Commentary by David F. Larcker, James Irvin Miller Professor of Accounting & Director, Stanford GSB Corporate Governance Research Program; and Brian Tayan, Stanford GSB Case Writer, MBA ’03.
The Dodd Frank Financial Reform Act requires that publicly listed companies submit executive compensation plans to shareholders for an advisory vote of approval (say on pay). At issue is no longer whether such votes should be held, but at what frequency (annually, biennially, or triennially, to be decided by shareholders on a company-by-company basis).
While the rules are set, the implications for the board are far from clear. How will the board respond to a say-on-pay vote that garners a simple majority but is not convincingly in the company’s favor? What percentage of dissent would cause you as a board member to rethink the executive compensation program?
One option is to take a hard line. As a board member, you might rightfully claim that 51% approval is majority approval, and the company therefore has the general support of shareholders. But this attitude likely would be perceived as hostile and probably wouldn’t stand over the long term.
On the other hand, you might strive to achieve nearly unanimous consensus. To do so would require extensive outreach to shareholder groups, including those who routinely vote against compensation plans as a matter of principle. This would involve considerable time on the part of compensation committee members, time which may not be well spent.
Preliminary feedback suggests that boards are currently struggling with this issue. According to a recent study by Towers Watson, half of all companies stated that they do not know what level of shareholder support they would consider a “success.” Among those who did have an opinion, the average response was 80%.
Intuitively speaking, 80% may be the right threshold, but the board will have to be prepared for a variety of outcomes. For example, in 2009, the shareholders of AFLAC (which voluntarily adopted say on pay that year) approved executive pay-for-performance policies by a vote of 804 million to 21 million (97%). By contrast, in 2009, the shareholders of Motorola approved executive compensation policies by a much closer margin, 1,244 million to 708 million (64%).
Question: If you were on a board of directors, what level of support would you consider a “success?” How would you respond if this level was not reached?
Let us know, your comments are welcomed!
AFLAC, Form 10-Q Filed May 8, 2009