'The bull's-eye is on their backs': US investors hit the mark on executive excess

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The Independent Online

Could American shareholders have found a way to halt the upwards spiral of executive pay? Some of the most powerful institutional investors in the US think they have.

A new corporate governance strategy sweeping Wall Street is forcing companies to agree to genuine elections for directors for the first time. And that means those who sanction egregious pay awards will now find themselves turfed out of a job.

Remuneration committee chairmen, we are targeting you. That's the message from Richard Ferlauto, the director of pension and benefit policy at the American Federation of State, County and Municipal Employees (AFSCME). "The bull's-eye is on their backs," he says. "Pay for non-performance is a regular occurrence and we want to moderate that quite substantially."

The movement towards majority voting for directors has been the most startling trend in this year's season of annual shareholder meetings, which is now drawing to a close. In the past few weeks, despite the objections of company boards, investors at Exxon Mobil, General Motors and some two dozen other large companies have demanded meaningful elections for directors. They want any executive who does not get 50 per cent of the vote to be barred from taking the job.

Until now, while shareholders could protest by withholding their backing, directors in the usual uncontested election could be victorious with just one share cast in their favour.

"Because elections are, in effect, fake, investors have virtually no power to influence entrenched boards," Mr Ferlauto says.

Beth Young, the lawyer at The Corporate Library, a corporate governance information service that has been campaigning for majority voting, says: "If there was a remote possibility of your not getting re-elected, you might become more accountable, more responsible, more diligent - all the things we are trying to get our boards to be."

It is barely a year since the idea of majority voting first surfaced as a means of giving shareholders more power in the companies they own. And already, more than a quarter of the Fortune 500 listing of America's biggest companies have adopted some version of the system.

The dam ruptured at the start of the year when Intel, the world's biggest microchip maker, altered its by-laws to accept the result of majority voting. It was the first big name to do so and the company argued that it really wasn't that difficult to implement.

Critics say majority voting makes it harder for rebel shareholders to elect their own representatives to the board, and so might mean management aren't forced to consider new strategic ideas. But governance campaigners now believe these kinks and unintended consequences can be ironed out.

The three-quarters of the Fortune 500 yet to adopt majority voting will have noted that the companies with the biggest votes in favour of reform were those where storms raged over executive pay. At Exxon, investors were protesting at the $400m (£215m) retirement package for its former chairman, Lee Raymond. At the DIY retailer Home Depot, there was fury that its chief executive, Bob Nardelli, took home $124m over five years when the share price was going backwards.

The consequences of a shift to majority voting could, over time, prove profound.

"This is about the balance of power in the US, and the pendulum is shifting from boards to stockholders," says Claudia Allen, a partner at the law firm Neal, Gerber & Eisenberg. The voting initiative comes at the same time as moves towards annual re-election for all board members, and other corporate governance measures such as stopping stockbrokers from voting shares held in nominee accounts.

"Most directors do their jobs and exercise their fiduciary duty. But for shareholders who don't agree, there is now an alternative to selling," says Ms Allen.

There is still distrust on both sides. Some companies have headed off shareholder resolutions on majority voting by agreeing that any directors who fail to get 50 per cent backing will have to "tender" their resignations - leaving open the possibility that boards will find a reason not to accept it. "That formulation is not acceptable," says Mr Ferlauto. "We need an absolute standard."

Many companies fear the governance lobby can't be trusted with something as important as deciding who runs the company. It is not just about applying a formula or ticking a box, they say, and they doubt whether governance advisers will do enough research on the directors whose fates they suddenly hold in their hands.

But Ms Young says her industry is discussing these issues. Shareholders are likely to limit their attacks on directors to particularly flagrant cases, she says, adding: "Majority voting strikes people as logical. It is hard to argue against it."

And as Mr Ferlauto sums it up: "The consequences will not, usually, affect individual directors. What it means is that, when investors sit down with boards, there will be a much fuller dialogue."

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