Dodd-Frank say-on-pay unlikely to have impact – CalPERS governance chief

The head of corporate governance at the $220bn (€167.8bn) California Public Employees’ Retirement System (CalPERS) reckons the new advisory vote shareholders have on corporate pay under the Dodd–Frank act will have little impact.
“I expect it will do ‘sweet Fanny Adams’, it’ll be a feather duster,” said Anne Simpson at a lecture organised by campaign group Fair Pensions at the House of Commons last week. “I’d love to see some bold thinking in the realm of executive pay,” she added. “We haven’t got to the root of the canker.”
Under the act, which came into force in July, publicly traded firms must submit to a shareholder vote on executive compensation at least once every three years.
Simpson said shareholders “rue the day” they allowed companies to set up compensation structures based around share options, an idea originally meant to tie executives to corporate performance which had the unintended consequence of intensifying the focus on share prices.
Simpson firmly advocated shareholders as the drivers of corporate change after the financial crisis. “If not share owners, then who? Not government, not banks, not employees.”
Without getting into philosophical discussions about the nature of ownership, Simpson pointed to shareholders’ vital role as the “actual providers of capital”.
And she noted that shareholders can “do more” in private asset classes. “In private equity you really call the shots,” she said.
Simpson joined CalPERS from the International Corporate Governance Network, where she was Executive Director, almost two years ago. Under hertenure, the fund has undergone a rethink of its famous Focus List approach to corporate engagement.
In the lecture, Simpson reflected on the fact that investors’ proxy voting resolutions tended to focus on “relatively trivial issues” during the teeth of a major crisis. Responsible investment needed to be integrated, not solely based around issues like oil sands.
She also made pointed reference to CalPERS own well publicised issues of fund governance. “The license to operate applies as much to investors as companies and the responsible investment movement needs to take account of this.”
CalPERS has its own lobbyist in Washington DC, to assist it in campaigns covering issues like systemic risk, retail protection and credit rating agencies. Simpson claimed there are 12 derivatives for every one dollar in the global economy.
CalPERS, Simpson said, misread what went wrong with its own holdings in the financial crisis. So she talked to banks that received TARP funds. She said it was clear that companies “know how to look good and pass the ISS/RiskMetrics filter”.
“Governance can become a fig leaf to hide embarrassment,” she said. She advised investors to meet boards and talk to them. “It comes down to board quality.” CalPERS itself is setting up a pool of directors it can propose to companies.
Simpson said CalPERS was moving away from an obsession with board directors’ independence towards director competence. “See it as an investment and not a cost otherwise we’ll always rely on third party agencies.
“Investors don’t talk to companies – and companies talk to proxy voting agencies.”