Shareholders, who are understandably fed up with outrageous executive-pay packages and underperforming companies, may soon get a voice.
House Financial Services Committee Chairman Barney Frank, D-Mass., recently introduced a bill that would give shareholders a non-
binding vote approving or disapproving the pay packages of chief executives and other top company officials. The legislation was co-sponsored by 21 other House lawmakers.
The Senate, meanwhile, hasn’t introduced similar legislation. It should.
America’s businesses have a responsibility to shareholders. The economy depends on public
trust, which is why Congress needs to do everything it can to protect investors and grant them as much say in the business process as possible.
No Republicans have endorsed the bill. However, with the Democrats now controlling the House, Mr. Frank has publicly stated that he expects House passage as soon as next month. Let’s hope he is right.
While the bill would give investors a non-binding vote on executive compensation, it would also mandate that businesses allow shareholders to vote on any golden-parachute compensation deals proposed during talks related to mergers, sales or acquisitions.
The bill, which is called the Shareholder Vote on Executive Compensation Act, is designed to build on the Securities and Exchange Commission’s executive-pay-disclosure rules. The new SEC rules require public companies to include in their annual proxy statements to investors the chance to vote on a firm’s executive-pay plans.
Mr. Frank said in a published report that the key to the bill is that it would ensure that shareholders had a say in a company’s executive-compensation disclosures without “micromanaging the business.”
During a House Financial Services Committee hearing Thursday, Mr. Frank said that the legislation is simply “enhancing the ability of shareholders to vote on the salaries of those they employ.” What’s more, it wouldn’t seek to set limits on executive compensation.
However, while the proposed bill would grant shareholders only an advisory vote, any sign of disapproval from investors would be quite hard for a company’s board to ignore.
The bill needs to be passed, because any form of public censure would most likely force a company’s board to curb huge compensation packages and golden parachutes. In addition, shareholders’ having more of a voice might force boards to align more closely pay and performance.
Such votes are required in Australia, Sweden and the United Kingdom. Industry observers said that executive-pay packages are rarely voted down in those countries.
However, the mere knowledge that compensation packages must be put to a vote has helped keep them in check in those countries.
During his State of the Economy speech in January, President Bush challenged corporate America on extravagant pay.
The challenge is now with Congress to pass a key bill that would give shareholders a say on those executive-compensation plans.
