Shareholders Can Help in Reining In Executives’ Pay
Anyone who owns stock in a major U.S. company should look closely at what’s going on in corporate compensation circles.
We’re not talking about the multimillion-dollar salaries, the hefty severance deals, the company cars and planes and country club memberships. We’re talking about stock options.
Options, which are rights to buy common shares at a set price in the future, were designed to make company officers feel like owners rather than hired hands. And that was supposed to result in better management and thus higher share prices--a benefit to both the managers and outside stockholders.
Instead, many of the plans give managers the riches and outside shareholders the shaft.
The latest news on this subject is a proposal by Time-Warner Inc. to sell more than $3 billion in new securities. The proceeds would be used to pay down the company’s staggering $11.3-billion debt.
According to a plan filed with the Securities and Exchange Commission, the company’s current stockholders must kick in at least $63 for each of their shares if they want to own the same percentage of the company. If they don’t, their holdings are diluted because there are more shares outstanding.
Shareholders were so unimpressed with this deal that the company’s stock price fell 20% immediately after terms of the transaction were made public. Recently, it was selling for about $90 a share.
Time-Warner argues that paying off debt will benefit shareholders: The company will be healthier, and shareholders will be better off. That may be true. What’s troubling is that stock options held by managers will be “adjusted” so that executives do not have to pay for the deal like other shareholders.
Unfortunately, this isn’t unusual. Stock deals that benefit managers--often at the expense of other shareholders--are becoming the rule rather than the exception, said Graef Crystal, a professor at UC Berkeley who is a compensation expert.
“Executives are only in the same boat as shareholders when the stock price rises,” Crystal said. “When the stock price tanks, shareholders are in a tiny little rowboat going down the drain, while the executives are sitting on the deck of the QE2 waving goodby.”
Shareholders have been virtually powerless to do anything about this problem because of Securities and Exchange Commission rules that essentially prohibit them from having a say in a company’s day-to-day operations. Compensation packages fall into that category.
But the tide is turning, and shareholders may soon be able to exert some ownership control.
There is a bill pending in Congress that would allow shareholders to object to excessive executive salaries. Although stockholders would still not be able to force the company to pay executives less or change stock option plans, they would be able to get ballot proposals about salary packages circulated to other shareholders.
What may be more effective are actions being taken by some large shareholders. Public pension fund managers in California and New York, for example, have started pressuring companies to become more responsive to their shareholders, both through private meetings and through public shareholder proposals.
Last year, dozens of these shareholder proposals objected to so-called golden parachutes--big payments to executives who get fired.
What can small shareholders do?
If you believe that you should have more say in executive pay, write to your U.S. senator and U.S. representative, noting your support for the Corporate Pay Responsibility Act. (The Senate bill number is S1198; the House bill, HR2522.)
You can also voice concern to the SEC, which has supervisory authority over most publicly held companies. The SEC is headquartered in Washington, but there are regional offices in most major cities.
Most important, learn about the companies you invest in and vote on who will direct the companies’ boards. When you get annual reports and proxy statements, take time to read them. Corporate activities that affect your investment are disclosed there. You may still not be able to vote on individual actions that company managers and directors take, but you do elect the directors who approve these programs and who hire company managers. If these directors have been a bit too generous with your money and now want your support for reelection, borrow a phrase from Nancy Reagan and “just say no.”
Shareholder Activism
Big shareholders in U.S. companies--attempting to improve the value of their investments--have become far more active in corporate governance in the past several years. They are meeting with company managers and sponsoring shareholder proposals in record numbers. Already this year, big shareholders and so-called “activist groups” have sponsored 101 proposals to force managers to rescind poison pill rules, cancel golden parachute payments or allow confidential voting, for example. That’s up dramatically from 1987 when only 30 such proposals were introduced.
