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Shareholders Are Mad as Hell, and They Won't Take It Anymore

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Finally, there's hope to right the wrongs in our dysfunctional marketplace; the deprogramming has begun. Investors of all stripes have woken up, and they're voting against unreasonable CEO pay packages that for years have too often rewarded mediocrity or failure in corporate leadership.

Sorry, managements and boards, but spring has sprung with a vengeance
News headlines are touting a "shareholder spring" as investors remember they're part owners of public companies. Many are actively voting their shares to criticize the CEO pay abuse that's gone unchecked for decades now.

Shareholder rebukes just keep on coming; so far in these early innings, eight American companies have experienced say-on-pay defeats. Citigroup (NYSE: C  ) shareholders' extremely high-profile rejection of Vikram Pandit's pay was one of the first signs that even major companies are in the crosshairs of shareholder dissatisfaction with pay compared to performance.

We're still in the early stages of this revolution, and it should be interesting to watch some of the responses to these shareholder smackdowns. Maybe Citigroup's management and board are a bit dazed and confused right now, but over in Britain, Aviva's (NYSE: AV  ) CEO Andrew Moss took his ball and went home after shareholders voted against his pay package. He up and resigned.

The truth is, an increasing number of high-profile say-on-pay failures should show what these folks are truly made of. Good leaders and boards will listen to shareholder criticism and search their souls to do the right thing by shareholders, not to mention employees and overall business health.

Recently, Sprint Nextel's (NYSE: S  ) CEO Dan Hesse voluntarily relinquished $3.5 million in 2012 pay after "feedback from some shareholders" about his pay. Last year, Sprint had not taken the costs related to adding Apple's (Nasdaq: AAPL  ) iPhone to its network into account in bonus calculations.

In other words, any of these folks can voluntarily reduce their own pay at any time. These days, more humble gestures and just behavior are sorely needed.

Debunking bogus claims about the "market"
Many investors still defend generalized high CEO pay as a "market-based" factor, but they've been duped. A healthy marketplace rewards success and penalizes failure, and many CEOs have been paid millions upon millions just for showing up and bearing the "CEO" title, regardless of the true performance of the companies they've led.

Government bailouts during the financial crisis didn't help matters, either. Protecting those companies and their leaders from abject failure taught no lessons. The fact that some investors defended the concept of bonuses for AIG's (NYSE: AIG  ) top brass following its brush with failure showed that the brainwashing was stubborn. The popular defense that the company's executives still deserved supposedly "market-based" pay flew in the face of the reality: AIG would have failed without its taxpayer bailout.

The notion that boards populated with interlocking directors who happen to be other CEOs and who manipulated peer groups to boost everybody's pay were somehow perfectly normal market-based mechanisms has been proven hogwash, too. For too long, too many investors bought that irrational line of thinking, and allowed their capital to be squandered on ineffective leaders exhibiting poor performance.

The market's figuring out what's unbearable
Fortunately, shareholders have finally shaken off the complacency that has allowed CEO pay to burgeon out of control for too long. Fortunately, many of the shareholders who have awakened are the big ones who had forgotten their responsibility to exhibit stewardship over the hard-earned capital of most average Americans.

In 2010, The Wall Street Journal quoted legendary Vanguard founder Jack Bogle: "Directors are asleep at the switch because mutual funds are asleep. If mutual funds got together and said, 'We're not going to stand for it anymore,' the world would change."

Check it out: The world is changing. Shareholders large and small are remembering that they have a say regarding what the market will bear. When it comes to huge pay for poor performance or even failure, it's looking like the market's simply not going to bear it anymore. 

Check back at every Wednesday and Friday for Alyce Lomax's columns on environmental, social, and governance issues.

Alyce Lomax does not own shares of any of the companies mentioned. The Motley Fool owns shares of Citigroup and Apple. Motley Fool newsletter services have recommended buying shares of and creating a bull call spread position in Apple. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (5) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 09, 2012, at 8:56 PM, InvestWhatWorks wrote:

    I think too many pundits and headline writers automatically (from CNBC to Bloomberg to Fox to 'insert basically any media entity covering the stock market') attribute anger to votes against pay raises. I'm sure some shareholders voted because they were "mad as hell", but headlines would have you believe that every single vote against is a vote by an angry shareholder.

    When I voted against the pay raises of the boards of the various companies I own, I'm not voting out of anger. I try best to remove emotion out of investing. I'm not always successful in that effort, but I find that I end up being a investor when I do.

    Though good article overall, Ms. Lomax.

  • Report this Comment On May 09, 2012, at 8:58 PM, InvestWhatWorks wrote:

    Meant to write:

    "...but I find that I end up being a -better- investor when I do."

  • Report this Comment On May 10, 2012, at 8:07 AM, TMFLomax wrote:

    Point well taken, InvestWhatWorks! Right, I'm sure a lot of this is just a return to rationality about this issue -- a good thing.


  • Report this Comment On May 11, 2012, at 1:44 PM, downgoesfrazier wrote:

    What about the pay for the co-CEOs of Annaly Capital Management (NLY)? For 2011, they both had a base of $3MM and a bonus of $32MM. That's right...$70MM for the two of them. For three years, each has taken out over $74MM apiece.

    Sadly they are making money based upon a flawed mortgage market with guarantees from the US government. Who has ultimately paid for these huge payouts? Hmmm... .

    The contractual bonus structure basically guarantees another $30MM payday unless the Comp Committee steps in. What are the chances of that? About the same as Greece being in the Euro 12 months from now.

    Alyce - what can you do?

  • Report this Comment On May 11, 2012, at 6:20 PM, InvestWhatWorks wrote:

    I know you asked Alyce (and it was likely a rhetorical question), but "What can you do?":

    You can not but shares in the company. Or if you own shares, you can sell your shares. If you think the management is doing something you don't like, that's the simplest way to express your dislike.

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