June 06, 2011
Say on Pay as Appropriations Lever
Posted by Christine Hurt

Last week, I was on a panel at Law & Society with other scholars talking about executive compensation.  I was probably the only speaker who was arguing that compensation reforms like "say on pay" have no relation to systemic risk or to the financial crisis.  (Paper Regulating Compensation is here.)

Sunday, Gretchen Morgenson had an article in the NYT equating this "say on pay" season as "Investor Spring."  This phrase alludes to the "Arab Spring," so I assume Morgenson is comparing shareholders to oppressed citizens of violent or corrupt or inept governments, who are the corporations.  Nice.  I'm not sure who should be more offended, U.S. corporations or rebels and protestors risking their lives to change their countries. 

Anyway, the article highlights shareholders at Celgene Corporation who have found each other on the Internet and are trying to gather enough folks together to vote down the executive compensation pay package at the upcoming annual meeting.  (Their website is here.)  The article brings up some very interesting points about the new Say on Pay rule (pursuant to Section 951 of the Dodd-Frank Act) and on shareholder activism.

1.  The shareholders seem more unhappy about the stock price than anything.  Yes, the stock price is flat.  But, it seems to follow the U.S. market as a whole, as I compare the two on Morningstar.  The price has gone from the $40s to $75, and is now about $60.

2.    This leads them to balk that executive compensation pay is rising, but they are happy with management.  According to the article, the leader of the movement says that "in spite of executional excellence" the stock is flat and that Celgene is a "well-managed company."  Yet, he is concerned that pay packages have gone up this year, after being flat for two years.  So, if you're happy with management, then why are you against giving them a raise after three years of no raise?

3.  The pay increases are de minimus to the shareholders.  Celgene has 461 million shares outstanding.  The top four executives received $24.6 million, up from maybe $19 million.  So, if shareholders had that $5 million back, that would be one penny per share.

4.  This mobilization effort is working well.  So far, with just a few days to go, the shareholder activitsts have 79 shareholders holding 2.7 million shares.

5.  This isn't about the $5 million.  The shareholders are upset that the company has a poison pill.  The shareholders hold shares with a flat stock price, and the economy is opening up for M&A.  Maybe the shareholders aren't selling because they want Celgene to be acquired.  But, there's this poison pill. But the shareholders have no way to get rid of the poison pill.

6.  Say on Pay could be used as an appropriations tool.  Shareholders may be able to stall pay packages to get the attention of managers to do something else.  14a-11, the new proxy access rule isn't going to work very often.  As I heard Jill Fisch say last week when presenting her fantastic new proxy access paper, only 30% of U.S. companies even have shareholders who meet the 3%/3 rule.  But, maybe shareholders can get management's attention by not voting on their pay packages, just like Congress can affect agency behavior through the appropriations tool.

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