Congress Got 'Say-on-Pay" Right
NEW YORK ( TheStreet) -- It's easy to bash many aspects of the Dodd-Frank banking reform legislation, but Congress sure got it right when requiring "say-on-pay" for shareholders.
The Dodd-Frank Wall Street Reform and Consumer Protection Act -- signed into law by President Obama in July 2010 -- has certainly created a rocky landscape for the banking industry, with numerous threats to revenue streams and confusing and contradictory requirements -- such as the Volcker Rule -- which even has the Federal Reserve and other regulators scratching their heads.
Under the Securities and Exchange Commission's final rules, publicly traded U.S. companies are required to provide shareholders with an advisory vote on executive compensation at least once every three years, and beginning in 2011, with shareholders also voting to decide whether to hold say-on-pay votes annual, every two years, or every three years.
The rules also require "say-on-parachute," with companies required to provide additional disclosure regarding compensation arrangements with executive officers in connection with merger transactions."
While the shareholder advisory votes are non-binding, former Citigroup (C) Chairman Richard Parsons wasn't just pandering when he said on April 17 that shareholders' vote against the company's 2011 executive pay package -- which included total compensation of $14.9 million for CEO Vikram Pandit -- was a "serious matter."
Coming out of the credit crisis, following government bailouts and obscene losses for long-term investors, the last thing a large bank wants is a shareholder lawsuit against its executive pay packages. While Citigroup's board of directors hasn't yet taken any action to address shareholder concerns, investors expect the company to meet with some major stockholders and try to sort out an agreement.
Investors traditionally neglect to send in their annual proxies, leaving their brokers free to vote on their behalf, usually rubber-stamping whatever a company's board of directors decides to recommend. This is obviously changing in the wake of Dodd-Frank, and this can only be a good thing.
Mark Poerio -- a partner in the employment practice at Paul Hastings -- points out that even an advisory vote has "high litigation risk," since during 2011, "there were 40 companies that failed to get a majority vote" on say-on-pay, with "about 20% of the companies failing to get a majority vote getting sued for breaching fiduciary duties."
Citigroup is now "on the radar screen for a shareholder derivative action by disgruntled shareholders," according to Poerio, who added that "the Citi vote was a surprise," since the company went from 93% shareholder approval of its 2010 executive pay package to only 45% approval last week for the 2011 pay package.
The eight shareholder lawsuits following "no" votes on say-on-pay during 2011 "pretty well had no traction," according to Poerio, who said that "only one has moved beyond a motion to dismiss," but it would seem that executives of large companies really can't afford these court battles. After all, disgruntled shareholders could vote with their feet, hurting the share prices supporting the generous stock options awarded to the executives.