Verizon Communications has turned up the heat on whether shareholders should have a greater say in executive pay packages, an issue that dominated this year’s proxy season and is sure to be back again in 2008.
The telecom giant earlier this month voluntarily adopted a policy to let shareholders have an advisory vote on executive pay packages, starting with the company’s annual meeting in 2009. In making the announcement, Verizon pointed to the results of its 2007 annual meeting, where 50.2 percent of shareholders approved a proposal calling for such “say on pay” votes.
Verizon acknowledged that it has since monitored the voluminous discussion on this issue and has also engaged in a dialogue with major investors and others, including the Verizon retiree who made the proposal, William Jones.
“This is very significant,” proclaims Cornish Hitchcock, a lawyer for Amalgamated Bank, a wing of the AFL-CIO and well-known for pushing shareholder rights. “It is one of the largest and most widely held public companies. If Verizon says this is important to do, others should follow.”
Ferlauto
“It is the first adoption pursuant to a shareholder vote,” adds Richard Ferlauto, director of pension and benefit policy for the American Federation of State, County, and Municipal Employees. “It makes it safe for other companies because they would not be breaking new ground.”
Last February, insurance company Aflac became the first major U.S. company to give its shareholders a say-on-pay vote, also beginning in 2009. Aflac was not, however, responding to any specific shareholder resolution and vote. Verizon is the first company to adopt say-on-pay after a shareholder proposal calling for it.
Such proposals have sprung up like weeds in the last 18 months. In 2007 alone, more than 40 shareholder proposals for say on pay went to a vote at annual meetings. Eight received more than 50 percent support and another 20 received 40 to 50 percent. The average support for all was 43 percent.
Heavy-hitting institutional investors in Verizon, led by the AFL-CIO, fired off a letter on Oct. 17 to Joseph Neubauer, chairman of Verizon’s human resources committee, calling on the company to implement a shareholder advisory vote on executive pay. The letter read in part: “We are concerned by the disconnect between executive pay and corporate performance at Verizon and other public companies, especially in light of recent studies that show that public companies now pay nearly 10 percent of their aggregate earnings to their top five executives.”
Shareholders activists now have their sights trained on the other seven companies that saw majority support for say-on-pay proposals. They are Activision (69 percent), Blockbuster (57.8 percent), Par Pharmaceuticals (56.8 percent), Ingersoll-Rand (56.7 percent), Motorola (54 percent), Valero Energy (53 percent), and Clear Channel (50 percent).
HEARING THE CALL
Below is a statement from Verizon on its decision to adopt shareholder advisory votes on executive compensation.
The board of directors of Verizon Communications today adopted a policy that provides for an annual advisory vote related to executive compensation beginning in 2009.
The Board's Human Resources Committee also adopted policies on two other issues related to executive compensation. The Committee amended Verizon's executive severance policy to define more specifically the types of payments included in the calculation of severance payments. It also adopted a policy requiring that, on an ongoing basis, the Committee's independent compensation consultant will only provide services to the Human Resources Committee and will not perform any other services for the company.
"The Board believes that these actions further strengthen Verizon's corporate governance practices. We believe that it is important to engage in an ongoing dialogue with shareholders and others," said Sandra O. Moose, presiding director of the Verizon Board of Directors.
Policy Reviewed With Major Investors
In May 2007, a shareholder proposal seeking an advisory vote on senior executive compensation, sponsored by Mr. C. William Jones, received 50.18 percent of the vote. Verizon has since monitored the ongoing discussion on this issue and has also engaged in a dialogue with major investors and others, including Mr. Jones.
The first advisory vote will be held at Verizon's 2009 annual meeting and will relate to the 2008 executive compensation information described in the proxy statement for that meeting. In the interim, Verizon will continue its dialogue with shareholders and other interested parties.
Source
Verizon Communications (Nov. 1, 2007)
AFSCME and Timothy Smith, director of social investing at Walden Asset Management, put together another letter for those companies, also signed by numerous institutional investors. “There is growing investor and political interest in this reform,” the letter states. “We believe shareowner input on compensation is timely and important.”
“We are hoping for what happened in the beginning with majority voting,” says Meredith Miller, assistant treasurer for policy with the state of Connecticut, which signed the letter. “We hope more and more companies voluntarily adapt.”
What Comes Next
Some companies seem to be taking this initiative seriously. Randy Hargrove, a spokesman for Blockbuster, tells Compliance Week: “The board is considering its options and hasn’t made an announcement. It will continue to consider its options.”
A spokesman for Ingersoll-Rand, which is known to be receptive to investors, said nobody was available to speak to the issue. Ferlauto says the company is going through a process similar to what Verizon and Aflac did, seeking the views of institutional investors.
Valero, on the other hand, contends that the measure did not receive majority support if abstentions are included. “It’s not something we plan to implement,” says company spokesman Bill Day. “We didn’t agree with it.”
Activists stress that their goal is not to micromanage the compensation process. Indeed, the letter contends that for companies which present compensation plans that are “reasonable and based on performance,” the shareholder vote will be a formality akin to the vote to ratify the auditors. But, the letter adds, “For a company whose executive compensation packages are inadequately tied to performance or whose metrics are unclear or have an unreasonable package, the vote gives investors a method to send a clear message to the board and management.”
One point of concern with say-on-pay votes is that if shareholders were to reject a compensation plan, they could only reject the whole thing; exactly what part of the pay package they object to—and modern compensation packages have performance goals, summary tables, discussion sections, and many other parts—might not be immediately clear.
Proponents of compensation advisory votes, however, say that the point of the policy is to foster a dialogue with the company over the issues that they are troubled with. Says Hitchcock: “There will doubtless be conversations before the vote.”
“This provides an opportunity for board committees and investors to get together,” Miller adds. She stresses that each candidate for a no vote will always have a unique issue that would trouble shareholders. Rather than acting as a one-size-fits-all approach, she says, advisory votes “are kind of a proxy for engagement.”
Meanwhile, say-on-pay advocates are encouraged by what they perceive as a supportive climate in Washington, D.C. In April, the House of Representatives passed a bill that would give shareholders a non-binding, advisory vote on senior executives’ pay packages. The Senate has yet to act on a companion bill, but Sen. Christopher Dodd, lifted activists’ spirits with some recent comments in favor of say on pay. A Dodd spokeswoman, however, stressed that he “only made one brief comment to a reporter on a vote. He said it was a possibility. He hasn’t really made any comments.”
Looking ahead, activists and companies are also awaiting proposals from a working group on compensation advisory votes, led by Pfizer, AFSCME, and Walden Asset Management.
They also anticipate as many as 80 say-on-pay proposals for the 2008 proxy season. Daniel Pedrotty, director of the AFL-CIO Office of Investment, confidently predicts: “Next year, we will see more high votes and majority votes at a larger number of public companies.”
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