Lawmakers Debate Pay Vote Bill
Submitted by: L. Reed Walton, Staff Writer
While lawmakers agreed that better disclosure and more dialogue on executive pay would help U.S. companies and investors, House panel members were sharply divided on whether to give shareholders a vote on CEO pay packages.
During a March 8 hearing, scholars, investors, and shareholder advocates testified largely in favor of "say on pay" legislation that would give investors a non-binding vote on the compensation packages of corporate executives.
The new bill, introduced by Rep. Barney Frank (D-Mass.), who chairs the House Committee on Financial Services, would modify the Securities and Exchange Act of 1934 to provide an annual advisory shareholder vote on executive pay.
"Collective wisdom is better than individual knowledge," said Frank, "so I am puzzled when people tell me ... that the collective wisdom that [shareholders] bring to the process somehow evaporates when it comes to paying the people who run their company."
The bill, if passed, would also require a separate vote on "golden parachute" payments to outgoing executives after a merger or acquisition.
The issue of executive pay has been in the spotlight recently due to federal investigations of stock option grants at numerous U.S. firms, as well as investor anger over large payments to outgoing CEOs at companies such as Home Depot, Exxon, Occidental Petroleum, and drug manufacturer Pfizer.
"For years we've been concerned about executive pay and the distortion that executive pay causes in the market," Rich Ferlauto, director of pension and benefit policy at the American Federation of State, County, and Municipal Employees (AFSCME), testified at the hearing in Washington.
Last year, AFSCME and other investors submitted "say on pay" proposals at seven companies. The first-time resolutions averaged 40 percent shareholder support, according to ISS data.
Rep. Frank introduced a similar executive pay bill in 2005, but it stalled, as the House was then under Republican control. At the March 8 hearing, Rep. Spencer Bachus (Ala.), the ranking Republican on Frank's panel, applauded the bill's intent and commended insurance company Aflac for agreeing to allow an advisory vote but stopped short of endorsing the bill itself.
"Even though this is a problem, there may not be a government solution that makes it any better," Bachus said.
Stephen M. Davis, a fellow at Yale University's Millstein Center for Corporate Governance and Performance, supported the bill but said he was frustrated with U.S. lawmakers' efforts to reform corporate governance.
"Our laws essentially tie the hands of public shareholders so they cannot act as owners," said Davis, who recently completed a study on "say on pay" votes in the United Kingdom.
The U.K. has had an advisory vote rule in effect since 2002, and a study by London-based New Bridge Street Consultants of the 100 largest British companies concluded that the rule has served to slow the rise of executive pay.
In the U.S., the Securities and Exchange Commission last year unveiled new rules that require companies to better disclose the total cash-and-stock compensation received by top executives.
Criticism of the Bill
Critics of the proposed law say that the new SEC rules have not been given time to work. Rep. Ron Paul (R-Tex.) said the bill would "abuse the privilege of voluntary financial arrangements" between shareholders and companies.
Steven N. Kaplan, a finance and entrepreneurship professor at the University of Chicago, warned lawmakers that "the regulation, criticism, and hounding of public company CEOs may have a major cost: CEOs can and will leave public companies to do something else."
John J. Castellani, president of the Business Roundtable, testified that an advisory vote would overburden company boards and compensation committees. "Companies were never designed to be democracies," he said.
Rep. Scott Garrett, a Republican from New Jersey, agreed. He said an advisory vote on pay would be comparable to asking Boston Red Sox fans to vote on whether the baseball team should hire Japanese pitcher Daisuke Matsuzaka.
Investor Efforts
Until the introduction of Rep. Frank's bill, which has 21 Democratic co-sponsors in the House, the rallying cry for advisory votes in the U.S. has come mainly from investors.
More than 60 pay-vote proposals have been filed at companies this proxy season. An AFSCME-submitted proposal will be on the ballot April 10 at Morgan Stanley, and a similar proposal from the AFL-CIO goes before United Technologies shareholders April 11.
While Aflac is the only firm that has agreed to hold an advisory vote, more than a dozen companies, including Tyco, Intel, J.P. Morgan Chase, and Pfizer, have formed a working group with investment fund representatives to discuss the issue.
Most other companies would like to see the effects of the new SEC disclosure rules before committing to an advisory vote, Timothy H. Smith, senior vice president of Walden Capital Asset Management, told Governance Weekly earlier.
Rep. Frank lauded the new SEC rules but called them "incomplete" in a March 2 interview with the Financial Times.
"Although the [SEC rules] will provide a lot of information to the marketplace, they will not by themselves improve pay practices," Lucian Bebchuk, a Harvard University law professor and shareholder advocate, testified at the March 8 hearing. "This is where advisory votes are going to help."
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