Do corporate CEOs get paid too much? Rightly or wrongly, lots of investors believe that to be the case, and some activist shareholders have been trying to rein in the growth of executive compensation.
The activist investors’ latest tactic is to put forward a shareholder proposal that, if adopted, would require the company to obtain an advisory shareholder vote on executive pay. Such proposals are pending at more than 60 companies, including Citigroup, Northrop Grumman and Wells Fargo & Co. With AFLAC having recently announced that it will voluntarily allow such an advisory vote, the pressure on other companies from activist investors will doubtless grow.
According to The Wall Street Journal, under these proposals, “the vote would be nonbinding, but activists hope that public censure, or the threat of it, would prompt directors to curb outsized awards and better link pay with performance.” In fact, however, it’s highly unlikely that a shareholder vote on executive pay would be very meaningful.
Most shareholders lack incentives to gather the information necessary to actively participate in decisionmaking. A rational shareholder will expend the effort necessary to make informed decisions only if the expected benefits of doing so outweigh its costs.
Given the length and complexity of corporate disclosure documents, the opportunity cost entailed in making informed decisions is both high and apparent. In contrast, the expected benefits of becoming informed are quite low, as most shareholders’ holdings are too small to have significant effect on the vote’s outcome.
Accordingly, most corporate shareholders are rationally apathetic. If they bother to vote at all on one of these executive pay issues, their vote will almost certainly be uninformed.
To be sure, the relatively small number of activist investors may well expend the effort to make an informed vote. Unfortunately, it is these activist investors who are most likely to use their voting rights to pursue private interests.
Who are these “activist shareholders” and what do they want? Tellingly, most of the activists are union pension funds, state and local government employee pension funds, and various corporate social responsibility investment funds.
These are precisely the institutions most likely to use their position to reap private benefits not shared with other investors. As Yale law professor Roberta Romano observes, “it is quite probable that private benefits accrue to some investors from sponsoring at least some shareholder proposals. The disparity in identity of sponsors — the predominance of public and union funds, which, in contrast to private sector funds, are not in competition for investor dollars — is strongly suggestive of their presence.
With respect to union and public pension fund sponsorship of shareholder proposals, for example, Romano points to such potential private benefits as “progress on labor rights desired by union fund managers and enhanced political reputations for public pension fund managers, as well as advancements in personal employment.”
This is not just academic speculation. The pension fund of the union representing Safeway workers, for example, used its position as a Safeway shareholder in an attempt to oust directors who had stood up to the union in collective bargaining negotiations. Noris this an isolated example.
Union pension funds tried to remove directors or top managers, or otherwise affect corporate policy, at more than 200 corporations in 2004 alone. Union pension funds reportedly have also tried shareholder proposals to obtain employee benefits they couldn’t get through bargaining.
Public employee pension funds are even more vulnerable to being used as a vehicle for advancing political/social goals unrelated to shareholder interests generally. The Los Angeles Times reported, for example, that activism by CalPERS during the 2004-06 period was “fueled partly by the political ambitions of Phil Angelides, California’s state treasurer and a CalPERS board member,” who was then planning his 2006 run for governor of California. In effect, Angelides allegedly used the retirement savings of California’s public employees to further his own political ends.
In sum, we have here an “advisory” vote being sought by folks whose motives are inherently suspect. What private benefit do the activists seek? Class warfare? The ability to harass executives at companies subject to collective bargaining? The possibilities are endless.
One thing seems reasonably certain, however, which is that these proposals have very little to do with good governance.
UCLA Law Professor Stephen Bainbridge is a member of The Examiner Blog Board of Contributors and blogs at ProfessorBainbridge.com.
