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There’s an article in the New York Times today – or at least the online version – about how the “say on pay” provisions of the Dodd-Frank rules aren’t effective. “Efforts to Rein In Executive Pay Meet With Little Success,” at http://dealbook.nytimes.com/2011/07/12/efforts-to-rein-in-executive-pay-meet-with-little-success/?ref=business.
According to the article, shareholders disapproved of pay plans at only 39 of 2,502 companies in 2011 proxy votes. One reason, the author posits, is that “independent board members are often not in an effective position to push back forcefully. The chief executive runs the company. … It doesn’t help their objectivity that independent directors may be using the same strategy to increase their salaries at their own full-time jobs.”
Yeah, I agree with that. But do we really need say on pay? I guess other things being equal, I would rather have say on pay than not, but a non-binding referendum doesn’t do much good. The only effective way for shareholders to have a seat at the table would be to make say on pay votes binding.
But I’m not for that either. Isn’t the board supposed to set executive pay? Why are shareholders involved at all? Because the Congress that enacted Dodd-Frank believed - correctly, I think – that directors are beholden to management. Shareholder control over directors was ineffective, so the only way shareholders can influence executive pay is to bypass the board and have a direct vote. That’s turned out to be not so effective, as the article points out.
The real way to solve the problem is to allow shareholders to nominate their own directors so they can vote out the directors who approve pay packages to which the shareholders object. In that case, we wouldn’t need say on pay. The SEC wrote such a proposal, but the Business Roundtable and the Chamber sued to block its implementation, and the SEC withdrew the proposal pending the outcome of the lawsuit.
As to which way the lawsuit turns out, I’m all goosebumps.
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Good post – you’ll like this one, too:
http://web.mac.com/m.levin/theactivistinvestor/Blog/Entries/2011/6/15_Say-on-Pay_or_Say-on-Directors.html
Comment by Michael Levin July 13, 2011 @ 1:41 pmThanks Michael. It looks like you said it earlier and better than I. But I’m glad someone out there is thinking the same way. Or at least similarly. GG
Comment by davideromine July 13, 2011 @ 1:53 pm