IT’S early in the US proxy season, but it looks as if shareholders are set to give directors a stern rebuke on at least one of the two say-on-pay items that are on annual meeting ballots this year.
As reported in this article by contributor Vanessa Schoenthaler of Qashu & Schoenthaler yesterday, shareholders are voting against the recommendations of directors in many say-on-frequency votes, which are meant to advise boards on how often shareowners want to vote on executive compensation.
While directors are mostly recommending that say-on-pay votes be held only every 3 years, shareholders are defying them and mostly voting for annual advisory votes.
It all seems to be shaping up into a dramatic showdown between angry shareowners on the one side and oblivious directors on the other pushing for the least stringent standards they can legally get away with.
But is that really what’s going on? I’m not so sure.
Directors out of touch with reality?
On the face of it, board directors and their advisors seem to be entirely out of touch with shareholder sentiment. While 55% of 250 boards have so far recommended a vote every three years, investors have so far supported annual votes by a 2-to-1 margin.
When you think about the history of say-on-pay, the current lower levels of trust in corporations, the financial crisis we’re still crawling out of, high unemployment, people still losing their homes, and general public antagonism to corporate “fat cats,” it’s astonishing that directors thought they could get away with recommending a triennial frequency.
And perhaps that’s actually what is happening. Maybe directors are so far removed from the real world that they really thought shareowners would support having a less frequent say on pay. Maybe there are too many lawyers and accountants and conflicted advisors giving directors counsel and not enough people with public affairs experience.
Who knows for sure? Whatever the case, it certainly looks like corporate boards have seriously misjudged the mood of shareowners and now are set to be humiliated.
Or classic diversionary tactic?
Or maybe not. Perhaps we’re not giving directors enough credit. They are, after all, some of the most experienced and strategic minds in business. And when you think about that for a moment, you start to see things in a somewhat different light.
By taking an antagonistic position on the say-on-frequency vote, directors are channeling investor anger towards the less important of the two say-on-pay proposals while giving a window-dressing opportunity to their institutional investors, who must still disclose their votes to their own shareowners.
It’s a risky diversionary tactic, but so far it seems to be working. For even while investors are voting against directors and management in the sideshow frequency votes, they’re overwhelmingly voting in favor of directors on the really important issue of executive pay practices. In fact, 87% of pay votes so far have received more than 80% support from investors.
That’s a great result if you’re a director, and remarkable when you consider that there is negligible public support for current high executive pay levels. And when the funds which hold Main Street’s retirement savings have to disclose how they voted, they’ll conveniently be able to point to their strong stand against management on frequency as evidence that they “stood up for the little guy.”
There is a likely loser in these sham say-on-frequency battles, but it’s not boards or their institutional investors.