Deemed the issue this proxy season in the US by some experts, ‘say on pay’ has taken on a life of its own. Even American Iros who aren’t at the 50-plus companies with a shareholder vote looming are considering how they might handle an advisory vote on compensation practices.
In February, when Aflac announced it would be the first US company to give shareholders an advisory vote on executive compensation, the concept of say on pay suddenly rocketed onto North American Iros’ radar screens, after being a mere trend they might have noticed in the international business pages. Following closely on the heels of Aflac’s decision, Congressman Barney Frank of Massachusetts introduced legislation to require a shareholder vote on a company’s executive pay packages. It gained traction at the end of March by passing the House Financial Services Committee, and moved on for consideration in the full House.
Although say on pay might seem to fall within the bailiwick of the corporate governance office, it’s also an IR issue. Ken Janke, senior vice president of investor relations at Aflac, says he was ‘intimately involved’ in all discussions from the moment ‘I was notified by our chief executive that we had received a proposal asking for a vote.’
Should an advisory vote come to pass, Cary Klafter, Intel’s corporate secretary and vice president of legal and corporate affairs, says IR might be ‘the tip of the spear’ for initiating a shareholder conversation on pay. UK Iros say they’ve played a big role in the dialogue since the idea gained approval there in 2003.
What is say on pay?
In a nutshell, say on pay is a non-binding shareholder vote on a company’s pay practices. The vote is ‘a referendum or a poll of your investors,’ explains Timothy Smith, senior vice president at Walden Asset Management, a proponent of several say-on-pay proposals.
Because a non-binding vote can be a fairly ‘blunt instrument’, Smith co-founded a working group for large pension funds and major companies like Tyco, Schering-Plough, Bristol-Myers Squibb and Colgate-Palmolive to consider how such a vote might look.
This spring, shareholders at more than 50 companies will vote on say on pay, according to Richard Ferlauto, director of pension and benefit policy at the American Federation of State County and Municipal Employees (Afscme). By contrast, last year only seven such initiatives reached the ballot, but the average vote in favor exceeded 40 percent so this issue clearly has legs.
One reason an advisory vote on pay is proving so attractive in the US is that it’s already legally mandated in the UK, Australia, Sweden and the Netherlands. And according to Stephen Davis, a fellow at Yale University’s Millstein Center for Corporate Governance and Performance and co-author of The new capitalists: how citizen investors are reshaping the corporate agenda, ‘all major parties now accept that say on pay has been a net plus to the UK market.’
In 2003 GlaxoSmithKline lost an advisory vote on pay, sending shockwaves through British boards. Since then, says Davis, the measure ‘has produced a dramatic increase in dialogue between investors and boards.’ To the probable relief of many UK companies, this often means no more than cozy chats with investors behind closed doors. Even though a vote on remuneration is legally required, explains Walker, ‘it hardly leads to overt shareholder activism on pay and remuneration packages.’
US Iros worried about possible altercations may take consolation in the UK experience. Richard Singleton, director of corporate governance at Foreign & Colonial, advises UK Iros to focus on how pay deals are worked out, which can assuage shareholders.
‘There is talk sometimes about how shareholders should get to decide pay, but that’s the job of the company’s board,’ Singleton says. ‘You can, however, talk freely to shareholders about how pay is decided, limited and approved.’
Less clear, though, is the impact of an advisory vote on actual compensation. Executive pay hasn’t declined in the UK, but the rate of increase seems to have slowed, and performance metrics have improved. For Ferlauto, that’s very positive. ‘Even if you have a ratcheting-up in pay, the pay should deliver value – which is not the case here,’ he points out.
Getting ready
Arguably, the beauty of say on pay is its modesty. ‘It’s almost an easy sell,’ says Paul Schulman, executive managing director of the Altman Group. ‘It doesn’t force companies to do anything; it’s just a way for investors to give a thumbs-up or thumbs-down to the firm’s compensation practices.’ For these reasons, he argues, ‘it’s tough for companies to object.’
Of the growing support for say on pay witnessed last year, Carol Bowie, vice president of the governance research service at Institutional Shareholder Services (Iss), says, ‘Investors are looking for a systematic way to communicate with management when they have concerns – this provides such a communications tool.’
Enter Iros, whose specialty is communicating with investors. But how do you open a dialogue with investors about something as complicated as compensation practices? Taking a company’s pay message on the road is one suggestion Davis offers in a new white paper entitled, ‘Does say on pay work? Lessons on making Ceo compensation accountable’. He advises companies to consider roadshows for communicating about pay. ‘If you have a dialogue with some of your top investors, you’ll quickly get a sense of what you can and can’t sell,’ he says. ‘It’s not rocket science.’
Others wonder whether such efforts would be overkill. Janke, the only Iro in the US currently facing this initiative, says he’s received ‘surprisingly’ few investor calls about it: ‘We didn’t get nearly the calls corporate communications got from interested media outlets.’
Who’s got it worse?
The say-on-pay concept may have been inflicted on UK Iros first, but there are reasons they might handle it more easily than their US counterparts. For one, they have far fewer shareholders with whom to connect.
‘Within the UK you can talk to maybe a dozen people and discover up to 40 percent of your shareholder register,’ explains Richard Singleton, director of corporate governance at Foreign & Colonial. ‘In the US it’s a lot more diverse, with less institutional input.’
There are also differences concerning the nature of the UK shareholder base. Most US investors hold their investments as part of a self-managed pension fund, says governance specialist Peter Walker of Pielle Consulting, ‘so they are actively involved in their companies. But in the UK, pensions are institutionalized and pension funds are the big investment institutions – private shareholders are still a small and largely inactive minority.’
Ruth Bender, senior lecturer in finance at the Cranfield School of Management, agrees UK-based Iros are better positioned. ‘I think we have advantages,’ she says. ‘We have a more cohesive body of investors, helped by the Association of British Insurers (Abi) and National Association of Pension Funds (Napf). We have a huge concentration of investors in London, so they are easier to address. Our comply-or-explain system makes it easier to get a coherent sense of company policy.’
The job may get more challenging as UK remuneration committees are increasingly looking toward setting pay deals at ‘international’ – for which, read US – levels, say critics. This may bring with it the more objectionable US-style bonus and share options packages.
But corporate social responsibility (Csr) expert Paul Toyne from Article 13 says there is a way to defuse potential conflict. ‘Companies can make sure the composition of the remuneration committee ensures there is enough independence within it to ask the challenging questions,’ he concludes.
