Say on pay

The House has passed a bill that says:

Any proxy or consent or authorization under this section shall permit a separate shareholder vote to approve the compensation of executives as disclosed pursuant to the Commission’s compensation disclosure rules (which disclosure shall include the compensation discussion and analysis, the compensation tables, and any related material). The shareholder vote shall not be binding on the board of directors and shall not be construed as overruling a decision by such board.

Here's Gordon Smith, Bainbridge, Dealbreaker and the WSJ.

Remember the quaint idea that the states were supposed to decide corporate governance, and the federal securities laws were supposed to be just about disclosure? Obviously this is a significant decision about the allocation of power between shareholders and managers that's being made by the U.S. Congress. Wasn't that supposed to be a matter for state law?

Efficient compensation must be crafted on an individual-by-individual and firm-specific basis to provide the right incentives and attract the best people. It's like designing a product. Can anybody seriously believe that shareholders en masse can make a meaningful, intelligent, up-or-down decision on executive compensation?

Everybody who thinks this is about meaningful reform of executive compensation raise your hand. (Hey – how did that guy with the clown suit get in here?)

Not that this was unexpected. As I said a few months ago about the SEC's compensation disclosure rule that underpins this new initiative:

Unions already have secured an extensive executive compensation disclosure rule to whip up populist resentment about executive pay. The next step is to create a mechanism to bring that resentment to bear in corporate elections. It should be obvious to anybody who cares to look past the rhetoric that the unions are seeking bargaining leverage on behalf of their members, and to ensure their own survival. They are not seeking to represent the interests of investors generally. Their ideal is the sclerotic European firm, with its labor representatives on the board.

Let's think about some other likely specific effects of the proposal beside shoring up the flagging power of labor unions:

• Providing a potential basis for litigating the outcomes of board elections.
• More benchmarking of compensation.
• Increasing firms' incentives to manipulate compensation. Backdating was an early version of this technology, which will likely evolve into more sophisticated techniques.
• Spurring further brain drain of talent from publicly held firms. This, of course, increases the net costs of public ownership and the wealth and power of private equity (where managers' pay dwarfs that in public firms).

Even if one agrees with the concept of "say on pay," this law isn't necessary.  Many companies already are voting on, and some have adopted, similar shareholder proposals.  But the unions won't win all of these votes, so the idea seems to be to get Congress to force the idea down the throats of firms whose shareholders have rejected the union initiatives.

Now it's on to the Senate, with Barack Obama using this gimmick to demonstrate his astuteness on business issues.

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