IN-DEPTH: Shareholder seeks greater say on director compensation
While public companies in the U.S. have been presenting their executive compensation plans to an advisory vote since 2011, this year's proxy season saw the spotlight shift to director pay.
Michael Levin, who runs The Activist Investor blog crafted the proposal asking certain issuers to introduce binding “say on pay” votes for director compensation. John Chevedden submitted the demand to 13 of his portfolio companies for the 2024 proxy season, with five of the targets including it on their AGM agenda.
Levin argues that the proposal addresses one of the "most egregious conflicts" in today's boardrooms – that directors design and approve the structure and amount of their own compensation without any oversight from the shareholders they represent.
Levin told Diligent Market Intelligence (DMI) that he was inspired to move forward with the resolution following the conclusion of a 2020 lawsuit brought against Tesla by the Police and Fire Retirement System of the City of Detroit which ended with an agreement to put director pay up for a shareholder vote.
“Companies assert they compensate directors fairly and reasonably, so why do we need this now?” Levin said in a blog post discussing his resolution. “As Tesla shareholders learned the hard way, while things might look fair and reasonable now, they might not remain that way.”
For Doug Chia of Soundboard Governance, the proposal seemed like the logical next step, “I’m actually surprised that shareholder proponents have not brought this type of proposal before, because to me, it is such an obvious thing to want. If you have a say on executive pay, would it not make sense to have a say on director pay too?” he told DMI.
A binding commitment
Unlike the current system of advisory "say on pay" votes on executive compensation which cannot be construed as overruling a decision by the board or implying any change in the fiduciary duty of the board, Levin's push for a binding vote on director pay appeared to make many shareholders think twice.
At the annual meetings of the five companies where it made it to the ballot - NiSource, PayPal, Fortiv, Devon Energy and Alphabet, the proposal secured less than 3% average support.
"The binding nature of it makes shareholders think twice in terms of the consequences, especially for a proposal that they have never seen before, because the unintended consequences and repercussions are unknown,” noted Chia.
One such possible repercussion was raised via the SEC no-action process where seven of Levin's targeted companies successfully blocked the resolution from being considered on their ballot papers. In many cases, their chief argument hinged on separate legal analyses that disallowing directors from voting their own shares on the proposal would potentially violate state law.
Next year’s proposals may drop this element, Levin noted. "It's good practice to exclude directors' own shares from a director ‘say on pay' vote, but hardly essential. We won't do that again."
Future tweaks
Reacting to the low level of support, Levin said in a recent blog post: "We thought shareholders would welcome the opportunity to express views about a BoD beyond empty complaints to a nominating committee or a feckless 'vote no' campaign."
He told DMI he was “not surprised, although a little disappointed, more with the proxy advisors that think this sort of corporate governance reform is unnecessary rather than with shareholders that might not understand to even a limited extent the intent and mechanics of the proposal.”
Looking ahead to next season, Levin is considering certain tweaks to the demand such as making the "say on director pay” vote non-binding.
However, Levin warned, “shareholders might prefer a precatory proposal for a non-binding vote. This reflects poorly on shareholders, who routinely and bitterly complain about companies that ignore their desires.”
