Shareholder Say on Fat Cat Pay

Investors believing the collapse of Wall Street means the dawn of a new age of shareholder democracy to rein in crony capitalism may have to wait much longer.

That's because new shareholder proposals letting investors rein in fat cat pay and also fire miscreant, apathetic board directors are merely advisory, nonbinding, with all the force of a goose feather. That goes even for banks who received taxpayer money via the Troubled Asset Relief Program (TARP).

Corporate governance watchdogs for years have said companies have been manipulating their profit results with accounting maneuvers in order to inflate short-term earnings and in turn executive pay.

Executive compensation is typically tied to earnings metrics like revenue, profits or stock performance, and the myopic focus on artificially boosting short-term earnings on Wall Street and at banks in order to fatten executive wallets is widely believed to have helped cause the collapse in the financials.

But there are trends and legislation afoot, in the wake of a financial crisis that has zapped $11 trillion in stock market value since the October 2007 peak (based on the Dow Jones Wilshire 5000 index, which includes nearly every U.S.-listed stock), flattened the financial sector with crippling writeoffs, and has resulted in a massive government bailout program, with about $10 tn in US taxpayer programs and government spending.

The bailout programs will blow out the deficit, the Congressional Budget Office says, and effectively tear a hole in the universe that future taxpayers will have to fill.

Shareholders Have No Voice Now

The burst housing bubble revealed that, since the start of 2002, Wall Street executives at Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Bros and Bear Stearns were paid a total of $312 bn in compensation and benefits.

That compensation was largely based on fictitious profits, and many top banking officials walked out the day with sizable retiree pay packages, leaving behind the smoking wreck of companies and bellowing watchdogs who accused them of being as "crooked as a sack of corkscrews," one analyst tells me.

And as the current proxy season closes, investors found out that they couldn't even vote 'no' against an official or board director who signed off on fat cat executive pay.

About half of the top US companies merely let shareholders vote either yes for an executive or director, or to just withhold their vote. So executives were reinstated even if most shareholders withheld their votes against them.   

Moreover, many chief executives at banks and companies also hold the title of chairman, and then get to wield inordinate power over management pay, risk models, board directors, even audit committees (Bank of America's chief executive Ken Lewis was recently stripped of his chairman title).

No U.S. Pay Plans Voted Down

So far during this spring's annual meeting season, shareholders have yet to vote down a single executive pay plan at U.S. companies, and only a handful of corporate directors have lost investor backing. Support for corporate management is still the status quo, according to a recent analysis by the Associated Press.

For now, it appears the only activist investor wielding some power over executive pay has been the U.S. government, which has tried to put restrictions on executive compensation at TARP recipients, moves that have met with heated opposition from business lobby groups.

And while it's true that investors at more companies are voting in support of putting a shareholder vote on executive pay on corporate ballots, that's just the first step before a vote on the pay plan can take place, the AP says.

More importantly, the votes are nonbinding, meaning, management can merely take these shareholder votes under advisement and not do anything at all.

Still, Investor Votes on Exec Pay Gaining

The number of shareholder proposals asking for a nonbinding investor vote on executive pay has doubled since 2007 to more than 100 this year, according to data from the American Federation of State, County and Municipal Employees, or AFSCME, a Washington-based labor group representing government workers, the AP reports.

But just 23 US companies have allowed say-on-pay provisions to proceed to a vote (for some of the names, see below). Overseas, shareholders wield more power.

Five companies in England already have lost binding shareholder votes on executive pay. One of these is the oil company Royal Dutch Shell PLC, which on Wednesday unveiled a major overhaul of its businesses and management that will affect thousands of jobs, part of a shake up ordered by the incoming chief executive.

New Legislation to Bolster Shareholder Say on Pay?

New York Democratic Senator Charles Schumer recently proposed broad legislative changes in what he calls the "Shareholder Bill of Rights," which would give shareholders the power to vote no in board elections and give them a "say on pay" vote.

The Schumer bill would also let shareholders propose new directors, require separation of the chairman and chief executive roles and also proposes the formation of risk committees to strengthen board oversight.

Since there is political momentum behind the proposals, the Schumer bill could end up in Congress's reforms to strengthen corporate governance.

The Say on Pay Companies

The 23 non-TARP companies that now allow non-binding, shareholder say-on-pay votes include the following names, according to AFSCME:

Ingersoll-Rand

Intel

Motorola

Occidental Petroleum

Verizon

Apple

Honeywell

KB Homes

Lexmark International

Marathon Oil

Pfizer

Valero Energy

Lexmark and Apple have each agreed to adopt an annual shareholder vote on executive compensation, AFSCME says.

Additionally, companies where say on pay shareholder proposals will be voted upon in the coming weeks include CVS Caremark, Chevron, Colgate Palmolive, ConocoPhillips, Exxon Mobil, Home Depot, McDonald's, Pepsico, Qwest, Raytheon, Target, UnitedHealth and YUM! Brands, AFSCME says.