Fair Game
When Shareholders Make Their Voices Heard
April 7, 2012
By GRETCHEN MORGENSON, The New York Times
Executive pay, that is — something that, in investing circles, can be more irritating than April pollen.
The figures, disclosed in corporate proxy statements this time of year, are often maddening. Many corporate boards talk a good line about paying for performance. Then they turn around and award fat paychecks to chief executives who, by many measures, don’t deserve them.
But this year, this rite of spring has an extra kick. We are starting to see something that, for the most part, we haven’t before : evidence that shareholders — the people who actually own public companies — are gaining some influence over corporate pay practices.
These straws in the wind appear as a result of the Dodd-Frank law. Rules mandated by the law require companies to put their pay practices to a shareholder vote at least every three years.
Admittedly, these votes aren’t binding — which means that boards can choose to ignore them. But the say-on-pay rules went into effect in 2011, so this year’s crop of corporate proxies provides the first real glimpse into how companies are, or aren’t, responding when their shareholders express displeasure over C.E.O. pay.
The early indications are positive : some companies seem to be listening. That’s a refreshing change, particularly given how corporate America has pushed back on other aspects of the Dodd-Frank legislation.
Granted, shareholders have to get pretty angry, or at least organized, before companies respond. Pay experts generally consider it a sign that shareholders are deeply unhappy when at least 20 percent vote against a company’s pay practices. The good news is that some companies in this category have responded with changes that they hope will calm restive shareholders.
Consider what happened at Stanley Black & Decker. Last year, fully 48 percent of the shares voted at the annual meeting objected to its pay practices.
Management seems to have gotten the message. According to the latest proxy statement, Stanley Black & Decker ended its practice of staggered terms for directors, a shareholder-friendly move that makes directors less entrenched. It also significantly raised the minimum stock ownership required of its executive officers.
The company didn’t stop there. It said that, henceforth, new severance agreements with executives would no longer have the company foot their tax bills, a practice known as gross-up. Executives also have to hold on to stock options or restricted shares they receive for a year after they are granted.
And John F. Lundgren, the C.E.O., took a 63 percent pay cut, according to data compiled for The New York Times by Equilar. (Still, Mr. Lundgren got $12.1 million last year.)
Another example of a shareholder-induced change came at Johnson & Johnson. In 2011, its pay practices got a thumbs-down from a quarter of the shares voted at its annual meeting. This year, J.& J. revamped its long-term incentive program for executives.
Out went longstanding cash payments for long-term incentives. Now, the company awards stock units that vest only over three years and after meeting three goals aligned with shareholder returns. The company’s proxy statement said the change came “as a result of what we learned in 2011.”
FABRIZIO FERRI, an assistant professor at the Columbia Business School, said he thought say-on-pay votes would bring many changes like these. He bases this view on his studies of such votes among companies in Britain, where they have been a fact of life since 2001.
Mr. Ferri and David Maber, an assistant professor at the Marshall School of Business at the University of Southern California, examined companies whose pay practices received objections from more than 20 percent of the shares cast. They found that after such votes, these companies were more likely to remove provisions that were seen to reward failure than those where shareholders had not expressed high dudgeon over pay. Once the problematic provisions vanished, the companies experienced lower dissent — or none at all — in the next proxy season.
These shifts show the positive impact shareholders can have when they are engaged in the proxy process. Say-on-pay votes “assure that rules of the game are fair in terms of the process of setting pay and that there are clear checks and balances on provisions that may be viewed as controversial or that may be manipulated,” Mr. Ferri said in an interview last week.
But for every active shareholder who votes for change, thousands of passive ones remain disengaged. Votes that abstain, are never cast or that are delegated to brokerage firms to vote, typically in support of management, still make up a lot of the proxy counts.
Many shareholders have long felt that voting against management is futile. But it is troubling that so many are absent when it is becoming clearer that they can make a difference.
“The higher the level of ‘absent’ votes, the easier it is for someone to exploit a company,” said Gary Lutin, chairman of the Shareholder Forum, a series of programs supporting investor access to decision-making information. “Self-dealing executives know this, and so do opportunistic activists.”
Consider an analysis by Morningstar of shareholder votes last year at the 100 American corporations whose chief executives were paid the most, based on a separate analysis conducted for The Times by Equilar. Morningstar found that the median absentee vote on pay among these companies in 2011 was 24 percent, a figure that equals the median absentee voting at the companies in the Russell 3000.
The median supportive vote at these companies, meanwhile, was 66.6 percent last year, while dissent stood at 6.1, Morningstar said.
Absentee votes reflect an abdication of shareholders’ rights and obligations as owners. Because non-votes are typically removed from the count when calculating results for such proposals, the outcomes often look more favorable to management than they actually are.
At first glance, for example, shareholders of Viacom, a perennial at the top of the best-paid list, largely supported the company’s pay practices last year. Only 3.41 percent of the shares voted were opposed in 2011, while 82 percent supported the company’s pay.
But take a closer look. About 15 percent of the shares outstanding did not vote on the company’s pay practices at all. And when the millions of shares held by its insiders, like Sumner M. Redstone, its chairman, were eliminated from the equation, support for its pay eroded significantly. Counting only shares voted by independent owners, just 8.9 percent supported the pay. Almost double that percentage — 17.3 percent — opposed.
Framed as a percent of votes cast for and against Viacom’s pay, fully two-thirds of nonmanagement votes opposed the compensation, while one-third supported it.
In the company’s shareholder meeting in early March, shareholders voted again on a number of matters. One involved Viacom’s senior executive short-term incentive plan, with a potential pool of 525 top employees. The plan’s terms stated that the maximum award to any participant for a performance period could not exceed eight times that person’s annual base salary, or $50 million, whichever came first.
The results of that vote showed that 92.7 percent of shares supported the plan while 2.9 percent opposed it and 4.4 percent were absent. But eliminating management’s stake brings those figures down to 64.4 percent in support among independent shareholders, 14.3 percent opposing and 21.3 percent absent.
SO who are all these absentee shareholders? Probably not institutional investors, who consider it their duty to vote the shares they hold on behalf of their clients. If these holders abstain from voting, it may be because they hope to stay away from a controversy at a company.
Most likely, the AWOL stockholders are people who simply can’t be bothered to vote. Like Americans who stay home on Election Day, these investors are giving leaders — in this case, corporate ones — free rein to do what they please.
For years, investors have been powerless to change the dynamic at companies that award outsize pay to executives for undersize performance. Now that shareholders’ voices can at last be heard, silence should not be an option.
