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Welcome A Shareholder Spring That Holds Bosses To Account
Perspective | 25 May 2012

Recent weeks have seen what some are calling a “shareholder spring” in the US and Europe. Investors, led by institutional shareholders (traditionally a quiescent bunch), have protested pay awards for top executives at several big public companies, and in some cases have overturned them.

European Union regulators are now considering a next step: giving owners a binding vote on top pay instead of the nonbinding “say on pay” that prevails in much of the EU and in the US since 2011, compliments of the Dodd-Frank financial reform law. We understand why some people have reservations about requiring a binding vote on pay, but on the whole we are for it.

The shareholder backlash has been mainly directed at financial institutions. More than half of Citigroup’s shareholders chose not to support the board’s proposal for bosses’ pay last month. Shareholder revolted over pay at UBS AG and Barclays. And after investors in Aviva, a big British insurer, balked at the board’s plans for top executives’ compensation, the chief executive officer (CEO) resigned. It has spread beyond pay, too. Pressure from shareholders recently dislodged the CEO of AstraZeneca, a big pharmaceuticals company. In that case, the fight was over performance and strategy.

Exit Packages
Banks’ shareholders in particular are right to feel aggrieved. Mismanagement has cost them dearly in recent years – to say nothing of the costs imposed on taxpayers. Beyond banking, there are signs that the trend of fast-rising CEO pay has moderated or even gone into reverse lately, but overgenerous exit packages and other cases of pay for failure still arise. You could more easily argue that shareholders have been too patient for too long than that their recent complaints are groundless.

Better corporate governance needs owners who are more engaged. The shareholder spring is a welcome development; in the US last year, investors approved all but 2 percent of corporate compensation plans. But there is evidence that companies, nervous about an embarrassing vote, are road-testing their pay plans with large institutional investors before putting them to a shareholder vote. Whether the uprising needs to be bolstered by further regulatory change is another matter.

Advisory votes on pay, some argue, are enough: Votes that empower shareholders to dictate pay at the top usurp the proper role of directors and could interfere with contractual obligations. Others argue almost the opposite – that shareholders would be more timid in exercising a mandatory vote for fear of driving out skilled managers, destabilising the company and pushing down the share price.

In the UK, the government has proposed the more radical idea of requiring the support of 75 percent of shareholders to approve a corporate pay plan. That is going too far: A supermajority rule risks giving undue blocking power to an activist minority whose interests might not be those of owners generally.

But it is hard to see a principled objection to giving a simple majority of a public company’s owners the power to overthrow (rather than merely complain about) a pay proposal. The chances are good that such a tool would not be used except in rare cases when a board is dysfunctional.

No doubt, compensation committees should not need this extra encouragement – but until recently they have not done a notable job and could evidently use more help. Perhaps the knowledge that a shareholder vote really means something will make owners and management more attentive.

Separate Board Chairman
Corporate governance in the US would also be strengthened if other recent trends advanced further. For instance, it is becoming less common for the role of CEO and board chairman to be combined. The board’s role is to oversee management on behalf of shareholders – hard to do properly if the crucial player on each side of the divide is the same.
The quality of independent directors also seems to be improving, or at least they seem more willing to challenge top executives. And numerous companies are moving away from staggered terms for directors to annual elections, making it easier for shareholders to clean house when a board is ineffective. Institutional investors, hedge funds and other major providers of capital are driving these changes and remolding corporate culture – in the process, helping other owners by holding managers more accountable.

Managers of public companies complain that they are already overregulated, and warn that if the burden gets any heavier the flight to private ownership of major companies will accelerate. They have a point. As a general matter, governments should not be running companies or designing pay plans for top executives. But better corporate governance is not the same as stricter government control. Closer scrutiny by shareholders of rewards for top executives is both legitimate and desirable. You could say the owners owe it to themselves.

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