When "Say on Pay" Is a Must

Investors should “just say no” to say on pay? One of my Foolish colleagues voiced that opinion last week, but more recent developments underline the fact that if regular people -- including investors -- don’t step up and take responsibility for themselves and reject things that are amiss, somebody’s going to step in and do it for them.

Case in point: Democratic New York Sen. Chuck Schumer plans to introduce a corporate-governance bill next week that will ensure that investors have an “advisory vote” on executive compensation levels. It would also make companies name independent chairmen and elect directors on a yearly basis. Boards would also be required to disclose their roles in managing risk.

Plenty of reasons to be outraged
Schumer’s bill certainly underlines many important themes these days. Most noticeably, there’s plenty of outrage regarding outrageous executive compensation and bonuses (with good reason), and it’s particularly well placed when it comes to the huge entities that have required bailouts, such as AIG (NYSE: AIG  ) , Bank of America (NYSE: BAC  ) , and Citigroup (NYSE: C  ) . Companies that have received government bailout money are required to give “say on pay,” and heck, if you’re surviving on the taxpayer dime, I’ll acknowledge that that’s the least you can do.

Meanwhile, many policies such as “golden parachutes” are simply absurd. We can all flip out about some corporate welfare cases’ executive compensation, but in most cases the people who were at the helm when the mistakes were made are long gone, having departed with millions or billions all told, between past pay, golden parachutes, and so forth. There’s something seriously screwy when someone who massively fails is given a massive going-away present. Shouldn’t they simply be told not to let the door hit them on the way out? Why, for the most part, have shareholders shrugged and let this type of attitude pass?

Another theme is that boards of directors have been apathetic for far too long. In a recent article, in which I beseeched CEOs to voluntarily “do the right thing,” I pointed out that for many companies, decadent levels of pay are too often not really tied to performance. All of these disconnects really do say that corporate boards need to wake up, and that the era of gladhanding between boards and managements sorely needs to be over.

Just say no to apathy
That said, though, I can’t give shareholders a pass. There’s been plenty of apathy in that quarter as well. Simply ignoring corporate governance issues as unimportant, or believing that if shareholders are unhappy with management, their only recourse is to sell their shares, strikes me as the root of our problems to begin with.

Eschewing personal responsibility and making an assumption that people are ultimately powerless to change anything is exactly what leads government to step in and take control, and this often has unforeseen consequences, especially when it comes to business and markets.

However, even without Schumer’s bill, there are signs that some shareholders do care and some companies are open to such changes, such as advisory votes on executive pay. Apple (Nasdaq: AAPL  ) said yesterday that it made a mistake in its vote counting and that it will adopt “say on pay” after all. Other well-known companies that already have say-on-pay advisory vote policies in place include Blockbuster, Verizon (NYSE: VZ  ) , and AFLAC. So even if some say-on-pay proposals are being defeated recently, as happened at Johnson & Johnson (NYSE: JNJ  ) and Abbott Labs (NYSE: ABT  ) , there have been rumblings of much-needed change taking place, and that’s going to get noticed.

Remembering responsibility
I don’t have a problem with the measures Schumer is recommending in the bill, since I’ve long been a fan of say-on-pay advisory votes and separating the chairman and CEO roles at companies. Rather, my problem is with government mandates. That may be a hardwired philosophical issue on my part, but I do fear that the more we open the door to government interventions in business, the more we are going to risk inadvertently crippling the competitiveness of our companies. Schumer’s bill has good intentions, but of course we all know the road to hell is paved with good intentions. It makes me wonder what’s next.

Furthermore, the idea that our government must intervene and legislate these matters because our supposedly “best and brightest” are so greedy and driven by self-interest that they can’t behave in a rational and ethical manner, and our populace is so apathetic that they can’t expect better, is a cynical thought that should disturb all of us. I’d rather all of us take more personal responsibility for our actions and reject some of the excesses and absurdities that bubbled up during the bubbly times.

So thanks, Sen. Schumer. These are great ideas; if only we had all embraced them years ago, without forceful government nudges. For now, though, I would rather see shareholders big and small demand these changes at their companies, and corporate managements and boards do their jobs the way they’re supposed to, with reason and restraint. Still, maybe corporate managements and boards are getting one thing straight, at least: More of us have got our eye on them than ever before. And that’s a good thing.

Apple and AFLAC are Motley Fool Stock Advisor recommendations. Johnson & Johnson is a Motley Fool Income Investor pick. Try any of our Foolish newsletters today, free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy.


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  • Report this Comment On April 28, 2009, at 7:06 PM, boogaloog wrote:

    And what, exactly, am I supposed to do about it? You say I should take more personal responsibility to do something about the problem, but you don't even give a hint as to what I -- a small investor -- can do. And don't even try to pretend that my proxy vote matters. All of us small investors combined don't matter. Do you really think corporate fat-cats care when a group of investors NOT named Buffett or Gates makes a stink? So please, tell me, what can a small investor do about a CEO who makes a hundred million dollars? Write a nasty letter? That'll show 'em!!!

    There is no regulation in an environment where those making the money are left to regulate themselves. I'm pretty sure they don't care about doing the right thing.

  • Report this Comment On April 29, 2009, at 8:50 AM, Stocklovr wrote:

    I agree with you about the govt. mandates and I really don't care about Schumer's intentions. Schumer's bill on "advisory vote" is just a wonderful example of government interference... but then again, I guess we should be getting used to that these days.

    The very government Shumer works for allowed the sweetheart bonuses at AIG in the first place. We need to go back and read the story about the fox guarding the hen house.

    That said, I read all kinds of articles complaining about executive compensation so let me state a fact and then ask a question.

    The fact is that executive compensation is set by the board or some compensation committee appointed by the board. As shareholders, large or small, we vote for the board every year so in it's truest form, shareholders (owners of the company!) allow this compensation. In a fair world, then maybe the little guy would have more say but who said the world is fair? So... here's the question.

    If shareholders elected representatives don't get to set compensation, then WHO does and how do they determine what is appropriate? Who determines what the executive makes and who gets to say that $xxx is too much whereas $yyy is just right?

    The current system is not perfect but I see a lot of complaining about corportate compensation and nobody can answer my previous questions. Who really gets to determine what is, in this author's words, "absurd" and what is "just right"? Although I agree that some compensation is over the top, I'm not sure how to draw the top or more importantly, "who" gets to draw the top.

    -Slvr

  • Report this Comment On April 30, 2009, at 10:18 AM, Classof1964 wrote:

    Far too many people still assume the mantra of the last 25 years that "markets are self-regulating and self-correcting." We are in the situation we are in now because markets, the private sector, too many government regulators, and congress people too influenced by campaign contributions, all failed the public good. When, as now and in the Great Depression, the private sector fails so badly, we have the choice either to let things drift until they sort themselves out or to go to the source of last resort in this capitalist economy, the government. The regulations put in after the 1907 and 1929 crashes (prohibitions against derivatives, Glass-Steagall) kept the economy fairly stable until they were repealed at the end of the 1990s.

    Senator Schumer advocating some sensible regulations to return some influence to the owners of companies, the investors. The company managers, and their back-scratching boards, have given themselves such huge stock options, stock awards, restricted and otherwise, that the small investor as Boogolong said above has little influence. How many of us can go to the Corporate Library and look up each firm we hold 100-500 shares in? And how much difference will it make when managers collectively hold thousands, if not tens of thousands of shares. I agree with Alyce Lomax that we have been too apathetic, but that also includes pension and mutual fund managers, not just individuals. How many proxy votes have there been to give the stock holders a say on severence packages, let alone corporate pay? How really demanding are those multiple performance criteria that compensation committees can look at in determining bonuses, etc.?

    So let's recognize that the best capitalist economy is one that has a balance of interests, and for us that means that from time to time the government must take steps to ensure, restore or keep a level playing field, which the special interests are always trying to tilt.

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