Corporate Governance

Say on Pay Prospects Brighten

By Jason Cowart

Regardless of who is elected President, shareholders may soon get the type of ?say-on-pay? rights they deserve.  Earlier this year, the House of Representatives passed a bill requiring companies to give shareholders the opportunity to cast non-binding votes on the company?s executive pay packages.  Although the legislation stalled in the Senate, and is opposed by President Bush, but both Senator McCain and Senator Obama support the measure.  Indeed, Senator Obama is the author of the Senate bill.

As we have previously reported the SEC has tried for the last several years to extract more and better executive compensation-related disclosures from corporations.  Unfortunately, these efforts have not been particularly successful.  Indeed, last year the SEC identified 350 public companies whose executive compensation disclosures failed to meet the Commission?s new and improved guidelines.  The SEC found that when such disclosures were clear and understandable, they tended not to be meaningful or responsive to disclosure requirements.  Conversely, when the disclosures were responsive in content, that content tended to be obscured by arcane and convoluted terms.  The SEC went back to these companies and asked for more information, only to be told that the previously provided information was sufficient.  Put simply, a stalemate developed.

The proposals that both Senator Obama and McCain support would not only give shareholders a once a year vote on executive pay, it would mandate a separate non-binding vote when a company gives a golden parachute to executives while simultaneously negotiating to buy or sell the company.  This provision is designed to counteract the inherent conflict of interest that exists when senior managers simultaneously negotiate buy or sell agreements and personal compensation packages. 

Say-on-pay proposals seem to strike a reasonable balance between shareholder rights and managerial power.  Such proposals do not establish artificial limits on executive compensation.  The proposals do, however, insure that investors are kept informed about executive compensation policies and provide those investors with an ability to voice their approval or disapproval.  While we might question why the votes should only be advisory, an advisory vote (accompanied by meaningful disclosures) is obviously better than nothing.  It is time we had a say on pay.

Full post as published by PomTalk on June 10, 2008 (boomark / email).