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House Committee Holds Hearing on Executive Pay Votes
Rep. Barney Frank recently led a hearing of the Financial
Services Committee to solicit views on H.R.1257, the "Shareholder Vote on
Executive Compensation Act." Rep. Frank said the legislation would enhance
the ability of shareholders to vote on the compensation of the executives they
employ. It does not provide one avenue to the exclusion of others and does not
add or subtract from existing rules, according to Rep. Frank. It simply adds
another channel through which shareholders would be allowed to vote on an
advisory basis on executive compensation.
Ranking member Spencer Bachus said he has "an
abundance of concern" about the government's ability to fix the widening
gap between rich and poor. The SEC's recently-adopted disclosure rules may
address the executive compensation issue to a large degree, he said, and there
may not be a government solution that makes it any better.
Rep. David Scott, a cosponsor of the legislation, believes
that executive pay has become dangerously outsized, especially when compared to
the pay of rank and file employees. He believes the escalating executive
compensation is threatening the very fabric of the economic system. The advisory
vote would be nonbinding, but Scott believes it would be very powerful.
Rep. Scott Garrett noted that Rep. Frank had urged patience
during the implementation of the Sarbanes-Oxley Act and suggested the same for
the SEC's executive compensation disclosure rules. Give the rules time to work,
he said.
Harvard Law School professor Lucian Bebchuk said the SEC's
rules cannot improve pay arrangements. Investors must be able to use the
information that is provided to them. He believes an advisory vote will help and
noted that shareholders in the United States have much weaker rights than in the
United Kingdom.
Richard Ferlauto, the director of pension and benefit
policy at AFSCME, said the union does not have the option to sell shares if it
is dissatisfied with executive pay. Most of its investments are indexed and are
held for the long term. AFSCME has been highly concerned about executive pay and
its distortion on the marketplace for many years. Institutions have tried to
effect change for years, he said, but without success. Mr. Ferlauto added that
the exchanges have the power to require an advisory vote, but he has little hope
that they will use it to shareholders' advantage.
Mr. Ferlauto said that when an advisory vote is in effect,
the company's consultation with shareholders increases and company performance
is better aligned with long-term shareholder value. It provides an incentive for
the company to execute its strategic plan. He is concerned that the increased
disclosure under the SEC's rules could cause an upward spiral in executive pay
as CEOs seek to compete with the top echelon. Shareholders also must have the
right to replace directors, according to Mr. Ferlauto. He said the United States
is falling behind the European markets in corporate governance matters.
John Castellani, president of the Business Roundtable, said
the best mechanism for setting executive pay is independent directors. The
roundtable supports the SEC's new disclosure rules and believes the increased
transparency will benefit the marketplace. The introduction of an advisory vote
could erode critical board responsibilities, in the roundtable's view. It is not
a process that enhances shareholder wealth, according to Mr. Castellani.
Stephen Davis, a fellow at the Millstein Center for
Corporate Governance and Performance, gave a preview of a white paper the center
is producing on advisory votes on compensation policy. The overall conclusion of
the analysis is that advisory votes on executive pay policies are rational,
timely and practical for use in the United States, he said. The center reviewed
the United Kingdom's experience with advisory votes and found that they sparked
a dramatic increase in the dialogue between companies and their shareholders.
Advisory votes transformed the way executive pay is determined, Dr. Davis said.
Dr. Davis reported that the United Kingdom now sees
advisory votes as critical to its competitive position in the world marketplace.
The Millstein Center believes that advisory votes are best adopted on a
legislative basis.
Steven Kaplan, a professor at the University of Chicago
Graduate School of Business, argued that the critics are largely wrong and that
the pay process is not broken. The legislation will generate few benefits while
imposing additional costs, in his view. He does not believe that CEOs are
overpaid today and warned that many are leaving public companies for private
equity funds and higher pay. The problem with the legislation, Prof. Kaplan
said, is that even companies with no problems will be subject to advisory votes.
Prof. Bebchuk suggested that underpaid CEOs may see their
pay increase with an advisory vote. Critics assume the vote would be negative,
he said. The only reason one would be concerned about pressures on executive pay
is if they believe they have a problem, Dr. Bebchuk said.
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