Few US Public Companies Failed New 'Say On Pay' Votes
July 07 2011 - 7:54PM
Dow Jones News
In the first year that major U.S. public companies have been
required to let shareholders vote on executive compensation, few
companies failed to gain approval for their plans, but those that
did face a high risk of shareholder lawsuits.
With the annual-meeting season wrapping up, just 39 of 2532
companies reported that shareholders rejected their compensation
plans, according to a tally by Mark Borges, a principal at
executive-pay consultancy Compensia Inc. The votes are non-binding,
so companies don't have to change anything even if shareholders
disapprove.
Shareholders have filed lawsuits against board directors at five
of those companies and, according to the law firm Schulte Roth
& Zabel LLP, plaintiffs' lawyers have announced investigations
into 18 others. The suits generally allege that directors breached
their fiduciary duty to investors by ignoring their wishes for more
modest pay packages.
Democratic lawmakers added a "say on pay" mandate to last year's
Dodd-Frank financial overhaul amid intense voter anger at Wall
Street and the lavish bonuses banks doled out in the aftermath of
the 2008 financial crisis.
Supporters pitched it as a way to empower shareholders and
discourage compensation practices that encourage excessive
risk-taking. Critics in the business community argued nonbinding
votes on pay would give too much power to proxy advisory firms that
advise large shareholders on how to vote in corporate
elections.
Hewlett-Packard Co. (HPQ) and Stanley Black & Decker Inc.
(SWK) are among the companies that failed their say-on-pay votes.
The companies whose boards are being sued after failed say-on-pay
votes include Jacobs Engineering Group Inc. (JEC), Beazer Homes USA
Inc. (BZH), Umpqua Holdings Corp. (UMPQ), Hercules Offshore Inc.
(HERO) and Cincinnati Bell Inc. (CBB).
H-P and Stanley Black & Decker declined to comment. Umpqua
spokeswoman Eve Callahan said the company's board moved last month
to add performance conditions to all restricted stock awards and
options. "We have a commitment to taking shareholder input
seriously and into consideration," she said.
Spokespersons for the other companies who were sued did not
respond to requests for comment.
The number of failed votes was not out of line with
expectations. Last year, investors rebuked pay practices at only
three of 300 companies that held say-on-pay votes voluntarily or
had to offer them because they received government bailout funds.
But some observers predicted many more companies would face high
levels of negative votes, even if their plans passed muster with
the majority of shareholders.
In fact, 71% of companies received at least 90% shareholder
support for their plans, according to Jim Barrall, who heads the
benefits and compensation practice at the law firm Latham &
Watkins LLP. Meanwhile, 92% of companies garnered at least 70%
shareholder support for their plans.
Aside from lawsuits, board directors at companies that have had
their pay plans voted down face unpleasant publicity and the risk
that shareholders will vote against re-electing them to their
seats.
"You don't ever want to get to a 'no' vote," argued Charles
Elson, head of the Weinberg Center for Corporate Governance at
University of Delaware's business school. Elson said that even a
20% negative vote from shareholders could signal a company is at
risk for a shareholder backlash the following year.
Shareholders upset over pay plans already appear to be venting
their frustration by targeting members of board compensation
committees. At 36 companies that had failed votes this year, such
board members who were up for reelection received an average of
13.5% fewer favorable votes than other directors on the ballot,
according to Schulte Roth & Zabel.
Critics of the requirement have seized on the small share of
failed votes to argue that executive pay generally isn't a great
concern of investors. The issue is "used as a whipping boy by
politicians," said Tom Quaadman, vice president of the U.S.
Chamber's Center for Capital Markets Competitiveness.
Proxy advisory firms also didn't wield nearly the power over the
votes that some had predicted. Institutional Shareholder Services,
the dominant proxy adviser, recommended no votes on pay for 298
companies so far this year, many times more than the votes that
actually failed.
Meanwhile, fans of the new mandate say it has resulted in a high
level of dialogue between companies and their shareholders.
"Lots of company management teams and directors are going out to
sell their [compensation] plans to investors," Patrick McGurn,
special counsel at ISS, said. "Everyone is taking the process to
heart."
-By Jessica Holzer, Dow Jones Newswires; 202-862-9228;
jessica.holzer@dowjones.com