Companies pay price for ignoring say-on-pay votes
By Reynolds Holding
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Companies that ignore say-on-pay votes may pay a hefty price: lawsuits. Shareholders in the United States are speaking up on executive compensation with the voice they were given by last year’s financial reform legislation. Their advice is not legally binding, but that hasn’t stopped disgruntled investors from calling in lawyers to enforce their views. Rather than fight, boards might be smarter just to listen.
The Dodd-Frank Act created say-on-pay to blunt criticism that executives were compensating themselves like rock stars. Beginning on Jan. 21, most public companies had to put top-officer pay packages to an “advisory vote” by shareholders. The law didn’t change directors’ fiduciary duties, so ignoring a thumbs-down verdict is allowed.
In the current annual meeting season, few boards have faced that option. On Friday, for example, just 27 percent of Goldman Sachs’ shareholders voted against Chief Executive Lloyd Blankfein’s $18 million 2010 payday. At last count, only 12 of more than 350 companies that have held meetings so far received less than majority support for their executives’ pay. Still, those few could face costly consequences.
A negative vote can lead to bad publicity or the ouster of directors. But for Jacobs Engineering and Beazer Homes — the first companies to lose say-on-pay votes this year — it has meant lawsuits filed against management by major shareholders.
The suits don’t claim that the votes were binding but cite them as slam-dunk evidence that executive pay packages were excessive. By not altering them after the votes, the suits argue, management unjustly enriched itself, breached its duties to shareholders and, in Jacobs’ case, wasted company assets.
These are tough arguments to win, given that the law generally leaves compensation decisions up to the business judgment of directors. It’s easy to see the reasoning behind that. Most shareholders don’t pay enough attention to make informed decisions about corporate matters, and some others — such as labor union pension funds — may have agendas that diverge from the interests of smaller investors.
Still, executive compensation has generally soared, even when profits and share prices have fallen. Many CEO incentives are sorely misaligned with shareholder interests. When that perception is wrong, boards should explain why. And when it isn’t, they’re better off heeding shareholder concerns about pay, and adjusting accordingly, than squandering more of their owners’ treasure on defending themselves in court.