marc Hodak on April 30, 2008 under Executive compensation | Read the First Comment

That was the headline of a WSJ article primarily about holders who don’t want more say. In fact, the three skeptics it cited are surprising to anyone who plays in the corporate governance world.

Charles Elson, chairman of the Weinberg Center for Corporate Governance at the University of Delaware, has rarely seen a governance reform he didn’t like. But in this case, he says that it isn’t the job of shareholders to tweak compensation plans; if you have a problem with the board’s work, go after the board, not their work. This attitude is similar to the attitude held by most people (including Elson) regarding the line of demarcation between the board and management; if the board doesn’t like what management is doing, it should reconsider the management, not get involved in the particulars of management policy.

Edward Durkin is Director of Corporate Affairs United Brotherhood of Carpenters. It’s not often that a union man is against anything that would make management’s job more uncomfortable, but Durkin says:

a simple “yes” or “no” vote on pay plans would lead to a “hollow” dialogue between investors and directors. The union manages 95 pension funds with around $40 billion invested in thousands of companies. Reviews of each of those proxies would necessarily be cursory, he says. In response, he would expect directors to standardize compensation packages, which could lead to less flexible and poorer pay plans.

Durkin prefers to target a smaller group of companies, gain an deeper understanding of what is really going on, and engage management in a discussion about their practices. In other words, he’s already fulfilling the promise of “Say on Pay” without the ham-fisted proxy fights or legislation that impose unnecessary costs on the shareholders. In fact research shows that management engagement by major shareholders is one of the few activist tactics that actually works in altering corporate governance for the better.

Finally, Peter Clapman questions the wisdom of “Say on Pay.” Nobody would accuse Clapman of being a tool of management; he is former governance chief at the giant fund manager TIAA-CREF, and a partner in U.K.-based investors’ group, Governance for Owners LLP.

The quality of a proposal is not, of course, to be judged by who lines up for or against it; it should be judged on the merits. It’s just nice to see some of the corporate governance mavens espousing a more thoughtful approach than the press headlines.