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Board Governance | Remuneration

CEO pay: Shareholders care more than ever Every year, As You Sow – the leading US non-profit shareholder advocate – identifies the 100 most overpaid CEOs of the S&P 500 and analyses whether or not pension funds and financial managers have held companies accountable for excessive compensation.

In February 2019, As You Sow issued its fi fth annual report, The 100 Most Overpaid CEOs: Are Money Managers Asleep at the Wheel?, created in order to bring the problem of excessive CEO pay into focus.1 Under provision 951 of the 2010 Dodd-Frank fi nancial reform act, shareholders of US companies were given the right for the fi rst time to vote on compensation as presented in the company’s annual proxy statement for the five named executive officers (NEOs). The provision grew out of decades of shareholder activism at hundreds of companies, with shareholders demanding disclosure on CEO pay. In the years leading up to the act, shareholder proposals that called for such a vote began receiving majority support. Several companies agreed to voluntarily adopt what some called a say-on-pay policy. Shareholder votes began in 2011 and the fi rst votes covered by our report were from 2013, when how funds were exercising this fiduciary duty was still unclear. The fi rst year that I authored the CEO pay report, I expected and dreaded hearing from investor relations or other executives, pushing back against the idea that a particular CEO was overpaid. That was not the case. In fact, I only heard from one senior executive, at a company I will not name. He told me, confidentially, that he believed the CEO of his company was unjustifiably overpaid and should have been on our list. I told him that we were only focussing on S&P 500 companies. I left that conversation with a realisation that even highly placed executives outside the C-suite often think CEO pay is excessive. Now that As You Sow has been releasing the report for five years, there’s a routine to the publication and I can anticipate to some extent what kind of calls and emails I will get from press and investors after the release.

54 Ethical Boardroom | Spring 2019

Board directors need to ask more questions Rosanna Landis Weaver

Programme Manager for Power of the Proxy: Executive Compensation at As You Sow There was a new request this year from a fund that voted against a higher proportion of compensation packages than many of its peers. It wondered if it could use a copy of a particular chart in its client presentations. It wanted to advertise how rigorous it was in voting against CEO pay packages. To me, this was a telling moment about where we are. The issue of overpaid CEOs, inextricably linked to larger concerns about income inequality, has risen to such a high prominence that the votes are something fund customers care about. This is reflected in my own experience. Many of the investors I speak with are continuing to lose patience with CEO compensation, seeing it as a systemic issue and going further to address that. Because we’ve been compiling this report for several years, we have seen a number of significant fi ndings. We’ve analysed how these fi rms’ stock prices performed since we originally identified their CEOs as overpaid. We then found that the 10 companies we identified as having the most overpaid CEOs, in aggregate, underperformed the S&P 500 index by an incredible 10.5 percentage points and actually destroyed shareholder value, with a negative 5.7 per cent fi nancial return. We’ve observed that several of the most overpaid companies are in some way insulated in some manner from annual shareholder votes. Companies with triennial votes appear to be awarding mega-grants on years when their shareholders don’t vote, which suggests that they may fear shareholder backlash. The trend I’m highlighting here is shareholders’ growing dissatisfaction with excessive pay. As You Sow’s research has found there are more funds that have

significantly (by more than five per cent) increased their level of opposition than followed the opposite trajectory. We found 18 funds, each with assets under management (AUM) of more than $90billion that voted against more than 40 per cent of the S&P 500 CEO pay packages. If the threshold of AUM of $1billion is used, there were 87 funds that met the same criteria. Several of these funds have more than doubled the number of CEO pay packages they vote against. The largest US pension fund, California Public Employees’ Retirement System (CalPERS, with assets of more than $350billion) has increased the number of S&P 500 CEO pay packages that it voted against by a factor of almost eight. In 2013, CalPERS opposed only 6.4 per cent of S&P 500 CEO pay packages, last year CalPERS opposed 45 per cent of them. That increasing level of opposition may come as a surprise to some directors who routinely see levels of support above 90 per

The issue of overpaid CEOs, inextricably linked to larger concerns about income inequality, has risen to such a high prominence that the votes are something fund customers care about

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Ethical Boardroom Spring 2019