Congressman Frank Gives Update on Say-on-Pay

Congressman Barney Frank, at an appearance in Minneapolis last weekend, predicted that President Obama will sign financial reform legislation into law by the end of June. The Frank Bill and the Dodd Bill (summarized in the ON Securities Cheat Sheet (PDF)) both include governance and compensation reforms that may change as they are reconciled in conference committee. However, both bills include similar requirements for Say-on-Pay, the requirement that all public companies hold an annual non-binding vote on compensation. Therefore, it’s pretty clear that Say-on-Pay will be adopted this year and will likely be required for all public companies by next year’s proxy season.

Congressman Frank, an entertaining speaker with an impressive grasp of the financial system, spent most of his speech discussing the need for financial institution regulation. However, he also emphasized the importance of Say-on-Pay. He believes executive compensation has gotten out of line with the concept of paying the amount necessary to regain good management. Congressman Frank pointed out that Say-on-Pay has been used in the United Kingdom for a number of years.

The speech was sponsored by the Caux Round Table, an international network of business leaders based in St. Paul, Minnesota. This group works with business and political leaders worldwide to promote good governance practices. Caux Round Table has produced the Principles for Responsible Business (published in twelve languages), which address corporate responsibility issues, including some compensation and disclosure principles, and make interesting reading.

Another Company Loses Say-on-Pay Vote

In the RiskMetrics Blog under “Occidental Also Fails to Get Majority Support on Pay”, Ted Allen reports that Occidental Petroleum lost a shareholder advisory vote on compensation last week. This is the second major company to lose such a vote; as I reported last week, Motorola also recently lost its advisory vote.

Of course, these votes are purely advisory and have no direct impact on compensation practices. However, they may have a major indirect impact. For any company that loses a Say-on-Pay vote, RiskMetrics and other proxy advisory services are more likely to recommend a “withhold” vote against members of the compensation committee at a future annual meeting unless the company makes significant changes in its compensation practices. This will increase the pressure on compensation committees.

The threat of a large withhold vote against directors may have an even bigger impact in the future, because under the current version of the Dodd Bill, companies listed on stock exchanges (including Nasdaq) will also be required to adopt “majority voting” policies in director votes. If this provision is included in the final law, a director’s failure to receive a positive majority vote will result in a requirement that the director resign. Therefore, the current financial reform legislation could create a big incentive for board members to cater to the wishes of institutional investors, particularly on executive compensation issues.