“What is of more concern to shareholders is that it looks like C.E.O. pay is recovering faster than company fortunes,” said Paul Hodgson, chief communications officer for GovernanceMetrics International, a ratings and research firm (“We Knew They Got Raises. But This?” New York Times, July 2, 2011).
This says it all – if Say-on-Pay were to be accorded credibility as a positive factor in corporate governance the miscorrelation between performance and pay raises for top executives would need to show some sign of abating. However, it would appear as if Say-on-Pay is a well publicized side show with no impact on what actually happens.
Corporate Governance as a discipline is littered with “false metrics” – think for a minute of the amount of legal and legislative time and ingenuity that has gone into defining “independent,” regarding boards or auditors. No level of independence, however defined, has ever been correlated with enhanced corporate performance. Consider all the talk about “electing” directors, whose accession to that status bears virtually no relationship to how that term is used in its customary role. We are still waiting for the D.C. Circuit Court to offer opinion on the authority of the SEC to set rules by which shareholders may nominate directors on to the company proxy statement. Based on past performance any effort to make use of a meaningful right of access will result in expensive and protracted litigation. Say-on-Pay is simply the most recent false rabbit track for the gullible to follow. It is cruel because of the implied suggestion that it actually is important. Early in the history of Say-on-Pay in the United Kingdom, where concepts such as shame and public responsibility are still evident, the compensation committee of Royal Dutch Shell created a compensation incentive arrangement with a number of hurdles. In the end, the hurdles were not achieved but the company paid the bonuses anyway notwithstanding a contrary shareholder mandate from a Say-on-Pay resolution. Arising from this maze of confusion, deception, distraction is one simple truth: the passage of a singlepreemptive corporate law providing that 5% of the shareholders may call a special meeting at which a majority may remove any or all of the directors with or without cause would provide the real discipline so conspicuously lacking in American corporate governance today. The way for shareholders to have effective input into the question of executive compensation is by having the power to remove directors or, as a possible alternative, compensation committee members who are responsible. We do not want shareholders to be put in the position of deciding on compensation questions; we only want that they can require their representatives – the boards and committees – to do the job properly. It is worth pausing to understand the consequences of permitting shareholders to remove directors. Whenever a director is threatened with removal, management typically would begin conversation with the shareholders petitioning for his removal. This dialogue leaves management with the prerogative of naming a satisfactory successor director, but it also gives the shareholders an effective veto power – resulting in the kind of “creative tension” that is the objective of aspirational corporate governance. This process ensures direct discussion between management and effective owners. It does not suggest that shareholders intrude into those areas traditionally or legally reserved for management such as nomination of directors or the setting of pay. In the simplest way imaginable, it focuses the ultimate shareholder power to require accountability of those they have “elected” with respect to pay of senior executives. So much discussion is devoted to complex and controversial practices with little potential for real impact, while so little is given to this simple corporate law amendment which would bring the United States into conformity with the rest of the world. One wonders why this condition is tolerated. Probably, when division and deception are allowed to exist, the explanation is simply that it is convenient to those who have the power. So, the challenge now is for institutional shareholders to collectively lobby for appropriate change.