Economic hard times have nurtured the first flowers of a revolt against egregious executive pay practises. Boards are cutting executive compensation slightly. And referendums on pay are multiplying. Yet progress in giving investors more control over pay could slip once the economy recovers. In the US at least, changing broker voting rules would firm reformers’ footholds.
Signs of shareholder discontent are evident. The number of so-called “say on pay” resolutions at US companies reached 106 on April 1 according to RiskMetrics. This total is expected to rise as more companies file proxies and recipients of US bank bailout money – which must give shareholders a non-binding vote on executive pay – are added to the total.
Investors outside the US are clearly angered by the levels of executive pay, too. About 90% of votes on Royal Bank of Scotland’s executive pay and pension packages in the UK last week were negative.
Board directors have noticed. Median pay for bosses at the biggest US public companies to file their proxies so far fell 9.4% according to a study the New York Times commissioned from Equilar. That may sound like a lot until one considers the average S&P500 company lost close to 40% of its stock market value during the year.
Still, even this middling progress may not be long-lasting. Compensation fell after the markets tanked in 2001, but it quickly resumed its upward trek. And while say on pay measures are proliferating, successes aren’t. Four of the five say on pay proposals so far were voted down by shareholders. In most cases, support stalls around 45% in favour of a vote.
The problem is that most institutional investors reflexively back management. And brokers routinely vote shares held in street name against pay-limiting proposals if a client doesn’t provide instructions to do so otherwise. This is unsettling. The companies controlling these votes may be seeking investment banking or retirement account businesses from these very same bosses, creating conflicts of interest.
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One way to break the impasse is to curb broker voting – as the New York Stock Exchange has asked regulators to do. Some of the biggest brokers, such as Merrill Lynch and Morgan Stanley already vote uninstructed ballots in the same proportions as instructed ones, though this tends to favor the status quo.
The Securities and Exchange Commission has studied the issue and may make a ruling within weeks. Ending this variation of election rigging is the right thing to do. And it might just help indirectly defuse populist anger against executive pay abuses, not least by helping to eradicate them.
