Unlike Australian and UK companies, US companies do not have votes on executive compensation. And if shareholders do not like a compensation plan, or any other way a company is run, they have almost no power to change the board. Under pressure from pension funds and other investors, this is about to change.
Aflac plans to become the first major U.S. company to give shareholders an advisory vote on executive compensation packages, bolstering investor groups that have vowed to push companies to change their governance practices at annual shareholder meetings coming up in the next three months.
Aflac, the world’s largest seller of supplemental health insurance, said last week that it would allow shareholders a non-binding vote on its corporate pay practices beginning in 2009 – the first year that the company’s proxy statement will contain the three years of compensation data required by the Securities and Exchange Commission’s new disclosure rules.
Aflac made its announcement after a proposal last year by one shareholder, Boston Common Asset Management. However, Aflac, like most other large companies, has been under pressure to introduce the non-binding vote by large pension funds. These funds have also been lobbying Congress to change the laws to make such a vote compulsory.
Such proposals are among the most controversial of the hundreds this year by major shareholders, who are emboldened by public furor over outsized executive compensation. Proponents say that even though the votes would be non-binding, they would pressure companies to change compensation policy.
At least 50 companies will have votes on compensation policy at shareholder meetings, up from seven last year, the majority regarding new option and share plans.
Other closely watched resolutions include a proposal to allow shareholders to run opposing board candidates and another to tie executive pay more directly to corporate performance. Many of the companies targeted are in the hot seat over executives’ salaries or the practice of backdating options. Unlike Australia and the UK, US shareholders cannot directly oppose a director’s nomination to a board or nominate their own directors. Believe it or not, nominations are the preserve of the board. This has been heavily criticised because those nominated are generally considered allies, even friends, of the CEO-Chairman who runs the company. It is this concentration of power in the CEO with no counterpoint that is the primary reason for US pay to be so extraordinary relative to the rest of the world.
Home Depot, still smarting from controversy surrounding the lucrative exit package given to its former chief executive, this month invited an activist shareholder to join its board, helping to avert a potentially nasty proxy fight. And dozens of prominent companies, including Lehman Brothers, Honeywell and Wells Fargo, have agreed to change how directors are elected.
Despite the onerous Sarbanes Oxley Act and recently introduced pay disclosure rules that follow Australia’s pattern of disclosure, it seems the US is still struggling towards the more flexible yet finely balanced UK and Australian governance systems