Inviting Comments on Activist Concerns about Universal “Say on Pay”

Ed Durkin, the representative of the United Brotherhood of Carpenters (“UBC”) whose proposals of alternatives to universal “Say on Pay” have been stimulating debate among corporate governance professionals,  has encouraged comments from Forum participants on the observations he presented in the following letter to the SEC:

• July 20, 2009, Edward J. Durkin of the United Brotherhood of Carpenters, letter to the U.S. Securities and Exchange Commission regarding its July 1, 2009 proposed rules [Release Number 34–60218, File No. S7-12-09]: “Shareholder Approval of Executive Compensation of TARP Recipients” (4 pages, 63 KB, in PDF format)

As an experienced activist in the advocacy of pension fund interests in executive compensation and other corporate governance issues, Mr. Durkin supported his very practical concerns with the following explanation (pages 3-4 of his letter):

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"We are concerned that these goals of enhancing investor understanding of executive compensation in order to encourage plan improvements will be unintentionally undermined by the expanded use of simplistic pay plan advisory votes at potentially thousands of companies.

"The UBC pension funds, like other private and public employee pension funds, hold a large number of corporate stocks in our investment portfolios. At present, UBC pension funds hold the common stock of 3,603 different corporations, and the latest financial report for the California Public Employees Pension Fund posted on the fund's website indicates that the fund holds the stock of 4,856 domestic companies. The voting rights associated with these shares are a plan asset and plan trustees have a fiduciary duty to ensure that these voting rights are exercised in the best interests of plan participants. Our trustees take this responsibility seriously and have provided for the informed analysis of proxy voting issues that are raised at portfolio companies. However, this commitment and duty will be severely challenged by the institution of a broad annual advisory vote at all listed companies. Further, such an action will undermine the goals that motivated the work to improve compensation disclosure, as casting a pay vote at thousands of portfolio companies will have to be based on a simple checklist of plan features given the time constraints and resource limitations facing the funds.

"Following the 2007 proxy season, the SEC Staff initiated a project to communicate with companies concerning their compliance with SEC's new compensation requirements. The Staff reviewed numerous companies CD&As and then communicated with them concerning disclosure shortcomings. It is our understanding that the Staff examined 350 companies as part of this project, a fraction of all listed companies. This focused examination clearly reflected an evaluation of how best to use SEC resources in an effective manner. Institutional voters attempting to vote on executive compensation on an annual basis would have to undertake a similar level of research and analysis on thousands, not hundreds, of companies. The quality of the research and analysis will be compromised as the universe of companies to which a voting requirement applies, and the resulting vote, will impart little or no important information to companies and their compensation committees.

"The past proxy season advisory vote on executive compensation at TARP recipients has highlighted the shortcomings and dangers associated with a broadly applied advisory vote. The establishment of a broad annual advisory vote at all public companies would be irresponsible, undermining executive compensation reform efforts and the voting responsibilities of institutional investors."

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Your comments will be appreciated, on this letter or on Mr. Durkin’s previously reported proposals.

Gary Lutin, Chairman, Shareholder Forum