Legislation may give shareholders 'say on pay' for chiefs

By Russell Grantham

The Atlanta Journal-Constitution

When Aflac became the nation’s first company to give its shareholders a say on top executives’ pay, the Columbus-based insurer displayed a far calmer demeanor than the excitable duck in its well-known commercials.

“What can it hurt?” a longtime director on Aflac’s board told The Atlanta Journal-Constitution at the time of the nonbinding vote in 2008.

Apparently it can hurt a lot, judging from the reaction that such “say on pay” proposals are getting now at some major shareholder-owned companies in Georgia.

Home Depot and Coca-Cola Co. opposed shareholder proposals this year to hold such nonbinding votes at future annual shareholder meetings. Coca-Cola’s major bottler, Coca-Cola Enterprises, likewise opposed a shareholder proposal seeking a say on large future exit packages called “golden parachutes.” Shareholders rejected the proposals at all three companies by votes ranging from 45 percent to 55 percent, over the support of roughly a third of the firms’ investors.

Their victories could be short-lived, however, because lawmakers in Washington, D.C., are working on legislation that could make the votes mandatory at all publicly traded companies’ annual meetings. The “say on pay” provisions are in both the House and Senate versions of financial reform legislation that lawmakers are trying to meld into a final bill this summer.

And while experts debate how much impact the proposed votes would have, it’s clear that many people are angry at a perceived disconnect between stratospheric executive pay and the shaky recovery of many companies, employees and other players in the economy.

So far this year, shareholders at three major companies — Motorola, Occidental Petroleum and Ohio banking firm KeyCorp — have rejected their executive pay plans in recent votes.

They were among roughly 300 companies that now give shareholders an advisory vote on executive pay. Most — like Atlanta’s SunTrust Banks and Columbus-based Synovus Financial Corp. — were required to hold the votes as a condition of receiving federal bailout money.

About 70 U.S. companies, including Aflac, voluntarily adopted the annual votes.

Aflac has asked shareholders their opinion on executive compensation for three years, said spokeswoman Laura Kane. More than 90 percent of the shares were voted in approval each time, reaching 98 percent of the vote this year, she said.

Indeed, none of the large Georgia companies came close to being rebuked by shareholders, according to a review of 25 firms’ regulatory filings by The Atlanta Journal-Constitution. SunTrust and Synovus also garnered overwhelming approval rates of 90 percent and 93 percent, respectively.

If such “advisory” votes are expanded by Congress, opinions are divided on what impact they could have.

Companies that oppose the votes say shareholders already have adequate methods to express their opinions.

“We do believe there is a better mechanism,” said Coca-Cola spokeswoman Kerry Kerr. She said Coca-Cola “work[s] hard to stay attuned to investor sentiment.” Shareholders can vote for or against members of the board of directors, she said.

Institutional investors — the pension plans, mutual funds, insurance companies and other firms that typically control 80-plus percent of a company’s shares — are also divided on the issue.

Some big money managers say they deal directly with the companies’ managers and directors on such issues, and vote with their feet — sell shares — if they believe the companies are being mismanaged.

But others believe the votes, even though nonbinding, will still have an impact by pressuring boards of directors to make sure executive pay more closely follows the fates of their companies’ profits and their shareholders’ returns.

Shareholders’ “nay” votes at Motorola, Occidental Petroleum and KeyCorp were a “PR disaster,” said Paul Hodgson, senior research associate at The Corporate Library, an independent corporate governance firm in Portland, Maine.

“I think those companies will be meeting with their shareholders to make sure that doesn’t happen again,” he said.

Conversely, the fact that only three companies out of about 300 were snubbed by shareholders shows that investors are being sober about the vote, despite widespread public ire over executive pay levels, said Justin Levis, senior research associate for the Council of Institutional Investors.

“We are big fans of ‘say on pay,’ ” Levis said. “We believe it is an incredibly important way for shareholders to communicate.”

The Washington, D.C.-based group, which represents pension funds with about $3 trillion in assets, says the votes should prod more boards of directors into making sure management’s pay is linked to the company’s performance and isn’t out of line with pay at similar companies.

Levis said some red flags that may garner “no” votes include CEO pay packages that include a high proportion of cash rather than stock or options; easily sold shares; excessive perks; or bonuses for below-average performance. (The organization’s checklist can be viewed at
http://bit.ly/votesonpay.)

For instance, shareholders likely voted against Occidental Petroleum’s executive pay plan, Levis said, because compensation was about three times higher than peer companies. Likewise, shareholders probably disapproved of the fact that Motorola’s co-CEO was assured of getting a large bonus. Normally, a bonus should be a type of incentive pay that the executive gets only if the company performs well.

“We believe a guaranteed bonus is not a bonus at all,” he said.

Staff writer Michael Kanell contributed to this article.