Yesterday, House action brought the U.S. say-on-pay movement closer to being a matter of corporate compliance with federal law, as opposed to discretionary internal corporate governance.Say-on-pay proposals, as a general matter, empower shareholders with an annual vote regarding the salary and bonus compensation of senior-level executives for companies publicly traded in the U.S. Most proposals are non-binding; so although a corporation could ignore its shareholder vote and compensate its executives in the manner the board felt it had or wanted to, such a move would appear publicly unpopular. An amendment was proposed and approved that allows SEC exception; presumably, for agency flexibility and the inappropriate application to smaller corporations. The concept is not altogether new, as corporations in the last several years have independently instituted such proposals as proactive corporate governance.
The legislation also prohibits the corporation's executives to sit on the board's compensation committee; an apparent attempt to resolve potential conflicts of interest and insure committee independence. Relatedly, the legislation also empowers banking agencies and the SEC to prohibit incentive banking pay that promotes "inappropriate" risk-taking (that's a whole other post ...).
Opponents of the legislation argue the bill effectively allows the federal government to determine senior employee pay. Some may find this ironic in light of courts historical and near unanimous avoidance of interfering with a properly board-determined executive compensation package (as discussed here and here on this blawg). Some opponents also fear disproportionate shareholder influence; that large shareholders (read: institutional investors) may inappropriately control an executive's compensation, limiting reward for good performance, or scaring talent away to a competitor.
The Obama Administration and Treasury Department have been vocal in their request to receive legislation from Congress empowering shareholder input as a factor among others in determining executive pay (as applicable to all public corporations, and not merely those recipients of TARP funds). The bill passed the House Financial Services Committee yesterday; the Senate Banking Committee is also expected to deal with the issue this week. Before becoming law, the legislation yet requires both the House and Senate to vote on and pass the bill, as well as a Presidential signature.
Photo credit: Jon Sullivan.
If this becomes law, it will be interesting to see how this changes executive behavior in the future. Recent business history suggests owners (stock holders) are nothing of the sort. Instead, they are treated as cash machines, useful for driving the stock price up (and compensation) and providing capital (and perhaps tax dollars) but not providing input into critical issues like governance and pay. Principal agency problems have been rampant as a result.
ReplyDeleteHi E.C.!
ReplyDeleteThanks for the comment - how are you?
I think two things in response to your comments. The first being agreement (that s/h(s) practically serve a purpose of cash-functions than anything else): but for a different reason >> the individual and lay investors are largely cavalier about most management matters (and after our current economic crisis fades, I wonder how frequently we will be discussing execomp?). It is like a bad relationship: s/h(s) do nothing in light of corporate concerns for the longest time, and then one day it's 'the last straw' sort of scenario, and they turn immediately turn to litigation absent their active involvement. So maybe the say-on-pay will create more involved s/h(s)? Though if the s/h lethargy is a question of culture, or competence, or preoccupation, then maybe not ...
The second thing that comes to mind: the courts are really quite firm - in language and historical precedent - in leaving undisturbed business decisions that are properly determined by a corporation's board. The business judgment rule is only one example of this (generally, that directors are not liable for bad business judgments they may make, as long as they were reasonably well-informed and there is no bad faith or fraud). Courts simply do not consider themselves better arbitors of business decisions than the business people themselves (again, absent bad faith and fraud).
Then again, if the s/h votes are non-binding by law, the type and amount of litigation to be filed by angry s/h(s) is limited (as regards an execomp package that exceeds s/h say).
Am unsure, but found some interesting data on the say-on-pay movement that occurred in the UK in 2002, so will hopefully post that yet tonight. The results are mixed ...
Good night, E.C.!