Thursday, May 17, 2012

Binding 'Say on Pay' on its way

In an interview with the Financial Times, Michel Barnier, the EU’s financial services regulator, suggests that shareholders be given a binding vote on pay. Investors in banks would be able to set a cap on bonus levels and “curb ‘morally indefensible’ pay”.

When Say on Pay began (in the UK in 2002, and Canada in 2007), the larger and better governed companies were the first to sign on. It was more a less a rubber stamp of good corporate governance. In the first couple of years, the votes were in favour, no surprise. We all knew that the interesting times would come when shareholders voted against the executive compensation package.

According to the National Association of Corporate Directors , ‘Moving into May and the peak of annual meeting season, executive compensation is one of the top stories in the business media. To date, eight companies have failed their annual say-on-pay votes. With the bulk of annual shareholder meetings in the coming months, this number is expected to increase.’
The most high profile cases so far have been at Citibank, where 55% of shareholders voted NO ,  and at Aviva, where CEO Andrew Moss resigned after 54% of shareholders rejected the proposed executive compensation packages.

According to the New York Times, companies do address the issues raised by ‘no’ votes. “Mr. Ferri and David Maber, an assistant professor at the Marshall School of Business at the University of Southern California, examined companies whose pay practices received objections from more than 20 percent of the shares cast. They found that after such votes, these companies were more likely to remove provisions that were seen to reward failure than those where shareholders had not expressed high dudgeon over pay. Once the problematic provisions vanished, the companies experienced lower dissent — or none at all — in the next proxy season.” Read more about that research here.

On the other hand, in the midst of explaining a two billion dollar trading loss, J.P. Morgan received a 91.5% approval rating from shareholders on their executive compensation. However, it’s likely that many of the votes were cast before news of the failed trading strategy was made public.

Dermot Foley of Vancity Investment Management sees benefit in a binding vote. “ The votes in Canada have been pretty low, probably because they aren't binding. It does encroach a little bit on management responsibilities. However if it's for the top three or four executives, that might provide a pretty good disciplinary measure, particularly if performance measures aren't being met yet executives continue to get bonuses as has happened here in Canada.”

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