Legislation aimed at giving shareholders a greater voice in how executives at U.S. public companies are paid was endorsed by a House of Representatives panel this week.
By a 37-29 vote, members of the House Committee on Financial Services approved the "Shareholder Vote on Executive Compensation Act." The bill will likely be considered by the full House of Representatives when lawmakers return from their Easter recess in mid-April. To become law, the measure also must pass the Senate and be signed by the president.
The bill would not set any limits on pay but would allow shareholders to cast an annual advisory vote on senior executives' compensation packages. The legislation also would provide for a separate vote on severance payments for outgoing executives in the case of a merger or takeover.
"Excessive executive pay has been proven to have a significant impact on companies' profits and shareholder returns, and now the owners of the company will be given a voice on executive compensation plans." Rep. Barney Frank, the bill's primary sponsor and chairman of the financial services committee, said in a statement after the March 28 vote.
Frank, a Massachusetts Democrat, proposed similar legislation in 2005 but it stalled in the House, which was then controlled by Republicans. This week, most of the Republicans on the committee voted against sending Frank's bill to the full House. Rep. Patrick McHenry, a Republican from North Carolina who opposed the measure, said Congress should not legislate corporate salaries, Bloomberg News reported.
Shareholder advocates who have been pressing for advisory votes lauded the committee's vote.
"We're pleased and it shows that there is continued momentum behind advisory votes," said Richard Ferlauto, director of pension and benefits management for the American Federation of State, County, and Municipal Employees (AFSCME), who testified in favor of the bill at a March 8 hearing.
Ferlauto said he hopes that committee approval will embolden shareholders to support advisory vote proposals this proxy season. "I think this means we're going to have very strong votes," he told Governance Weekly.
AFSCME has submitted 12 of the more than 60 "say on pay" proposals at U.S. companies this season. At least 40 resolutions are likely to appear on company ballots, starting with proposals at Morgan Stanley (April 10), United Technologies (April 11), Wachovia (April 17), and Citigroup (April 17).
The Council of Institutional Investors has endorsed shareholder votes on executive pay, while the California State Teachers' Retirement System--the nation's second-largest state pension fund--sent a March 6 letter to Frank endorsing the bill.
However, some business groups argue that investors and lawmakers should wait and see how companies respond to the new executive pay disclosure rules issued by the Securities and Exchange Commission last year.
One company, Georgia-based insurer Aflac, has agreed to hold an advisory vote on compensation beginning in 2009. More than a dozen other companies, such as Tyco, Pfizer, JP Morgan Chase, and Intel, have joined AFSCME, TIAA-CREF, F&C Asset Management, Hermes, and other institutional investors in a working group to discuss the issue.
The United Kingdom has had a "say on pay" law on the books since 2002. So far, there has been just one instance of a negative investor vote. In May 2003, shareholders at pharmaceutical giant GlaxoSmithKline narrowly rejected a remuneration report that included a large potential severance package for chief executive Jean-Pierre Garnier.
Australia and Sweden also have advisory votes on compensation, and, in the Netherlands, the shareholder vote on pay is binding.
ISS is planning to hold a governance forum on the impact of advisory pay votes in these foreign markets on Wednesday, April 4 at 11 a.m. Eastern Daylight Time. To register for the webcast, please visit here.
*This article originally appeared in this week's edition of Governance Weekly.