Say On Pay

John McCain and Barack Obama finally agree on something: corporate accountability.

'Say on Pay' has become a hot topic in the 2008 elections and highlights our faulty corporate structure. 'Say on Pay' may be the first step in emphasizing to our political leaders how important corporate governance is to the United States economy.

The other day, I watched CNBC anchor Melissa Lee say, "…both presidential candidates railing against high executive pay at failed firms Fannie Mae and Freddie Mac and certainly the GSEs (are) not the only troubled firms giving multimillion dollar send-offs to departing CEOs. It has happened at Merrill Lynch, it has happened at Citigroup, the list goes on and on." Now executives at Lehman’s New York office that may be directly responsible for the world’s largest corporate bankruptcy are to share a $2.5 billion bonus courtesy of its deal with Barclays. Should a top executive pocket big bucks even if the company is failing?

Good question. The answer is NO.

Aflac, run by CEO Daniel Amos, became the first public U.S. company to allow shareholders a nonbinding vote on executive compensation. This is now referred to as 'Say on Pay.' Although shareholders did not secure the power to determine executive pay at Aflac, they did obtain the ability to present their views on compensation awarded the year prior. This might seem like a big improvement, but it is in actuality a baby step in the battlefield for improved corporate governance. Mr. Amos' comment, "it’s symbolic, but it’s an important symbol," is true but nonbinding clearly does not give shareholders much say at all.

The Say on Pay bill was passed by the House of Representatives on April 20, 2007 after being introduced by Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat. The Aflac vote was held at its May 5 annual meeting where 93% of shares were voted in favor of Say on Pay. With elections around the corner, it might be beneficial to highlight what candidates have said about Say on Pay and executive compensation:

Obama: Senator Obama introduced a companion bill in the U.S. Senate on the same day the House bill passed requiring public companies to give shareholders an annual nonbinding vote on executive compensation.

An Obama speech attacks CEOs "who are making more in one day than their workers are making in a year." He states, "It's about changing a system where bad behavior is rewarded so that we can hold CEOs accountable, and make sure they're acting in a way that's good for their company, good for our economy, and good for America, not just good for themselves."

The WSJ reports in an article entitled 'Candidates Target Executive Pay' that, "Obama staffers … renewed his request for Senate hearings on the measure. If the 'say-on-pay' bill doesn’t pass this year, 'it will be a priority for Senator Obama as president,' campaign policy director Heather Higginbottom says."

This past week Obama stated, "The American people should not be spending one dime to reward the same Wall Street CEOs whose greed and irresponsibility got us into this mess. Not one dime." CEO accountability is probably the only issue where Obama and I agree. But Obama should demand it be binding.

McCain: Sen. McCain joined in under his proposed reforms. BusinessWeek’s 'McCain Seeks Shareholders Say on Pay,' says the candidate believes that "all aspects of a CEO's pay, including any severance agreements, must be approved by shareholders."

McCain also takes a strong stance on corporate accountability: "Something is seriously wrong when the American people are left to bear the consequences of reckless corporate conduct, while the offenders themselves are packed off with another forty - or fifty million for the road. If I am elected president, I intend to see that wrongdoing of this kind is called to account by federal prosecutors."

In regards to Fannie and Freddie he states, "We’re looking at a costly government-led restructuring of our home loan agencies and we need to keep people in their homes, but we can’t allow this to turn into a bailout of Wall Street speculators and irresponsible executives."

I agree. I don’t think we should bail out irresponsible executives either.

Even Senator Hillary Clinton introduced a bill (S 2866) to the Senate on April 15, 2008 that would require a shareholder advisory vote on a company’s executive compensation package. In addition, it would revise Section 304 of Sarbanes-Oxley, which would surrender incentive-based or equity-based executive compensation if an issuer is required to restate an accounting statement due to misconduct, and to increase the observation period to 36 months from 12 months. The bill includes a definition of misconduct to incorporate the backdating of stock options and accounting irregularities.

Say on Pay is important for its acknowledgement of shareholder rights and for its placement of this issue on the national political scene. That is why I supported this first step by recommending Blockbuster's adoption of Say on Pay. This should lead to legislation with real substance; legislation that will protect the shareholder franchise and ultimately strengthen the management teams that run the greatest engines of our U.S. economy – public corporations.

Join the campaign.

Comments

[Randell Young]

Say on Pay is a step in the right direction but what is really needed is a true free market for corporate control.

1. All directors must come up for election every year. Staggered boards must be abolished.

2. Shareholders owning five percent or more of the total outstanding shares as of the annual record date must be allowed to nominate at least one director.

3. Shareholders owning ten percent or more must be allowed to nominate a number of directors equal to the percentage of the company they own.

4. A current shareholder list must be provided free of charge to any shareholder of record who is eligible to and nominates one or more directors.

5. Both confidential and cumulative voting of shares must be allowed on all shareholder votes.

6. Shareholder rights plans (“poison pills”) which thwart free market bids for corporate control by diminishing the rights of shareholders acquiring an ownership stake above a triggering threshold must be abolished.

[Robert Milne]

I believe if someone becomes CEO of a solvent company and runs it into the ground that not only should the person not be paid but also fined.

[Michael Spring]

I believe that a significant cause of our current financial crisis has been the decoupling in time of reward and risk. Senior executives are financially encouraged to have their corporations take on excessive longer term risks in return for short term bonus boosting profits. Lehman,Bear Stearns, WaMu, AIG were highly profitable in 2006 and 2007. Senior executive reaped large bonuses based on these profits. Many high risk transactions that contributed to '06 & '07 profits blew up in '08 wiping out most if not all of the profits of '06 & '07. But there is no mechanism to 'claw back' any part of the bonus money despite the effective restatement of '06 & '07 profits. That is the danger of the currently prevalent 'reward first - risk later' compensation schemes. One of the primary fiduciary responsibilities of a senior executive is to help ensure the long term viability and profitability of their company. Compensation schemes must encourage this. Requiring contracts to have significant 'claw backs' over a 5 year term would go a long way to accomplish this. It would encourage prudent risk taking rather than the casino mentality that prevailed over the past few years.

[JGP]

"Say on Pay" is a sop for powerless share owners. It's a band-aid for for a brain tumor - meaningless.

The issue that needs to be addressed is corrupted and failed corporate agency.

The dribbling out of "sops" for share owners is a delaying tactic and useless diversion. For those content with this as a 'first step,' think of yourself as a boxer in the ring with Ali where you're getting the rope-a-dope treatment.

It is a better use of energy to press for RICO prosecution of boards and CEOs who routinely loot share owner assets. Please recall that the threat of a RICO prosecution brought down Michael Milken and Drexel Burnham Lambert.

[James]

Companies that fail should be allowed to fail. There is a post at http://www.gotoguy.com/?p=400 about market cycles suggesting that the government is just postponing the inevitable and maybe making things worse. The bailout won't solve this depression any better than the New Deal did in our last one.

[dc]

We need full disclosure, not more specific government control.

The market should dictate whether they are doing their job and deserve their pay... if you don't like the package don't buy the stock. Additionally, if there is full disclosure and you buy the stock and aren't happy, sell the stock. Confusing?

On the flip side, if you don't care or are happy with it buy more. This will reward the companies that are doing the right thing and create an incentive for the others to shift their policies and pay packages.

Rocket science? eh

[Ray]

Dear Mr. Icahn,

For at least two years I supported Congressman Frank's House Bill. It is hard to believe such a modest move met with so much delay and opposition. While it is a first step I am concerned that Mutual Fund Managers and Institutional Investors will vote large blocks with little regard for shareholders true feelings. But I would still rather see the Bill make it through the Senate and be signed into law as a first step.

In the meantime, I believe investors must write to Investor Relations Departments and express their displeasure. Your input and comments on responsible compensation might look like are invited. For example, the CEO of Southern Company (SO) was awarded about $3m from what I read but the Company has been a steady performer for years and as my largest holding these days it has been a bright spot in the current market. Thus it seems his compensation is justified compared to many other packages.

An unfortunate reality is that both candidates are associated with CEOs with at least some questionable history of compensation. I will refrain from names here but wanted to make the point that it appears that only 100 percent taxpayer financing of candidates will finally release candidates from the appearance and reality of influence or pressure from special interests.

I am very much looking forward to the plan of action in this area and your thoughts as to whether direct letter writing will have any impact on Compensation Committees and Boards.

Best wishes,
Ray
Alpharetta, GA