CEO Pay: Should Shareholders Have More Say?
Nell Minow is co-founder of The Corporate Library, a research firm that advocates corporate governance reform. On March 8 she endorsed legislation on Capitol Hill that would require companies to let shareholders cast nonbinding votes on CEO pay. With proxy season about to begin, I spoke with Minow about what she sees on the horizon. Here are excerpts from our conversation.
KIPLINGER'S: Shareholders seem pretty steamed this proxy season about executive pay.
MINOW: I think we're at the high water market for pay insanity. Last year, Home Depot and Pfizer awarded insane, disgusting departure packages for failed CEOs. On the other hand, in both cases, the boards tied for the "most improved player" award in designing more moderate pay packages for new CEOs.
Where is the fight headed from here? Right now, only certain portions of executive pay can be put to a shareholder vote, mostly having to do with the stock option plan. But there's a movement to give shareholders an advisory vote on the whole CEO pay package. It wouldn't be binding, but companies would still have to put in the proxy, here's our pay plan, what do you think? It would make companies more willing to communicate with shareholders and less willing put outrageous pay plans to a vote. This is done in the United Kingdom. There's only been one instance there of a majority vote against the pay plan, and in that case, GlaxoSmithKline substantially revised the plan after the shareholder vote. Aflac, the giant insurance company, agreed to be the first U.S. company to voluntarily put their pay plan up to an advisory vote this year -- needless to say, it's a pretty good plan.
What are some of the other shareholder concerns? The number one issue again this year is whether directors should be required to win a majority vote of the shareholders. It's a very simple idea. Now, under current laws, if a director gets one vote -- even if he casts it for himself -- he gets elected, even if 99% of shareholders vote against him. Shareholders have been asking companies to adopt a majority vote, so that if someone doesn't get that vote in support, he or she is not allowed to serve. Over 300 companies already have adopted this policy, and there are a lot more majority vote proposals this year. With or without a majority vote proposal, shareholders should vote "no" on directors who are doing a bad job -- starting with the ones on the compensation committees if need be.
Shareholders were supposed to get more access to company proxies to put their own board candidates forward. Has that happened? I support access -- it's the second-most prominent issue we're working on. But it stands in an unusual place right now. The Second Circuit Court of Appeals decided a case in favor of shareholders, but new rules from the Securities and Exchange Commission were expected to cut that back. The SEC hasn't yet, so we're in a bit of an interstitial moment. As a result, there are a number of shareholder proposals out there this season requesting access.
What's the next big issue? Climate change is very important, and I think it's going to be even more important going forward. I see a lot of calls to boards to create committees to address climate change. You can separate companies dealing with this issue into the Good, the Bad and the Ugly. The good ones see a lot of potential to create goods and services that respond to the increasing need for green products. The bad ones aren't thinking along those lines, but at least are thinking of ways to make their own operations greener. The ugly aren't doing either one. Climate change is where cutting ties to South Africa or tobacco was several years ago. They began as feel-good issues but became bottom-line, financial issues.
Should mutual fund investors be concerned about how proxies are voted by the funds they invest in? We just published a new report. Mutual funds are doing an even worse job than previously on proxy votes. They're supporting outrageous pay packages and seem generally unwilling to support shareholder resolutions about pay. And within some organizations, different fund managers are canceling each other out. The value fund manager supports a different view about executive compensation than the growth fund manager. Crazy!