Investors, get your share of corporate clout
It’s June and annual meeting season is in full bloom. That has many shareholders seeing red over executive pay.
Securities regulators, for the first time, have demanded that companies tally up all the components of annual pay for top officers and provide the data to shareholders in an easy-to-read fashion. The numbers frequently amount to a significant percentage of a company’s earnings.
“Greater transparency allows us to know how bad the problem is,” said Patrick McGurn, executive vice president of Institutional Shareholder Services, a proxy advisory firm in Rockville, Md. “These numbers can be eye-popping.”
After the sticker shock wears off, what can shareholders do?
They once were advised to “vote with their feet” by selling stock in companies with unsatisfactory policies on compensation. Now, however, many corporate governance activists say there has never been a better time to do the opposite. In such situations, they say, investors not only should hold on to their stock but they also should use those shares to press managers for positive change.
“Vote your proxy. Attend meetings in your area and speak up,” urged Richard Ferlauto, director of pension investment policy at the American Federation of State, County and Municipal Employees. “The pay issue, particularly with respect to getting an advisory vote on pay, has taken off this season. Shareholders should stand up and be heard.”
Excessive pay is the result of two things, corporate governance advocates say: board members who are either negligent or too beholden to management, and governance policies that limit the system’s checks and balances. To fix the problem, the activists say, shareholders should focus on the directors who serve on the board’s compensation committee and on corporate rules that govern how pay policies are made.
There are several ways to take action.
Vote
At many companies whose executive pay policies are out of control, large institutional shareholders are already sponsoring initiatives designed to temper pay, said Dennis Johnson, senior portfolio manager at the California Public Employees’ Retirement System in Sacramento. You can make a difference simply by voting for them, he said.
These initiatives come in various forms. Some demand that shareholders get an advisory vote on pay. Others seek to limit so-called golden-parachute payments when an executive is fired. Still others demand that the company link pay more closely to performance.
At some companies, shareholders have also asked to “de-classify” boards, demanding that every director be elected annually. In some cases, investors have sought rules that would require that directors who are unable to secure majority support in an election be forced to resign their positions. Such rules make it faster and easier to get rid of problem board members.
Companies often must get shareholder support for their equity incentive plans. If you don’t like how much of your money the company is giving away, just say no, activists advise.
If you believe a company is consistently overpaying executives, you can choose to “withhold” your vote from directors who serve on the compensation committee.
Even when shareholder initiatives are merely advisory or unable to generate majority support, a strong showing sends a powerful message to management, Johnson said.
Complain
Many investors own shares through mutual funds, so they do not have the ability to vote in individual company elections. They do, however, have the ability to tell their fund managers what they expect.
Last week, AFSCME, the government workers’ union, released a study that said several mutual funds were “pay enablers” that consistently voted against shareholder proposals that would rein in executive paychecks. Fund companies are supposed to serve as fiduciaries, acting in the best interest of their shareholders. If you think your company is negligent in this role, write a letter stating your concerns, experts urge. If it doesn’t respond, consider moving your money to a company that’s more attuned to your interests.
Lobbying is also an option. In Congress, a bill that would give shareholders the right to an advisory vote on executive compensation has passed the House and is being considered in the Senate. If you strongly support the measure, write your senators.
Initiate
Every company must publish in its proxy statement the procedure shareholders can follow if they want to present a matter for a shareholder vote. The process is surprisingly easy, said John Chevedden, a 62-year-old Redondo Beach investor who says he has sponsored hundreds of proposals over the last decade. All you need is to have held $2,000 in the targeted company’s stock for at least a year and be able to follow a few simple rules.
The process: Write a brief “resolved” statement, stating what you want. (As in, “Be it resolved that ... “) You then just need to back your resolution with a supporting argument.
For help in writing a resolution, Chevedden suggests looking through other company proxy statements to find one to use as a model. Some possibilities:
* A “say on pay” proposal submitted by institutional shareholders of Occidental Petroleum Corp.
* A KB Home shareholder initiative offered by the AFL-CIO urging that pay be directly linked to performance.
* At Home Depot, a proposal submitted by Chevedden aimed at restricting the company’s “poison pill” defenses, which are designed to make takeovers prohibitively expensive.
* Another proposal by another Home Depot shareholder to allow an advisory vote on supplemental retirement benefits for executives.
Any of these could serve as a model for like-minded shareholders, Chevedden said. Because they made it into company proxies, you can assume they’ve met SEC requirements.
Some examples of those requirements: It’s important not to air personal grievances in your resolution. If you do, the company can legally reject it and the SEC will side with the company. Not surprisingly, you also can’t advocate that the company violate state or federal law.
In addition, you can’t dictate to management on matters of daily business. You aren’t allowed, for instance, to say that managers can’t earn more than a set multiple of the average or lowest-paid employee’s wages. You also can’t ban executive bonuses. But you can ask that the board allow shareholders to voice their opinion through advisory votes.
Once the initiative is written, mail or fax it to the contact listed in the company’s proxy statement. (Every company must publish a notice saying how shareholders can submit proposals.) Keep a copy and a receipt showing when it was submitted.
“There are no tricks, no filing fee,” AFSCME’s Ferlauto said. “It takes a pen, paper and a stamp.”
