Securities Law - SEC Approves Shareholder Advisory Votes on Executive Compensation

The Securities and Exchange Commission by a 3-2 vote approved rules providing for shareholder advisory votes on executive compensation. The final rules as adopted largely follow the rules as proposed by the Commission.

Final Rule 14a-21(b) provides that companies are required at least once every six years to give shareholders an advisory vote as to whether the company’s “Say On Pay” vote will occur every one, two or three years. The votes are advisory only and as such are not binding on the company or the Board of Directors. The compensation of directors is not subject to Say On Pay vote. Results of the vote must be set forth in a Form 8-K within four business days after the shareholders meeting. Brokers are not permitted to vote uninstructed shares in a Say On Pay or Say On Frequency proposals.

The two negative votes were cast by the Republican members of the Commission.

Author’s Commentary
It appears to the author that the issue is over-analyzed, and, to a significant extent, a waste of time. For example, assume that shareholders of a given company over a period of years vote that the executive compensation is excessive and a shareholders’ lawsuit is filed claiming that the compensation is excessive and makes reference to the adverse votes by shareholders. It is unlikely that such a lawsuit would be successful. Existing precedent is to the effect that courts are not the best forum to determine the compensation and benefits of officers. Shareholders routinely lose such lawsuits.

The real concern is that the directors will acknowledge pressure to reduce or hold compensation down after votes suggesting the compensation is excessive.

In this proxy season companies have approached the new issue with a variety of approaches.

The author notes that Northern Trust gave the shareholder the right to select when the subject should be revisited. It states directors recommend you vote each year on the frequency of advisory votes on executive compensation.

The AT&T proxy card states that the Board of Directors recommends you vote every three years on executive compensation.

Northern’s direction is straight forward – “A vote every year is O.K. We can handle criticism.”
AT&T’s director approach is that executive compensation is for directors to set. AT&T wants as few votes on executive compensation as possible.

In sum, this issue is not nearly as important as the media reports have suggested.

Edward X. Clinton, Sr.