October 28, 2008
Executive Pay Comes Under Fire from Activist Shareholders for Contributing to Financial Crisis
by Robert Kropp
Study of shareholder voting by mutual funds shows SRI funds leading the way to increased
shareholder activism on matter of executive compensation.
Much has been made of one condition of the $250
billion federal bailout of nine of the nation's largest banks: that severance pay and recouping
incentive payouts based on �inaccurate� performance measures be reduced. In the current climate, in
which the performance of many CEOs has clearly been abysmal, the fact that CEOs of large U.S.
companies averaged $10.8 million in total compensation in 2006, more than 364 times the pay of the
average US worker, especially rankles.
Questions abound in the wake of the current meltdown of the financial industries. How could
presumably knowledgeable corporate executives ignore the dangers inherent in mortgage-backed
securities consisting of loans that were often bound to fail? Either through passivity or
self-interested compliance, did boards of directors shirk their oversight duties, thus allowing
corporate managers a free hand in contributing to the economic downfall? And what role could
shareholders have played in order to bring executives to account for their activities?
But excessive executive compensation has been a
target of resolutions by shareholder activists for years. A recent study by Fund Votes, which provides in-depth analysis of investment
fund proxy voting, analyzed mutual fund voting patterns on shareholder-sponsored compensation
resolutions across 47 mainstream fund groups and 6 SRI groups over five years of voting records.
Jackie Cook, the founder of Fund Votes, told SocialFunds.com, "Executive compensation is
at the heart of a growing problem between shareholders and management. Corporate structure is
supposed to be a system of checks and balances among shareholders, boards of directors, and
management. So why does executive pay continue to grow, even in times of economic downturns?"
The Fund Votes survey found that the number of "say-on-pay" shareholder resolutions�which seek
to afford shareholders the opportunity to ratify executive compensation packages�increased from
three in 2006 to 79 in 2008. Overall support among mutual fund families reached 51% in 2008. Also
significant is the fact that in 2008 only six of the 47 mainstream fund families gave no support to
Not surprisingly, the Fund Votes survey found that the six SRI
funds included led the way in bringing attention to the issue of runaway executive compensation.
Among the SRI funds, average support for all shareholder resolutions on compensation was 84% in
2008. The average for mainstream mutual funds was 41% in 2008.
Cook said, "The number of
advisory resolutions on executive compensation among S&P 500 companies reached 79 this year. The
question that shareholders raise in light of these numbers is, are boards of directors now prepared
to engage in constructive dialogue with shareholders on this issue?"
The Fund Votes survey
notes, "Shareholder activists argue that tighter pay practices would follow if shareholders could
annually cast a vote on an advisory resolution to ratify the boards� compensation reports. The
�say-on-pay� proposals would effectively allow us to gauge the degree of shareholder satisfaction
with the board�s compensation structure and incentive pay allocations from year to year. Clearly
boards could use some constructive feedback from those whose interests are most aligned with the
performance of the company."
In light of the current financial crisis, what is especially
interesting in the Fund Votes report is the existence of say-on-pay resolutions in 2008 that
targeted eight of the nine banks on the receiving end of the $250 federal bailout. In a research
brief published on October 21, an analysis by Fund Votes found that "fourteen of the 61 fund groups
surveyed failed to support even a single say-on-pay resolution at the eight bail-out banks targeted
with this resolution in 2008. Twelve opposed all such resolutions and two abstained on all."
On the other hand, the research brief found, "Many large fund groups and all of the socially
responsible investment groups surveyed supported every such resolution at the eight bail-out
Considering the failure of mainstream mutual funds to act on the issue of
executive compensation at a time when the economy was already beginning to unravel, Cook of Fund
Votes could only speculate, "Perhaps they might not have opposed such resolutions if they had come
to a vote now."
Could it be that outrage over the glaring discord between executive pay
and executive performance finally lead shareholders and boards of directors in the direction
advocated by the SRI community for years? There is some evidence that such might be the case.
The National Association of Corporate
Directors (NACD), an organization dedicated to serving the corporate governance needs of
corporate boards, responded to the current crisis by publishing a 10-point plan to strengthen
corporate governance. Acknowledging that "the current economic crisis has eroded public and
investor confidence in corporate governance," and that "American corporations must take action to
restore the public trust," the NACD argued for such correctives as board responsibility for
governance and accountability, corporate transparency, and director competency and commitment.
However, on the matter of shareholder involvement, the NACD called for no more than that
"governance structures and practices should encourage" shareholder involvement and directors'
communication with shareholders. Given the ease with which corporate management has sidestepped the
concerns of activist shareholders and drawn the global economy into its current malaise, such
advisory recommendations may fall short of their goal of regaining shareholder confidence.
A movement that may do more to bring corporate boards into line with the concerns of
shareholders has originated with no less colorful a public figure than Carl Icahn, the corporate
raider turned shareholder activist. Claiming that "one of the biggest problems we face today is the
egregious mismanagement and reckless incompetence of many American corporate boards which utterly
fail to do their primary job of holding managements accountable," Icahn called for the formation of
Shareholders of America to "push back against board entrenchment and make it easier for
shareholders to promote change in companies they own."
Perhaps desperate times call for
strange bedfellows. But if such an advocate of profitability above all else as Carl Icahn comes to
share the goals of an SRI community with long experience in calling for improved corporate
governance, then a renewal of genuine checks and balances as espoused by Jackie Cook of Fund Votes
may turn out to be a beneficiary of the current crisis.
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