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Proxy Access? A Lot Of Very Smart People Talking About A Very Stupid Issue.

An Interview With Ed Durkin, Director, Corporate Affairs Department, United Brotherhood Of Carpenters

God forbid that anyone thinks that Say-On-Pay and Proxy Access provide all the answers we need and all the tools we need to have good corporate governance!

Q: We know you have not been a fan of Say-On-Pay, so we assume you feel very good about Microsoft’s triennial say-on pay plan, and Prudential’s two-year plan. Are there more such actions in the wings, and do you think there’s still a chance to influence the legislative process here?

Durkin: There are a few more triennial or biennial say-on-pay programs in the wings, I think, but many companies have a concern about being seen as undermining Say-On-Pay at a time when federal legislation seems so certain. But we are not giving up on making Say-On- Pay a triennial event, and we have been having a good give and take on the Hill.

Q: What exactly have you been doing…and have you had any help from the corporate community?

Durkin: Without being too specific, yes, we have been joined by a fair number of corporate representatives who have been willing to voice support for a triennial process. And I think that most of the Senate staff actually gets it. But there is a sense of inevitability here, and a feeling that it’s a political imperative to pass a bill for annual Say-On-Pay.

Q: Just to remind readers, what are your objections to annual says on pay?

Durkin: Basically three things; First, there is no way that we could possibly make a meaningful evaluation of the 3600 pay plans we’d have to deal with annually. Second, we do not want to see anyone developing or using the kind of “check the box” voting advisory programs that will inevitably spring up. And last, we see annual Says-On-Pay to be an ‘easy out’ for voters, on what should be very important and very difficult issues to wrestle with.

Q: How do you go about evaluating executive pay plans now?

Durkin: When we engage a company, we use our 39-point evaluation plan, and we focus on “Pay for Superior Performance”. One of the key things we look at is ‘How does this plan reinforce, and drive, and incentivize the company’s long-term strategic plan?’ We want the plan to be very specific, and very distinctive to that company. Yes, we don’t like gross-ups, but they don’t necessarily mean it’s a bad plan. And yes, we may have some concerns about the social justice aspects. But if you have aggressive performance targets, that’s very important to us. We look especially for overall ‘reasonableness’.

Q: What kinds of thing are likely to trigger a more intensive review on your part?

Durkin: Last year we did a very intensive study of 125 companies in 11 industry peer-groups, where we looked within and across each group. Sometimes good performers had problematic plans, but mostly we focus on the bad performers. We want to see a majority of the incentive pay to be performance- vested vs. time-vested. Here, there’s been a nice trend with options and restricted shares. We look hard at post-employment benefits, mainly looking for overall reasonableness. We want to see rigorousness in terms of the linkages of pay to performance and we will challenge when incentive pay and peer performance seem to be out of line.

Q: Do you watch the newspapers and react?

Durkin: We’re not ambulance chasers, where we’ll see something and immediately target them or enter a shareholder proposal, but we will pick up the phone if something looks out of line.

Q: There was an interesting article in the Wall Street Journal this week, saying that we could and should do away with bonuses altogether. What do you think of that idea?

Durkin: We’re Carpenters, so when we think of bonuses we tend to think of a turkey, or something like that. There is a big disconnect between big bonuses and average people. Do I think there would really be a big difference in performance if salary was, say 80% of total pay and incentives or bonuses were, say, 10% short-term and 10% long-term? No, I don’t.

Q: We know that you are not a fan of proxy access. Can you summarize why?

Durkin: If we look at the long historical context, most activists have been proceeding under the belief that an active market for corporate control is the best way to keep boards and managements on their toes. So, eliminate pills, and staggered boards, and now, make it easier to oust directors and insert new ones.

We don’t buy into this theory. We don’t think this hasn’t helped to produce better corporate governance. We think it leads to short-termism. We see proxy access as a not so distant cousin of the takeover market; as a way to have very low cost engagement - that can and will be used as a wedge here. We believe that majority voting for directors is the real answer, and the strongest way to hold directors accountable. We also believe that if investors are serious about wanting to win board seats, they will mount their own campaigns using their own materials. So to me, proxy access boils down to a lot of very smart people talking about a very stupid issue.

Q: What are your big issues for 2010?

Durkin: We do not plan to have any compensation proposals in 2010. Our big push will be for majority voting, where we are working on 70 or so proposals. The market has really spoken: 85% of the S&P 500 companies are already here. Smart boards get it.

Q: That said, what percentage of your proposals do you expect will be settled ahead of time?

Durkin: Over the past two or three years, we’ve been averaging 66%. We think that this year, 75% of the companies we engage with will adopt majority voting voluntarily.

Q: Let’s talk about companies reaching out to you. Do you see more companies doing this these days?

Durkin: Yes. Initially, we did a lot of reaching out, in a very non-adversarial fashion, to those 125 companies in our study, for example. Now, we get visits from companies once or twice a week – like Best Buy and Staples last week – just to talk about broad issues, and to ask what may be on our minds.

One of my biggest frustrations is that very often some of our largest holdings don’t see us as being the big investors we actually are. We have a quarter-billion- dollar investment in Goldman Sachs, for example, but our ownership is masked, because our shares are held with a variety of institutions where we, as the beneficial owners, are invisible to them. We are probably JP Morgan’s 15th largest investor, but our ownership does not show up on their screens. When we go to see a company we always bring a print out of our holdings, and where they are held, so they can see where we really rank.

Q: Do you have a short-list of things NOT to do if you are a company seeking to engage constructively with you?

Durkin: The number-one thing NOT to say is, ‘You do not understand’…Or, just as bad, to come with the attitude that ‘We’re here to tell YOU’.

Q: Do you see more director involvement in these meetings?

Durkin: We see directors come along occasionally – most often if there are compensation issues. We don’t push for it. In general, we are very satisfied with the level of engagement.

Most companies resource the meetings very well, with the Corporate Secretary, or sometimes the General Counsel, and maybe the HR person, or the comp-consultant.

Q: Rich Ferlauto told us yesterday that he thought that with say-on-pay and proxy access virtual sure things, all the major corporate governance goals have been accomplished. What say you to this?

Durkin: Triennial say-on-pay would give us one-half of a good tool to monitor corporate governance.

God forbid that anyone thinks that Say- On-Pay and Proxy Access provide all the answers we need and all the tools we need to have good corporate governance!

We do think, however, that with majority voting for directors, no other governance change would be required.