I am Predicting the Future . . . Maybe

I’ve never been one to let the paint dry on something before playing with it and today is no exception. The object of my attention today is the Financial Reform bill passed by the Senate yesterday. What has me picking at the corners of this freshly painted piece of legislation are three provisions addressing corporate governance reform: Proxy Access, majority voting standards for uncontested director elections and Say-on-Pay.

What I am most interested in here are two things. Continue reading »

Why Say on Pay Doesn't Matter

A series of posts on Race to the Bottom this week has made much about the likely prospect of “Say on Pay” becoming the law of the land if the Dodd bill addressing financial reform passes in the coming weeks, which it is likely to do. However, the practical effect of this provision of the Dodd bill on executive pay seems negligible.

For those unfamiliar with “Say on Pay,” this is a concept first put forth by shareholders that calls on companies to submit all executive pay decisions to a vote of the company’s shareholders prior to going into effect. Like the provision in the Dodd bill, this shareholder approval ritual is advisory. Thus, directors can ignore the wishes of shareholders if they so choose.

In the short-term, it is unlikely that this provision will have any impact on the vast majority of public companies. Race to the Bottom notes that only a few companies that have submitted pay plans to shareholder approval have experienced any blow back from their investors. Citing the situation at Occidental Petroleum, shareholders voted down a compensation plan for the company’s CEO Ray Irani, a perennially overpaid executive who has been a lightening rod for investors for many years. Undoubtedly, when Say on Pay becomes the law of the land, there will be a few more of these votes getting majority status.

While shareholder approval of executive compensation is a good thing for some obvious as well as less obvious reasons, as a practical matter, very little will change in the short-term. What remains unchanged is the fact that institutional investors largely give companies a pass when it comes to pay practices. Despite the railing of pitchfork capitalists that things must change, those major investors “pulling the lever” at proxy voting time have no incentives to change their voting practices. There are several reasons for this.

First, a substantial percentage of institutional investors – investment managers, corporate pension funds, insurance companies and some pension funds – have policies when it comes to executive pay that I would characterize as “but for the grace of God go I.” By tackling the executive pay head-on as large investors, these institutions risk impacting their very own pay practices. While most of these investors would not admit to this practice, as a practical matter, this is the consequence

Second, institutional investors defer to their professional proxy voting advisors – ISS/Risk Metrics, Glass Lewis, et al. – in order to untangle the complicated mess that is designed to obfuscate the executive pay setting process. A quick glance at any company proxy statement will confirm the fact that 60 to 80 percent of proxy statements are devoted to executive pay discussions.

The proxy advisors have responded in an equally complicated fashion both to analyze these complicated pay setting processes as well as justify their own existence to their paying clients by demonstrating their intellectual prowess on the subject. For instance, ISS/Risk Metrics employs multiple regression analysis and a two stage assessment of just one aspect of company executive pay setting. While this approach gets the job done, the entire process from both the issuer and investor perspectives only obscures the problem.

The good news in all of this is that the question of executive pay will now be addressed head on by shareholders. A procedural barrier preventing meaningful discussion about pay practices has been removed. What now must be done is to address excessive corporate pay practices and their underlying causes in a meaningful manner. This will require a better informed corporate electorate that can decipher the the arcane data that currently obscures greater understanding of the matter.

The 2011 proxy season should be an interesting test of shareholder mettle on this subject. While some executives may fear a firing squad of sorts from shareholders, as a practical matter, their investors will most likely miss their targets. However, in time, investors may become better shots.

Corporations and Politics: Why Political Disclosure is Irrelevant

As investors and other react to the U.S. Supreme Court’s decision in Citizens United to allow unlimited corporate political spending, it is more apparent than ever that shareholder proposals calling for corporate political disclosure are a waste of time.

The Capital Eye, the blog for the Center for Responsive Politics has mentioned a recent agreement between Bank of America and New York City Comptroller John C. Liu who is all agog over the fact that the company has agreed to disclose its political contributions. In these sorts of matters, the devil is in the details, to wit:

• The information Bank of America will publish is already publicly available,
• Bank of America will not publish donations made individually by its employees, including top executives who routinely contribute to political causes with their employer in mind.
• Bank of America is refusing to disclose money it donates to not-for-profit political organizations, such as the U.S. Chamber of Commerce, that now, thanks to the recent Supreme Court decision Citizens United v. Federal Election Commission, have the ability to spend unlimited amounts of money on advertisements advocating for or against specific political candidates.

The Controller is obviously giddy about his success but he has clearly missed the point. Some time ago, corporations figured out that contributing directly to political causes exposed companies to too much scrutiny. With organizations like the U.S. Chamber of Commerce willing and able to do the dirty work for them, why not give them piles  of cash, launder it so that no trail could be found by the public and really affect change that matters to corporate executives. With unlimited political spending now available to corporations thanks to the U.S. Supreme Court, why bother with direct political giving?  If the NY City Controller wants disclosure, no problem.

Coincidentally. our friends at MoxyVote noted on their blog recently that John Bogle, the founder of Vanguard and a leading advocate for investors argues that corporations are not people and don’t deserve the free speech treatment afforded them by a recent Supreme Court decision infamously known as Citizens United.

[p]ublic companies aren’t people. As Justice John Paul Stevens, writing for the minority, observed, the court committed a grave error in treating corporate speech the same as that of human beings. The notion that the same freedoms should apply when a public company, often with tens of thousands of owners, speaks in matters beyond the scope of its business affairs offends common sense.

Bogle then suggested an incredibly simple idea that will have executives screaming. He proposes a shareholder proposal calling for shareholder pre-approval of political contributions.

RESOLVED: that the corporation shall make no political contributions without the approval of the holders of at least 75% of its shares outstanding.

Simple and straightforward I say. Whether the SEC in its infinite wisdom would vet this remains to be seen but let’s test this out shall we?

Is Wall Street Taking On Too Much Political Risk?

As Congressional Democrats and the White House call for reform on Wall Street, executives are understandably uneasy about giving money to those very politicians. As noted by the Center for Responsive Politics and reported in the Washington Post, 4th quarter numbers are starting to shift from the Democrats to the Republicans. But is this political hedging a safe bet or more like investing in currency default swaps?

Wall St. Shifting its Money to the RIght

As the Washington Post notes, the shift in giving from Democrats to Republicans puts Democratic politicians in a quandary. They need Wall Street support to fend off GOP attacks but need to distance themselves from the financial industry that is largely responsible for the current economic crisis.

Republicans, on the other hand, are grabbing Wall Street money like looters in Port-au-Prince. House Minority Leader John Boehner (R-Ohio) is “urging Wall Street executives to “help our team” oppose the “bizarre policies” coming out of the Obama Administration.” An unnamed Republican operative noted that the GOP expects to be attacked on Wall Street reform no matter what. “We’d rather have whacks and the money than whacks and no money.”

From a purely short-term perspective, Wall Street’s collective response as measured by the recent giving shifts makes sense. Throw some money at the Republicans and maybe some of them will win or stay in office. Considering the sums given in the context of overall corporate spending, oiling republican coffers could produce some outsized returns on their political investments.

Is Political Risk Real?

The largely unknown factor is what will happen in the post-Citizens United era, where corporations are free to spend unlimited sums on issue advertising. While shifts in candidate giving will not dramatically increase as a result of the U.S. Supreme Court’s Citizens United ruling, support for causes near and dear to the political candidates will undoubtedly soar.

Like the mortgage meltdown, where incremental screw ups by many different players contributed to this epic catastrophe, unlimited corporate spending or, as the U.S. Supreme Court calls it, “free speech,” can have massive unintended consequences. Will massive spending by numerous corporate players trying to shift public thinking about financial reform crush any hopes for solving the economic problems today? Maybe.

One view suggests that Citizens United will result in a situation where political power has so dramatically shifted from ordinary voters to corporate executives that the fundamental democratic process experiences a meltdown. Unlimited corporate political spending will create systemic risk impacting the political process. Like the mortgage crisis, no one player can be blamed for the crisis but the disastrous effects will be huge nonetheless.

On the other hand, some argue that Citizens United will have a negligible effect on corporate political giving since there are already so many loopholes in the system that allow corporations to inject money into the political system that the impact of Citizens United is more about rearranging the deck chairs than any real shift change in the political system.

Forces opposed to the Citizens United decision are rallying for change. However, current shareholder initiatives are totally inadequate for addressing the problem. These proposals, calling for transparency in corporate political giving, do nothing to address the problem. The current list of public companies disclosing their corporate political giving is impressive at first glance. However, in reviewing their disclosure, what remains undisclosed goes to the heart of the matter. Giving through political intermediaries, namely trade associations, has become the standard for obfuscating political activity. Unfortunately, proponents have been largely unsuccessful in addressing this problem.

With regard to the supposed risks – political, reputational and so on – such risks are largely fallacious. While a number of academic studies suggest that corporate political giving reflects any number of problems for companies, nothing suggests that companies experience any significant risk from making political contributions done in accordance with state and federal campaign finance laws.

Is There a Post-Citizens United Strategy?

That said, what is necessary is a new paradigm in which real risk is created for executives and companies they operate when political spending and influence is wielded. Political operatives that have argued that risk is the boogeyman in this process are in fact attempting to create that sort of risk. The rumored Schumer-Van Hollen bill to address the impacts of Citizens United will, among other things, compel executives to stand by their political ads. This doesn’t get at more sophisticated laundering schemes where corporate money is given to a trade association and is labeled as “non-political” and then some or all of that money is given to a political advocacy organization for issue advertising.

What is needed is a much more thoughtful approach to curtailing corporate political influence in America. So far, not much has been done to stem this growing problem.