Congress passes new executive compensation rules
It’s not a pretty picture. Especially not when you are looking at shareholder voting from your executive perch in Corporate America, with a bird’s eye view of the battlefield.
Representative Barney Frank (D-Mass) and 21 co-sponsors are pushing the ‘Shareholder Vote on Executive Compensation Act’ that passed the House by a vote of 269 to 134. Frank and his supporters are stressing that this is an ‘advisory vote,’ by which he seems to imply that corporate America should be considered unreasonable in its opposition to a simple ‘advisory.’ Frank’s own personal website, however, trumpets the bill’s passage thusly, ‘House passes executive compensation reform,’ which sounds a wee bit tougher than ‘advisory.’
Majority voting, whether it’s the Pfizer model, the Intel model or whatever is gaining in popularity at more and more companies. Though consequences vary, the bottom line is: If your directors don’t get a majority vote, they have to offer to resign. Given the pressure that Frank’s bill is going to generate once it is passed into law – and does anyone really think that such a populist bonanza isn’t going to make it into law? – at least some of the directors offering to resign will, in fact, be shown the door.
The problem with any sort of proxy vote is effectively getting your message across to shareholders. Corporations are unable to communicate directly with their objecting beneficial owners (OBOs). As elections become more tightly contested the importance of this relatively small group will increase – but the corporations will not be able to communicate directly with them. (This is one issue that everyone should get behind: In the event of any kind of proxy contest, communicating with the beneficial owners is difficult and costly no matter what you happen to be advocating. All stakeholders would benefit significantly from a reworking of the rules regarding beneficial owners.)
And, last but not least, the NYSE’s Proxy Working Group has proposed to the SEC that the ‘broker vote’ in director elections be eliminated. In October 2006, when the proposal was announced NYSE president and co-COO Catherine Kinney said, ‘the election of directors is simply too important to ever be considered routine, even where the election is uncontested. Shareholder voting on the election of directors is a critical component of good corporate governance.’
Elimination of the broker vote, and the possible decrease in the retail vote that may result, raises all kinds of questions: How do you reach a quorum without those votes? (This is particularly troublesome for smaller public companies that are little held by institutions.) Won’t this actually disenfranchise the large block of street-name owners who fail to instruct their brokers how to vote their shares? This uninstructed block represents between 10 and 20 percent of the outstanding shares of most companies – often much higher at smaller public companies – and can influence the outcome of director elections. If they don’t vote, doesn’t that have the effect of increasing the power of the institutional vote?
As of April this year, spokesmen for both the SEC and the NYSE said the matter was still under review, which some have interpreted as meaning the SEC commissioners are perfectly happy to let this hot potato cool off for a while.
English playwright Tom Stoppard had one of his characters say, ‘It’s not the voting that’s democracy, it’s the counting.’ There’s the rub, another English playwright might have said.
Fortunately there are a couple of proposed solutions out there that might solve most, if not all of the problems mentioned above. First, there’s a proportionate voting proposal endorsed by the Securities Industry and Financial Markets Association (SIFMA). This is an elegantly simple idea: The shares without voting instructions would be voted along the same lines as shares with instructions.
All the shares would be voted, so achieving quorum wouldn’t be a problem. And those shareholders instructing their votes would be used as a reasonable proxy for their uninstructed brethren.
However, this proposal merely increases the voting power of the shareholders who do instruct – and it assumes that all voters would vote the same way. It does nothing to involve the street-name owners who have, so far, refused to vote their shares themselves.
The second proposal comes from Stephen Norman, secretary and corporate governance officer of American Express. Norman is also a former chairman of the Society of Corporate Secretaries and Governance Professionals (back when it was still the American Society of Corporate Secretaries). For more than six years, he was also chairman of the Society’s Securities Industries Committee (now the Public Company Affairs Committee) and a member of the NYSE's Proxy Working Group, which proposed the elimination of the broker vote in director elections.
Norman believes the way to handle the situation is to find a way to make the street-name owners vote. And, if you can’t make them vote in each and every director election – the outcome most people would like to see – you can have them pre-elect at the time they create their brokerage accounts. He calls this solution Client Directed Voting or CDV. Under CDV, shareholders would be afforded a number of choices in an even-handed manner to eliminate any perception of ‘stacking the deck’ in favor of either management or dissidents.
Choices would include:
a) vote as management recommends
b) vote against management
c) abstain on all matters
d) vote in accordance with the brokerage firm’s published voting policies
e) vote proportionally with the firm’s other clients’ instructed votes on the same issue.
The default position for clients who don’t specify a choice in their brokerage agreements would be to vote proportionally as the brokers’ other clients have voted. In this manner, the shares are voted but neither management nor the dissidents receive an advantage when clients fail to give their broker instructions. CDV would apply to all matters, both routine and non-routine. That way shareholders’ wishes would be carried out on all matters up for vote. It’s not as good as having an involved and engaged shareholder electorate, but is that a truly realistic hope?
The NYSE’s Proxy Working Group has met with the SEC and discussed both proportional voting and CDV. Either would be an improvement over the current system, but, in my humble opinion, Client Directed Voting presents the prettiest picture possible.
