Regulators and legislators plan to implement reforms next year that could alter the landscape of executive compensation and give shareholders greater powers to nominate directors, place issues on proxy ballots and voice their view on the appropriateness of compensation through mandated say-on-pay votes.
Last year's financial meltdown has created a push to make directors more accountable for the performance of corporations, said Barbara Hackman Franklin, chair of the National Association of Corporate Directors, at the group's annual conference.
Executive compensation is a source of anger among Congress and the public, Franklin said at the event, held Oct. 18-20 in Washington.
Damon Silvers, associate general counsel of the AFL-CIO, agreed.
Executive pay is widely acknowledged as a contributor to the financial free fall, said Silvers.
He cited data showing that executive pay is now 300-500 times the average pay of workers compared with roughly 80 times the pay of two decades ago.
Because of that, people question whether we have the wrong incentives for executive pay, said Silvers. That is where the debate has ended up.
The ire over executive pay and its impact on investors, financial markets and the economy is reflected in say-on-pay and proxy-access proposals that would require majority voting and allow shareholders to place director nominees on the ballot, said Franklin, a former Commerce secretary and one of the original board members of the Consumer Product Safety Commission.
This could change the dynamics in the boardroom among directors, managers and shareholders It is time for us as directors to step up on vigilance and restore the public trust in American business. It is a call to action and it is urgent, Franklin said.
We need to let the White House and Congress know that we are stepping up to make a difference. The lack of trust in American business today is alarming.
We can't allow this lack of trust to exist or it will irreparably harm our economy. We have to show that corporate governance really works and that our entrepreneurial system of capitalism really is the best, he said.
Ira Millstein, senior partner with Weil, Gotshal & Manages LLP and senior associate dean for corporate governance at the School of Management at Yale University, agreed.
It's high time for corporate boards to adopt voluntarily at least some of the reforms being called for, said Millstein.
It is time for us to do something before the government and the Securities and Exchange Commission legislate and regulate us into a cookie-cutter mold.
If we don't do something on say-on-pay, majority voting and board nominating practices, it will be legislated by Congress or mandated by the SEC.
The SEC has barred brokers from voting for corporate directors unless they are instructed by their clients to do so, and in 2010 the Senate is expected to pass a say-on-pay proposal, already approved by the House, that gives shareholders a nonbinding advisory vote on executive pay packages.
SEC Chairman Mary Schapiro has said she is committed to adopting rules that would allow more shareholders even those who own as little as 1 percent of a company's shares to nominate directors and place issues on proxy ballots.
I am committed to bringing final rules to the full commission for consideration in 2010, Schapiro said Nov. 4 in a speech before the Practising Law Institute in New York.
We recognize that this timing means that any new rules will not be in effect for the 2010 proxy season, but we think it is far more important that we adopt the right rules, she said.
Schapiro also said the SEC is committed to reforms that would give shareholders more information about the qualifications of nominated directors, the risk associated with executive compensation practices, board governance structures, and fees paid to compensation consultants and those consultants' potential conflicts of interest.
But Millstein and others at the NACD meeting suggested that boards should implement such policies on their own and not wait until mandates are in place.
We need voluntary action because we didn't do well on assessing risks, compensation practices and oversight of management in the recent crisis, Millstein said. There is no reason companies can't talk about compensation practices, adopt majority voting and some type of say-on-pay plan, and discuss the qualifications needed in a director.
He also indicated that corporations should act now to create better ways to give shareholders more input into who is elligible to serve on boards.
Access is a hot issue and will remain a hot issue. You have to find a way to do it. he said.
Access to proxies is coming, agreed Mark Anson, president and executive director of investment services at Nuveen Investments of Chicago: Sooner or later there will be a rule making, so we need to get a jump start on this.
But not everyone is convinced that giving shareholders more access to proxies makes sense.
Are the majority of shareholders' interests really aligned with the best interests of companies? asked Phil Laskawy, nonexecutive chairman of the Federal National Mortgage Association (Fannie Mae) and retired chairman and CEO of accounting firm Ernst & Young LLP.
Many investors are merely in for the short-haul. Majority voting and say-on-pay make sense, but I am not a big fan of proxy access, he said.
Steve Bartlett, president and CEO of the Washington-based Financial Services Roundtable, agreed: Some organizations have things that they are trying to achieve that are not in the best interest of companies. That is one of the fears we have about expanded proxy access.
Bartlett is also concerned that the limits on compensation that have been placed on financial firms that have received federal bailout funds could be extended into the general corporate environment.
The size of pay is a slippery slope, argued Bartlett. You can put the economy into a crisis pretty fast if you layer the size of pay into a formula of how much absolute pay is too much.
We need to communicate internally and externally why the pay structure is what it is, and measure the risk of any compensation package at any pay level and ask whether it creates an appropriate or inappropriate risk for the corporation.
But Silvers suggested that both say-on-pay and limits on executive compensation are coming, and that it is only a question of when.
Say-on-pay is likely to be enacted in the near future, he said. Some people think it will make [the situation] worse, but we are going to get it because of the long-term failure of voluntary structures to get executive pay right.
Silvers added that unless problems with the financial system are fixed, executive pay limits also are coming.
Eventually we will end up with absolute limits on pay if we continue to go through these financial crisises and cycles, he said.
But whether what emerges will help or fix the problems is uncertain.
You can't go through the systemic failures we did without people questioning the appropriateness of the regulatory approach, said Kalpana Raina, managing partner of 252 Solutions LLC, a specialist in corporate strategic development. So we will get regulation. The question is whether we will get reform.
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