This spring will be the most exciting season for corporate America in decades. Pension funds, among other institutional investors, are set to go into battle on the excesses of executive pay. They have the power: state and local pension funds, which tend to be most activist, held 9.8% of US publicly-listed companies in 2005 (last available data, from The Conference Board), up from 2.9% in 1980.
They are supported by the general public's uproar against recent scandals, such as Home Depot paying former CEO Robert Nardelli a $210m (€162m) severance package notwithstanding that its stock fell 7.9% during his six-year tenure. Finally, pension funds also have new tools to fight this battle. Thanks to new SEC (Securities and Exchange Commission) rules, for the first time proxy statements contain one number that reflects the total compensation earned by the executive last year, including not just salary, but also non-cash perquisites, retirement benefits, and contingent compensation such as options.
"What the SEC has in mind is no less than transforming the landscape of public disclosure for the benefit of investors," SEC chairman Christopher Cox explained during a speech at Northwestern University School of Law. "By giving investors more, and importantly more usable, information we can enable increased participation by better-informed shareholders".
Quick to seize the momentum, pension funds and other institutional investors have filed a record number of shareholder resolutions to gain an advisory vote on executive compensation packages and the adoption of some form of majority voting to appoint company directors, who in turn will have to approve CEO pay.
By the end of the 2006 proxy season, nearly 180 companies had adopted majority voting policies, saying, for example, that their directors would resign if they didn't get a majority of shareholder vote. For the 2007 proxy season, there are additional 104 proposals to adopt similar rules according to Institutional Shareholder Services.
"Shareholder say on CEO pay will be the overriding issue of the 2007 proxy season," said Gerald W McEntee, president of the American Federation of State, County and Municipal Employees' (AFSCME) pension plan, which is leading a network of institutional investors that are seeking an annual, non-binding advisory vote on the summary compensation table that every corporate board presents to investors in its yearly proxy statement. "While the SEC has set up new rules for expanding disclosure of executive compensation, it is up to the markets to use that information to provide checks and balances.
Well, this is the market talking. This is investors banding together to
demand reform," added McEntee about the shareholder resolutions filed by that same network at 44 US corporations, including Affiliated Computer Services, Citigroup, Coca-Cola, Exxon Mobil, Home Depot, Jones Apparel, Merck, Nabors, Pfizer, Qwest, Time Warner, UnitedHealth and Wal-Mart. These companies were chosen because their executive pay had been excessive or there had been a misalignment between pay and performance over the past three to five years, according to McEntee.
Beside the AFSCME pension plan, active leaders in the resolution filing include the New York City Employees' Retirement System (NYCERS), the trade union AFL-CIO, the Connecticut Retirement Plans and Trust Funds, the Hermes Investment Management (from UK), and members of the Interfaith Center on Corporate Responsibility such as the Marianists, Bon Secours Health System, the Unitarian Universalist Association and the Benedictine Sisters of Texas.
"Institutional investors are fed up with the unbridled excesses of executive compensation in the US," said New York City Comptroller William Thompson Jr.
NYCERS is fighting not only in annual meetings but also in court: it is the lead plaintiff in a shareholder lawsuit against Apple over its stock options practices.
The latest development in public pension funds' activism on corporate governance is going to affect mutual funds' board too. More and more states offer their employees defined contribution (DC) plans beside the traditional defined benefit ones, and because DC plans are invested in mutual funds, public trustees want to influence these by requiring 75% of a mutual fund's directors to be independent of the fund company's management. The directors have the power to negotiate fund fees, for example, so if they are independent they are more likely to act in the interests of fund shareholders and not of the fund company.