Exorbitant CEO pay incites representatives to push for shareholder vote
What’s the modern shareholder to do? As Portia said in William Shakespeare’s The Merchant of Venice: O, these naughty times, Puts bars between the owners and their rights!
As it happens, Portia was commenting on women’s inability to choose their own husbands and not the rights of corporate shareholders, but Shakespeare, like the Bible and the legendary Yogi Berra, can be quoted to endorse almost any point of view imaginable.
Into these naughty times, when corporate chieftains are given exorbitant compensation, stride House Financial Services Committee chairman Barney Frank (D-Mass.) and 21 co-sponsors of the ‘Shareholder Vote on Executive Compensation Act.’ These Representatives want shareholders to have an advisory vote on the pay packages received by CEOs.
As of this writing, the bill has passed in committee. Frank says of the bill: ‘I do not understand those who argue that the people who make up our stock markets are collectively very wise, but at the same time are somehow incapable of rendering a coherent opinion on what they should pay those they employ to run the corporations that they own.’
Frank’s turn of phrase may not be Shakespearean in its poetry, but it’s pretty difficult to assail his logic: Shouldn’t the people who own something have a say in running it? Well, yes, but there are two problems with the underlying logic of Frank’s statement and the bill he is proposing.
Problem 1: There is an assumption that shareholders see themselves as owners of a company
But I have to ask: Do they really think of themselves as possessing a piece of the company? In the interest of full disclosure, I should state that I own some Exxon stock. When I pull into an Exxon or Mobil station, I do not think I am buying gas from myself. I don’t see myself as adding to the profits that I’m going to share through dividends.
In the interest of even more full disclosure, I do not wish to imply that I am a major investor with a vast portfolio. I wish. I’m just your typical ‘account-at-my-broker’ investor. I have some stock and some bonds. Guess what? I don’t differentiate between the two on the basis that the stock means I own the company and the bonds mean I’m lending it money. They are different types of investments, with different returns that add value to my total portfolio. The important point: Never, at any moment in time, do I think of myself as the owner of a company. I’m an investor. If I don’t like the way the board of directors is compensating the CEO, I won’t wait until the annual meeting to have my say in an advisory vote – I’ll dump the damn stock and invest my money someplace else. Owners of a company don’t have that luxury.
Problem 2: The advisory vote is the equivalent of government by referendum or direct democracy
Wait a minute, how can an advisory vote drive the way in which an entity is governed? Look at how recent instances of shareholder anger and the attendant publicity caused the departure of CEOs at Pfizer and Home Depot. And in each of those scenarios an advisory vote wasn’t even on the table. As seen in those instances, the repercussions of shareholder opinion can be far-reaching. Arguments can be made that those were just special cases caused by a unique set of factors, but what if a CEO leads his company through an expensive merger or acquisition that causes significant short-term pain – isn’t that CEO likely to face loud and angry disapproval at the annual meeting of the shareholders immediately after the pain ensues? Won’t the possibility of such public disapproval dampen the CEO’s initiative?
What if senior management is faced with a choice of proposing a large increase in R&D spending to fill the company’s product pipeline or, instead, to increase the shareholders’ dividends? The increase in R&D might have a major and positive effect on the long-term value of the company’s stock, but will any senior executives risk the shareholder wrath that could ensue when they can easily placate them with a dividend increase?
By proposing that shareholders have an advisory vote on executive compensation, Congress is effectively offering them a significant degree of control of the corporations that make up their investments. And if senior executives feel constrained by shareholder displeasure, doesn’t that constitute direct control by the shareholders?
This seems the equivalent of government by popular referendum. I have to wonder if Congress would accept the American voters having an advisory vote on the compensation packages that Congress grants to itself, to the executive branch and to the judiciary. What if Congress didn’t expand the benefits of some federal program – would they want to face an annual approval of their actions in the form of a non-binding referendum of the people on their salaries? What if Congress approved a war that became highly unpopular with the citizens – shouldn’t those citizens be able to express their coherent opinions by voting on the compensation package of Congress? What if Congress failed to cut taxes enough – shouldn’t the taxpayers then get to have an advisory vote on representatives’ pay?
The reason that it’s been 2,500 years since Athens tried direct democracy is that governments need a little insulation from their constituents to enable them to inflict short-term pain for long-term gain. In the last 25 centuries since the experiment with direct democracy, virtually every democratic system has been a representative democracy. In the United States we see it used in Congress, state legislatures, town councils, Parent Teacher Association’s and co-op boards. If representative democracy is such an exceptional idea for all of those groups, what’s stopping us from trying it in Corporate America?
The current model of corporate governance has provided huge value to shareholders for decades. The board of directors can (and in many cases, already does) function as a representative corporate government. With a little tweaking in the voting system, corporate democracy can work extremely well: Directors should be elected through a majority vote of shareholders, or, at the very least, through directors tendering resignations if they receive substantial withhold votes. The result being shareholders will have a real voice in the running of companies through their representatives, and management will be able to continue doing its job unencumbered by what amounts to opinion polling.
