Expert: ‘Say on Pay’ Rule Is Hurting Shareholders

Thursday, 28 Feb 2013 07:49 AM

By Michael Kling

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The new “say on pay” rule that lets shareholders vote on top executive pay packages was supposed to be a victory for shareholders.

But one expert says the new rule is actually hurting shareholders and their companies, while benefiting corporate consultants.

Seeking to avoid losing votes on compensation packages at all costs, corporations are spending more on proxy advisors and other consultants and pushing deals that might not be in shareholders’ best interests, argues Manan Shah, a partner in the employee benefits and executive compensation practice at Jones Day in New York.

Editor's Note:
 
Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

In an opinion piece for The New York Times, Shah writes that companies are trying harder to make sure their compensation packages pass in order avoid negative publicity and shareholder litigation that could damage its image as well as share price.

Corporate boards are striving to appease proxy advisers, even at the risk of the company’s long-term interests, he asserts.

They are spending more money for proxy advisers, compensation consultants, lawyers and other advisors, especially if the vote fails or is at risk of failing.

“This is likely to cause financial damage to the company through wasted assets and potential reputational harm, which could far outweigh the costs of the perceived ‘excessive’ executive pay,” Shah states.

And it’s not even clear if compensation changes urged by proxy advisers are in the best interest of shareholders. Research from the Rock Center for Corporate Governance, he says, concluded that the changes actually produced a net cost to shareholders.

Proxy advisers are for-profit firms that do not have the same interests as shareholders. Some may deliver generic reports not tailored to the company’s industry, location or its other specific features.

Instead of just relying on the proxy advisor’s report, investors must consider the board’s recommendation, and consult with the board and company executives before making a decision, he urges.

The say on pay votes have created a bonanza for lawyers, according to The Economist.

Law firms are suing companies, demanding more information about how they decide to pay senior executives. They’re finding that releasing information only leads to demands for more information, instead of ending the issue.

Forced to suspend annual meetings, companies reach costly legal settlements with law firms, according to The Economist. If corporations opt to fight rather than settling, their legal costs may ultimately be higher that a settlement.

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

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