Are Companies Paying Attention to Shareholder Concerns About Executive Compensation?

Last week, I wrote about a PwC study about corporate directors. A couple of their observations I quoted were:

·         “72% of directors indicate that their boards would reconsider executive compensation—even when these votes pass — if there are indications of significant shareholder dissatisfaction”.

o   Comment: why is this only 72%?

·         “To prepare for the “say on pay” vote and to embrace investor concerns about executive compensation, two-thirds of directors made changes to their approach from prior years. Forty-five percent changed the Compensation Discussion and Analysis (CD&A) to be more “plain English,” and 31% provided an executive summary in the CD&A.”

I also pointed out that the “risk of public perception that the compensation may be excessive was not discussed.”

This morning, I read in the Financial Review (you may need to sign up for a trial) about Australian practices and regulations related to shareholder votes on executive pay. Following a report from the Australian government’s Productivity Commission on executive pay (see analysis here), a law was passed that, among other items, said that if 25% or more of the shareholders voted against the company’s remuneration report at two consecutive annual general meetings, the company would have to hold a vote at another shareholder meeting within 90 days as to whether the directors should be retained.

The Financial Review reports that three listed companies (including News Corporation) received their first votes with 25% or more voting against the remuneration plan. One, Pacific Brands, had a majority voting “no.”

Now we will all have our views as to whether directors should pay attention when a majority of shareholders vote against the company’s executive compensation plans (I think they should). We will also have differing views on whether directors should be dismissed if just a quarter of the shareholders vote against the compensation plans. Certainly, it appears to be a controversial situation in Australia (I am here this week) and may have been a step too far.

However, with all the public unrest doesn’t it only make sense to do something when shareholders express discontent at some meaningful level?

What is the best answer to this tough issue?

Posted on Oct 25, 2011 by Norman Marks

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  1. One significant question is what constitutes a "meaningful level" of shareholder discontent?  This could vary from company to company, depending on a number of factors, including the composition of the shareholder  base. In some companies, ten percent of shareholders could be meaningful, but in others it could be as high as 75% or 80%.  That makes it difficult to enact legislation or SEC regulation that addresses this issue.  Even if legislators could agree on an appropriate remedy (which is doubtful), it would be hard to find agreement on what is significant across companies. 

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