US resolutions challenge executive pay structuresMarch 2003
Executive pay is emerging as a focus for shareholder action in the US.
‘Excessive’ executive compensation and linking the pay of directors in part to the social and environmental performance of the companies they run are both strong themes among resolutions scheduled for the coming proxy voting season, according to the Investor Responsibility Research Center, which monitors shareholder voting patterns on socially responsible investment issues at 2000 listed US companies.
By mid-February, nearly half of the 630 corporate governance resolutions already submitted were on executive pay. The number of governance resolutions is also up from the 529 submitted for all of 2002.
Many of the resolutions so far submitted by pension funds, charitable bodies and unions ask companies to link executive compensation more closely to the achievement of financial goals using tools such as performance-linked stock options.
Eighteen resolutions propose executive pay be partly linked to corporate social and environmental performance. Religious and social investment groups have filed a proposal asking Pfizer to report to shareholders on how the compensation of top executives compares with that of the lowest-paid workers at home and abroad, while the Connecticut Retirement Fund is asking Johnson & Johnson to consider ‘non-financial factors’ when determining executive pay, including ‘advances in equal employment opportunity and workplace diversity’.
Wal-Mart faces calls from the Service Employees International Union to base directors’ pay partly on the percentage of employees covered by health insurance paid by the company.
One resolution, filed for the computer company EMC’s annual meeting, asks for a freeze on directors’ pay when the company is making large-scale redundancies, as part of a ‘comprehensive executive compensation review’.
Although executive remuneration has been an issue for socially responsible investors in Europe for some years, particularly in the UK, it has been less prominent in the US.
However, it was highlighted last year when William McDonough, president of the New York Federal Reserve Bank, said excessive chief executive pay was ‘terribly bad social policy and perhaps even bad morals’.
Patricia Wolf, executive director of the Interfaith Center on Corporate Responsibility, which helped to compile the data, said the focus on pay disparity reflected ‘a time of what would appear to be egregious executive pay’.
More than 237 social and environmental resolutions have also been filed – more than at this time last year – most commonly on the environment or health issues such as drug patenting and tobacco.
Shareholder support for social proposals remains fairly low, but it is rising. In 2002, social issue resolutions received 9.4 per cent of votes on average – the highest level for ten years. More than one in eight of those voted got at least 15 per cent support and for the first time a social issue proposal opposed by management, on equal opportunity policy at CBRL Group (Cracker Barrel), won majority support. The company later ceded to shareholders’ wishes.
‘The once distinct line between “corporate governance” and “social advocacy” resolutions is being blurred by the increasing collaboration between “traditional” corporate governance shareholder advocates and organized efforts by labour unions, religious investors and SRI companies,’ said the IRRC.
The current trend appears to be a result of corporate scandals such as Enron and the general US economic downturn.
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