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Shareowners' Word of the Year: No

By Alyce Lomax - Updated Apr 6, 2017 at 10:11PM

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This tiny word could wield a ton of power over corporate managers' practices.

Depending on the source, the 2010 Word of the Year was "austerity" (Merriam-Webster) or the now-infamous "refudiate" (New Oxford American Dictionary). For better or worse, these words captured headlines and the public's attention during the course of the year. What buzzword might sum up 2011?

So far, shareholders large and small might nominate an elegant, simple, yet powerful word for this year's honor: "No."

New mandatory say-on-pay provisions at public companies are beginning to show that when given the option to cast a vote, some shareholders will definitely rebuke corporations' pay packages. These votes are non-binding, but they're increasingly sending the message that outsized pay and downsized performance aren't welcome anymore.

Just sayin'
More and more companies have begun to suffer shareholders' scorn. Hewlett-Packard (NYSE: HPQ) saw 50% of its shareholders voting against approval of its proposed pay practices. Stanley Black & Decker (NYSE: SWK) and Umpqua Holdings (Nasdaq: UMPQ) have more recently experienced similarly resounding votes against their own executive compensation policies.

A mere 39% of shareholders voted for Stanley Black & Decker's compensation practices. Riskmetrics Group highlighted Executive Chair Nolan Archibald's mind-blowing incentives, including a possible $45 million bonus connected to achieving "synergies" related to Stanley Works' acquisition of Black & Decker.

Riskmetrics Group also reported that the paltry 35% shareholder support for Umpqua's pay practices marks a low this year so far. Though shareholder returns have fallen on a one-to-three-year basis, and its stock has underperformed peers, Umpqua's CEO enjoyed a 72% increase in pay in 2010.

Even if they're non-binding, these votes may embarrass the companies that endure them, and sully their reputations not only with consumers, but also with potential and existing investors.

Along those lines, The Corporate Library recently pointed out General Electric's (NYSE: GE) decision to retroactively attach performance metrics to stock options awarded more than a year ago, following what the company called "constructive conversations with our shareowners," which could signal that many companies can't bear even the hint of say-on-pay defeats.

In other words, regardless of the votes cast, the mere idea that shareholders now have this option may push companies to think a bit harder about whether their compensation plans could use adjustment.

RiskMetrics Group's data shows that nine companies have failed to gain majority support in say-on-pay votes so far this year. Annual meeting season isn't over yet, either, and RiskMetrics highlighted several companies that may be about to get a compensation comeuppance at their meetings on Thursday, including Pfizer (NYSE: PFE), Johnson & Johnson (NYSE: JNJ), and eBay (Nasdaq: EBAY).

The "say no now" path back to sanity
Despite admirable exceptions, many CEOs' pay has skewed too far from any relationship to actual business performance. Last year, the average CEO made 343 times the pay of the average worker, according to the AFL-CIO's most recent data. Although many of us are fine with lucrative pay for exemplary leadership, too few CEOs seem to embody that quality. Shareholders of all stripes can logically conclude that overpaying underperforming CEOs is a wasteful practice that hampers profitability.

Reining in management-centric cultures that have failed to reward true performance can only benefit companies in the long run. Shareowners who are willing to take a hard look at management performance, and vote "no" to outsized and unreasonable pay packages in this pivotal year, could make "no" the word of the year for 2011. They could also ensure that better corporate leadership gets rewarded for building truly good businesses in the years ahead.

Check back at every Wednesday and Friday for Alyce Lomax's columns on corporate governance.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

HP Inc. Stock Quote
HP Inc.
$37.29 (0.97%) $0.36
eBay Inc. Stock Quote
eBay Inc.
$67.23 (1.76%) $1.16
General Electric Company Stock Quote
General Electric Company
$97.55 (1.60%) $1.54
Johnson & Johnson Stock Quote
Johnson & Johnson
$163.36 (0.26%) $0.42
Pfizer Inc. Stock Quote
Pfizer Inc.
$51.72 (0.47%) $0.24
Stanley Black & Decker, Inc. Stock Quote
Stanley Black & Decker, Inc.
$186.05 (0.92%) $1.69
Umpqua Holdings Corporation Stock Quote
Umpqua Holdings Corporation
$19.68 (-1.40%) $0.28

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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