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Morgenson returns again to say on pay

by Robert Teitelman | Published April 9, 2012 at 12:36 PM

Gretchen Morgenson offers another in a long series of Sunday New York Times columns, half hopeful, half depressed over the state of shareholder involvement in the affairs of major corporations. We come across her frantically trying to resuscitate the so-called say-on-pay provisions that give shareholders, well, more say on pay. Behind her valiant effort at CPR lay a number of presuppositions. First, that outrageous compensation practices for CEOs and senior managers is one of the major causes of everything that has gone wrong in corporate America. Second, that shareholders over the years have been kept at bay from more effective monitoring of this situation by entrenched managers and boards. Third, that if only the way was cleared for shareholders to vote their proxies on pay, the pernicious rise in compensation, particularly for CEOs, would plateau, and perhaps decline. Fourth, that evidence that pay is not coming down must mean that barriers continue to be erected around shareholders wishing to practice their democratic rights.

Say on pay is the latest effort the corporate governance true believers have sought to get more shareholder participation in corporate monitoring. Last year, the first year it was put into practice, the numbers were pretty dismal in terms of shareholders actually voting down compensation programs. But hopes spring eternal. And Morgenson's column represents the continuing faith, so appropriate on Easter, that shareholders will see the light - and that there's hope yet. Morgenson does dance around and find a few cases (Black & Decker, Johnson & Johnson) where shareholders have raised a ruckus and companies have made changes. And she finds cases, like Viacom, where the voting is so heavily dominated by insiders (notably CEO and chairman Sumner Redstone) that it doesn't really matter what "independent" shareholders do. Viacom, in fact, points up one of the oddities of the corporate governance model. A larger insider bloc does create entrenched management and board, which are bad; but it also produces that dream scenario of governance theory, alignment between shareholders and managers, which is normally viewed as a good.

The real sign here that Morgenson is whistling in the breeze is that she offers up no numbers to indicate rising levels of shareholder activism on say on pay. Now that may be because we're only in April, and proxy season is still in process. Or it may be that, like last year, there's no sign that say on pay is catching hold and that a rollback of pay is anywhere evident. (You know you're in trouble when Morgenson recounts the tale of John Lundgren, CEO of Black & Decker, who took a 63% pay cut after shareholders squawked - down to a mere $12.1 million.) In fact, about two-thirds of the way through the column, Morgenson surrenders to the bitter reality. "But for every active shareholders who votes for change, thousands of passive ones remain disengaged. Votes that abstain, or are never cast or that are delegated to brokerage firms to vote, typically in support of management, still make up a lot of the proxy counts."

Why don't they care? Why don't they vote? It's not because they agree with management on pay, or that they lack the infrastructure and research to vote intelligently on a wide array of holdings, or that they're naturally cautious or lazy. No, it's because they've grown discouraged over the years by management resistance. It's management's fault. "Many shareholders have long felt that voting against management is futile," she writes. "But it is troubling that many are absent when it is becoming clearer that theory can make a difference." Who are these passive souls? Not institutions, Morgenson says, arguing that institutions "consider it their duty to vote the shares they hold on behalf of clients," which is an amazing statement, made even more so by what follows: that institutions often abstain "to stay away from controversy," as if that was somehow an excuse. The real problems here are "people who simply can't be bothered to vote." She seems to be targeting here individual investors, whose role in all of this is insignificant compared to mighty institutions that inexplicably get a pass. But then she tries to link up this failure to vote with a short civics-lesson on democracy, corporate style. "Like Americans who stay away on Election Day, these investors are giving leaders - in this case, corporate ones - free rein to do what they please."

Morgenson is making an argument by wrapping herself in the flag. It's bad enough that she simply assumes that lower pay is a good thing; one can agree with that sentiment generally, particularly as it relates to advancing income inequality, while still seeing why a shareholder that has experienced decent performance might be loath to disturb senior management or simply have no views either way. Getting the "vote," whether in Iraq or in corporate governance, is not a magic remedy. Moreover, corporate governance is not the same as political democracy. Shareholders can exit by selling their shares; voters have no way to exit unless they emigrate: the democracy is themselves. Both Morgenson and the corporate governance community have famously avoided thinking too hard about the debilities of shareholders as monitors; it threatens the entire enterprise. They also failed to consider the role of shareholders as monitors in markets increasingly dominated by high frequency trading, speculation and ever-shorter holding times.

Here's a question I wish the governance crowd would seriously wrestle with: Why was executive pay so much lower in relative terms in the '50s, '60s and '70s, when the stakeholder model prevailed, when M&A operated at much lower volumes, and when boards and managers were so much more deeply entrenched than today? Now maybe it had nothing to do with the governance model of the day. Maybe it had everything to do with other factors: historical, social or economic. But if that's the case, why wouldn't pay be affected by similar determinative factors today? Perhaps we're chasing the wrong solution here.

But rather than get any kind of searching answer to the mysteries of governance, we get the same hollow ritual again and again. Shareholders are rarely to blame, and if they are it's usually some marginal group. Passivity is not a fundamental characteristic of shareholding but rather a response to managerial resistance. And there's always hope. Democracy and voting will prevail. Shareholders will do their duty, however defined. There is always some some sign, however fugitive, of progress. - Robert Teitelman

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