By James Hamilton, J.D., LL.M.
A leading global voice on corporate governance has praised a House bill mandating a shareholder advisory vote on compensation. In a letter to Barney Frank, Chair of the House Financial Services Committee, the International Corporate Governance Network expressed strong support for H.R. 1257, which the group believes will increase the competitiveness of the U.S. capital markets which are viewed internationally as relatively weak in this area.
Sponsored by Chairman Frank, HR 1257 would require companies to conduct a non-binding advisory shareholder vote on executive compensation plans. It recently passed the House of Representatives by a vote of 269-134. The Shareholder Vote on Executive Compensation Act also mandates a separate advisory vote if a company gives a new, not yet disclosed, golden parachute to executives while simultaneously negotiating to buy or sell a company.
In the view of the corporate governance group, H.R. 1257 properly balances the rights of shareholders for input into the important policy of executive compensation and the need for companies to have flexibility. The advisory vote is non-restrictive and non-intrusive, yet provides compensation committee members with sharpened accountability to owners. This fact, coupled with the improved SEC executive compensation disclosure rules, will permit shareholders to participate constructively in broad policies related to executive compensation.
The message companies receive from a shareholder advisory vote reflects a strong commitment to pay-for-performance, reasonable compensation levels, and the avoidance of rewards for failure. According to the ICGN, the advisory vote mandated in HR 1257 will also work a good long-term alignment between the interests of executives and shareholders.
ICGN members in the UK and the Netherlands, for example, have commented that the practical impact of this dialogue between companies and shareholders has been positive. Compensation is becoming more closely aligned to long term performance. In addition, the discussion on the shareholder advisory vote allows companies to communicate their strategic goals and tailor executive pay around specific objectives rather than market wide targets.