Say on Pay an Inevitability: Momentum Builds for Shareholder Bill of Rights

By Alan Petrillo on October 9, 2009 12:26 PM

On October 2, The Motley Fool surveyed the proposed Shareholder Bill of Rights Act. For the benefit of the sites audience of retail investors, Alex Dumortier wrote Lets Reform Say-on-Pay , a helpful primer on the Acts requirement that firms submit their executive compensation practices to a non-binding proxy vote.

Say on pay (SOP) has gained public attention through a sustained effort by some institutional investors. Major companies including, recently, Microsoft have accepted SOP provisions championed by Walden Asset Management and Calvert, among other firms and investor groups. These shareholders efforts have helped convince the Obama Administration and key Congressional leaders to include say on pay in their reform proposals.

Heading off Shareholder Rebellion

The cases of Microsoft and General Mills illustrate two common responses to say on pay campaigns. A SOP proxy resolution at General Mills won majority shareholder support despite management opposition, according to an update from Tim Smith of Walden and Aditi Mohapatra of Calvert. Despite this vote, the firm has yet to adopt SOP. Microsofts management, by contrast, committed to triennial shareholder review of compensation without the issue ever coming to a vote.

Paul Hodgson has considered management efforts to forestall shareholder rebellion at The Corporate Library blog. In his Brief History of Say-on-Pay , Mr. Hodgson describes a contentious SOP battle in Britain in 2003, the first year in which the UK required a vote on firms remuneration reports. After a majority of shareholders rejected a compensation package for the head of GlaxoSmithKline, the firm undertook a third-party review of its practices, resulting in major revisions to CEO Jean-Paul Garniers pay package.

Mr. Hodgson writes that this could have been the signal for a new contentious era in UK compensation practices, but this was not the case. He explains why:

Given the imminent introduction of say on pay in the US, and the fierce corporate opposition to it, a brief discussion of why this period of relative tranquility [in the UK] occurred is useful. In each of the cases where controversy appeared to have been brewing, behind-the scenes-discussions between the company and major institutional shareholders were taking place. In most cases in the UK today, companies regularly work closely with shareholders to ensure that there is full agreement on pay issues mostly those having to do with equity incentive plans prior to the annual meeting.

Microsoft Accepts Triennial Review

Microsoft provides an American example of this negotiated approach. In a company blog, the firms Brad Smith and John Seethoff write of their open and constructive dialogue with our shareholders .

They also explain why Microsoft has agreed to an every-three-years compensation proxy vote. Their reasoning should interest environmental, social and governance (ESG)-focused investors, who typically advise managers to take a long view of their companies.

Messrs. Smith and Seethoff write:

Our discussions led us to the conclusion that a three-year cycle is optimal for say on pay votes at Microsoft. Although we acknowledge that some constituencies support an annual say-on-pay vote, a number of considerations led us to our conclusion. Among them: 21bb37598146c54a272be26da55cd7ee Most compensation programs cant be changed overnight. Triennial votes give the Board and the Compensation Committee sufficient time to thoughtfully respond to shareholders sentiments and implement any necessary policy changes.

Tim Smith and Aditi Mohapatra note that while Microsoft has chosen the triennial approach, it is very likely legislation will require an annual vote.

More Fund Managers Should Think Like Owners

As for the prospects for federal reform, Paul Hodgson writes that say on pay now seems an inevitability, given President Obamas manifest support for it.

Perhaps another motivation is the example set by the investors whove led the American SOP movement. Its telling that a voice for retail investors, like Motley Fool, is taking a stand on this issue. Alex Dumortier connects the concerns of individuals to the efforts of institutions who support governance reform:

Individual investors are right to question whether their small voices will be heard. But remember: Not all institutional investors are created equal. You have a choice when you buy a mutual fund or select a fund manager in your 401(k). All other things being equal, you should certainly favor fund managers who have a straightforward proxy voting policy and who vote their proxies in a manner that proves they think like owners.