Harry Campbell Shareholder protests over excessive executive pay have erupted at Barclays, Citigroup and Chesapeake Energy. Could this be the beginning of a corporate Arab Spring?
Don’t bet on it. Each of these cases reflects a particular outrage against poor compensation practices. While it might make corporate governance activists and the Occupy Wall Street movement happier to think these events are a sign of change, these protests are more likely to dissipate once the media attention surrounding them dies down.
In Citigroup’s case, about 55 percent of shareholders voted against Citigroup’s executive compensation package. The flash point was last year’s pay of the bank’s chief executive, Vikram S. Pandit, which the influential proxy adviser Institutional Shareholder Services calculates could be as much as $49 million.
The only surprise about this vote was that so many shareholders still voted in favor. Citigroup’s stock has declined more than 90 percent in the last five years, and the company has been a prime example of mismanagement in the years leading up to the financial crisis. Mr. Pandit stabilized the ship, and Citigroup argued that he had been underpaid in previous years, with a salary of only a $1 a year.
But Citigroup conveniently ignored the fact that I.S.S. concluded his pay last year was above the median for comparable finance chief executives. Citigroup had also paid Mr. Pandit hundreds of millions of dollars to acquire his firm, Old Lane Partners, an investment it has written off completely. Shareholders simply had enough.
In Barclays’ case, shareholders actually heckled management at the annual meeting. When people yell in Britain, it is serious business and a sign that resentment of financial firms is even greater there than it is in the United States. More notably, despite this furor, only 26.9 percent of Barclays shareholders voted against the $10 million pay package of the chief executive, Robert E. Diamond Jr.
Then there is Chesapeake. The company had previously granted its chief executive, Aubrey K. McClendon, the right to buy up to a 2.5 percent interest in every well it drilled. Reuters reported that Mr. McClendon had borrowed $1.1 billion to purchase these interests. In the wake of the subsequent outcry, one analyst called for the Chesapeake board to be removed because of its “unwillingness” to stop these practices. I would argue that the board should be removed for simple lack of common sense.
All three companies now appear contrite. Richard D. Parsons, the retiring chairman of the Citigroup board, has said, “We’re going to have some more conversation with our shareholders … and then fix it. “Barclays’ chairman, Marcus Agius, has apologized to shareholders for not considering their views, and Barclays executives have revised the components of their compensation. And Chesapeake’s board has announced that it will end the well-repurchase program 18 months early and is reviewing the exact nature of Mr. McClendon’s financing arrangements. On Tuesday, Mr. McClendon announced he would resign as Chesapeake’s board chairman, but not as chief executive.
These instances drew shareholder attention, but a majority of companies escape scrutiny. Median pay for executives at 200 major companies was $9.6 million in 2010 according to a study conducted for The New York Times by Equilar, a compensation consultant. This figure was a 12 percent rise over 2009 figures, and the majority of these executives are now being paid above prerecession levels.
Say-on-pay provisions have given shareholders an outlet to express their opinions on this unchecked growth, but most of them don’t seem to care enough to express that opinion strongly. According to the I.S.S., only eight companies in the Standard & Poor’s 500-stock index failed their say-on-pay votes last year. Only 30 companies in the Russell 3,000 received negative votes because of say-on-pay rules. Recommendations by I.S.S. to vote no on pay were ignored about nine out of 10 times.
There is no reason to think that the “no” votes are going to be any higher this year. Even I.S.S. does not make its recommendation on the size of the pay package, but rather how it is tied to performance.
In Britain, where the outrage over executive compensations seems to be louder, little is being done to rein in pay. Say-on-pay provisions have been around in Britain for about a decade, but pay of chief executives has continued to increase. One study found that there were fewer than a dozen negative votes in the first six years that say-on-pay was introduced.
The fact is that shareholders — except for activist hedge funds who specialize in agitating for change — have little incentive to act. If they don’t like a company’s practices, they can simply sell and invest in another company. Compare this with shareholder activism, which is not only costly but risky, with benefits accruing to all other shareholders.
Moreover, pay is often a small part of a company’s expenses. Citigroup has a balance sheet of almost $2 trillion, so who really wants to spend time scrutinizing $50 million in light of the larger issues the company faces? Directors, too, would prefer to devote their scrutiny on the operation of the company and might not want to challenge the chief executive over pay.
These are all old reasons that pay continues to spiral upward, but recent events don’t change anything. The best we are going to get, even in egregious cases, is a few apologies and tweaks. Let’s see what these companies do once the rage fades in a few years. Citigroup’s board has yet to announce any compensation changes.
Expect to see a few headlines this proxy season about financial companies and perhaps a handful of no votes because of say-on-pay provisions. Companies may even adjust their pay packages to conform more with I.S.S. recommendations on tying pay to performance.
But this is just tinkering at the edges at best. Thousands of other companies will go on as before, safe in knowing that the dynamics of the corporation and say-on-pay will not touch them unless they have an eye-popping example like the Chesapeake chief executive’s deal.
If anything, say-on-pay provisions are likely to have the opposite effect from what was intended, as shareholders validate pay proposals in Soviet-style fashion. The fact that executive compensation increased more than 12 percent in the first year after say-on-pay was introduced doesn’t give much comfort.