Thus far, the main argument I've seen against the "Say on Pay" legislation, proposed by Congressional Democrats and passed by the House, is that it overreaches the federal government's historical power to define the relationship among shareholders, directors and officers. This is state law territory traditionally, even though the interstate commerce clause and the decidedly national reach of almost any publicly-traded corporation would nix any claim of unconstitutionality in Congress's mandating that shareholders be able to make a non-binding yes-or-no vote on executive compensation. When I first thought about whether there was another way to get to the result of more shareholder input on executive compensation, I came up with a few ideas:
- Encourage Say on Pay to be legislated by states, maybe with a SD v. Dole-style prod of losing federal funding for anything related to corporate law, governance, etc. On the other hand, this might increase Delaware's incorporation advantage even more; I could imagine the state deciding that it makes more money on its board-friendly corporate law than it would lose by acceding to the federal demand.
- Push the New York Stock Exchange and NASDAQ to make it a requirement for corporations that list on them, with the usual unspoken threat that if the exchanges don't do it voluntarily, the heavy boot of government will be coming down. Such private action would reach a lot more companies than I would think either federal or state legislation would, because many companies listed on the major U.S. exchanges are incorporated outside the U.S. On the other hand, such an intrusive, extra-territorial requirement might raise howls from other nations' governments, as well as perhaps being enough to make listing on those particular exchanges less attractive. I assume the London Exchange doesn't require foreign corporations to follow British "say on pay" rules. Those rules, incidentally, were legislated after the UK best practice code's recommendations failed to convince the biggest British corporations to voluntarily add an advisory shareholder vote approving or disapproving specific compensation agreements after they become effective.
- I wondered whether the SEC had a rule for executive compensation that sort of parallels Rule 13(e)-3's requirement for taking a public corporation private, wherein key actors are required to justify the fairness of the transaction. This fits with the SEC's general mandate that it can't keep people from doing things the SEC may not like, but by God it can force them to generate a lot of paper if they do. Boards seem to explain their compensation decisions mostly in retrospect, when successfully sued by shareholders in derivative actions (reading Eisner et al trying to justify Ovitz's pay package in the Disney case is slightly painful). Then I remembered: the SEC does now, having adopted Compensation Discussion and Analysis last summer. The SEC is big on "narrative," and the CD&A seems likely to be more of the same:
New company disclosure in the form of a Compensation Discussion and Analysis will address the objectives and implementation of executive compensation programs - focusing on the most important factors underlying each company's compensation policies and decisions. The Compensation Discussion and Analysis will be filed and will thus be a part of the disclosure subject to certification by a company's principal executive officer and principal financial officer.This sounds a bit vague and hand-wavey, and thus likely to fall short of what some have recommended that the CD&A do: "provide a justification for the compensation in light of the demands of the job, the particular industry, the actual performance, and other factors deemed relevant—in short, an explanation of why the compensation committee thinks the compensation is warranted. ... It would oblige specifically named individuals, the members of the compensation committee, to say publicly, 'This is what we are paying these executives, it is justified, and this is why.'" Presumably every corporation's CD&A will include words to the effect of "We want to recruit and retain the best executive talent in the market and reward high performance..." Which is all well and good, but doesn't tell us what the going rate for a good executive is, what the pay negotiations were like, who alternative candidate might be and what they would need to be compensated.
The only public corporation in which I've held stock directly (as opposed to mutual funds & such) issued statements and reports that had none of the above information. Then again, it also is the largest company entangled in a stock options backdating scandal -- having forced out its chairman and CEO over his questionable compensation (for those of you who think only the little guys go down) -- and so explaining the amount paid to executives, as opposed to the sketchy way in which it was paid, probably wasn't a a high priority.
All in all, I'm inclined to agree with Prof. Gordon's wait-and-see approach: "If a CD&A requirement and other process reforms seem ineffective after a five-year trial period, the shareholder advisory vote on a CD&A is an attractive next step." The only trouble with it is its lack of political realism: if the Democrats aren't in power in 2012, neither Congress nor the White House is likely to push for Say on Pay in any form, whether it be coercing the states or the exchanges, or having the SEC take action (Prof. Gordon remarks, "Such a measure could be adopted by ... the SEC as a condition for the circulation of a proxy statement," but it would go against the SEC's normal disinclination to force anything except paperwork on anyone). Therefore I consider it sensible for the Senate Democrats to hold the legislation in committee but continue to emphasize its existence and make clear that they are ready to act when necessary. This also has the political benefit of defining the Democrats as the party of oversight, without completely freaking out the business community.
UPDATE: And then there's the misinformation spread by the opponents of "Say on Pay"...