Citi shareholders have slim chance of enforcing say-on-pay vote
As Reuters reported Tuesday in a piece on Citigroup shareholders voting against the $15 million board-approved pay package for CEO Vikram Pandit, investors appear to be increasingly skeptical of lavish pay for executives of corporations with underperforming stock. With companies entering the second proxy season in which shareholders can offer an advisory say on executive pay, compensation and proxy experts are predicting more votes against compensation packages than we saw in 2011, when 45 companies got a thumbs-down from shareholder in say-on-pay votes.
Such votes are strictly advisory. Dodd-Frank mandated that shareholders have a say on pay, but it didn’t require boards to do anything in response to their votes. Some boards took 2011 votes against approved compensation packages to heart; according to a Feb. 21 Wall Street Journal story, a lot of the companies that failed say-on-pay votes hired new compensation advisers and improved communications with shareholders. The Journal also noted that a quarter of the companies that failed shareholder votes got new CEOs in 2011, a turnover rate that’s twice as high as overall corporate rates. (It’s not clear whether that’s because the execs figured they could do better elsewhere or boards interpreted say-on-pay rejections as a no-confidence vote on management.)
But what happens if corporate boards simply ignore shareholder say-on-pay votes? Based on the results of the first year of say-on-pay litigation, not much.
About a dozen corporations that failed say-on-pay votes in 2011 were sued in shareholder derivative actions accusing board members of breaching their duty. Only one of those suits has so far survived a dismissal motion. Last September a federal judge in Cincinnati denied Cincinnati Bell’s motion to toss a say-on-pay derivative suit, ruling that the board’s approval of multimillion dollar bonuses for three execs of the struggling corporation could plausibly constitute an abuse of discretion. Shareholders’ counsel from Robbins Geller Rudman & Dowd — which has pioneered the say-on-pay litigation — subsequently ran into some jurisdictional problems in the Cincy Bell case, but the company agreed last December to settle a related state-court derivative suit based on the same say-on-pay allegations.
Cincinnati Bell is apparently the third company to settle a say-on-pay derivative suit; according to a study last summer by Drinker Biddle & Reath, KeyCorp and Occidental Petroleum also settled. None of the Occidental terms were disclosed, but what’s known of the KeyCorp and Cincinnati Bell deals doesn’t suggest big recoveries for shareholders.
Meanwhile, at least five other say-on-pay suits have been dismissed by state and federal judges. A Georgia state court derivative case against the board of Beazer Homes was apparently the first dismissal, last September. The first federal court dismissal came in January, in a Portland, Oregon, case against Umpqua Bank’s board. Three more say-on-pay derivative suits got the boot in March: a Los Angeles state-court suit against board members of Jacobs Engineering on March 6; a San Francisco federal court suit against Intersil’s board on March 7; and a Baltimore federal court case against the board of Biomed, on March 12. (Shareholders were granted leave to amend their complaint against the Intersil board.)
That’s not necessarily the end of the road for say-on-pay litigation. There are a few more cases from last year still on the books. Moreover, shareholders may be able to argue that last year’s say-on-pay votes put boards on notice that they can’t simply rubber-stamp generous compensation packages, which could give shareholders a stronger argument for getting past the procedural hurdles in derivative litigation. Nevertheless, Citi’s shareholders shouldn’t count on it.
I emailed Darren Robbins of Robbins Geller but didn’t hear back.
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