Risk & Governance Weekly

Aflac to Hold First Pay Vote

By L. Reed Walton

On May 5, insurer Aflac will become the first U.S. public company to hold a non-binding shareholder vote on its executive pay practices.

At the company’s annual meeting, investors will vote on a management proposal to approve the “overall executive pay-for-performance compensation policies and procedures” for the preceding year, according to Aflac’s 2008 proxy statement. Shareholders will be asked to evaluate executive salaries and bonuses relative to company performance based on the pay tables and the compensation discussion and analysis section of the proxy statement.

The Columbus, Georgia-based company decided to start holding an annual advisory vote on compensation in 2009 after receiving a shareholder proposal on the issue in late 2006. In November, Aflac decided to move the first vote to 2008, reasoning that two years of in-depth pay data under the Securities and Exchange Commission’s new compensation disclosure requirements would be enough for shareholders to adequately evaluate company pay practices.

Because the “say on pay” vote is not binding, the board will not be obliged to revise pay practices in the case of a significant negative vote. The Aflac supporting statement noted that the compensation committee “will take into account the outcome of the vote when considering future executive compensation arrangements.” Aflac CEO Daniel Amos told The New York Times that the vote is symbolic, but he insisted it is “an important symbol.”

Amos earned a total of $14.8 million, and had approximately $70 million in stock options vest in 2007, according to the company’s compensation report. Amos’ incentive-based pay is entirely performance-based, the company says, noting that since he took the post of CEO in 1990 the firm’s total shareholder returns have exceeded 3,867 percent. Aflac's stock price has risen about 126 percent since early 2003.

“Since this is the first [“say on pay” vote], it will be very closely watched,” Amy Borrus, deputy director of the Council of Institutional Investors (CII), told Risk & Governance Weekly. “I don’t think anybody should assume it’s a cakewalk for management just because they agreed to put this on the ballot.”

The first pay vote comes as U.S. companies continue to hear shareholder objections to executive pay packages. In the wake of the corporate credit crisis, investor concerns over pay practices helped fuel significant opposition to board members at banking firm Washington Mutual and the CEO at homebuilder Toll Brothers, according to shareholder activists. In March, a congressional committee held a hearing to address the multi-million-dollar pay packages received by top executives at Citigroup, Countrywide Financial, and Merrill Lynch while their firms reported billions of dollars in mortgage-related losses.

Overseas, companies also have faced growing investor criticism of their pay practices this year. BP, a company headquartered in the United Kingdom--where advisory votes on pay are required by law--received more than 30 percent opposition to its executive remuneration report on April 18. (For more on this topic, please see the lead story in the April 25 edition of Risk & Governance Weekly.) In the Netherlands, where compensation votes are binding, investors rejected pay proposals from electronics giant Philips and retail fund VastNed. Office supply firm Corporate Express pulled remuneration proposals off its meeting agenda amid investor pressure, according to IR magazine. 

Candidates Support Pay Votes

In the United States, presidential candidates from both major parties have voiced support for shareholder votes on pay. Senator John McCain, the presumptive Republican nominee, criticized the pay received by Chairman James Cayne of Bear Stearns, and Angelo Mozilo, head of mortgage lender Countrywide, as “unconscionable” and “outrageous,” The Wall Street Journal reported. In 2007, Mozilo earned $10.8 million, down from $51 million in 2006, and sold $121.5 million in company stock, according to news reports.  

In an April 15 interview with CNBC, McCain endorsed the non-binding pay vote at Aflac. “[While] I do not believe in government intervention . . . I do believe we should take steps to increase transparency and also shareholder input into the compensation of CEOs,” McCain said.  

Senator Barack Obama, who is running for the Democratic nomination, has introduced a bill to require public companies to hold annual advisory votes. A similar measure, the “Shareholder Vote on Executive Compensation Act,” was approved by the House of Representatives last year, but Obama’s bill has languished in the Senate Banking Committee for a year. In an April 11 speech, Obama said that if the legislation is not passed this year, he will make it a priority to institute it during his presidency, Reuters reported. Obama’s bill now has seven co-sponsors.

The International Corporate Governance Network (ICGN) is backing “say on pay” legislation in the U.S. market. The organization, based in London, sent a letter in support of the legislation to Rep. Barney Frank, the lead sponsor of the pay bill in the House. “In our view there is an ‘accountability gap’ in US corporate governance, and we applaud companies that take steps to close this,” Anne Simpson, the ICGN’s executive director, told R&GW.  “The advisory vote on pay is just one measure that has proven effective in other markets in taming pay for failure, and making sure that rewards are in sync with performance.”

Senator Hillary Clinton, who also is running for the Democratic nomination, introduced her own bill on April 15 that would, like Obama’s bill, mandate a non-binding vote on executive pay at all public companies holding meetings after Jan. 1, 2009. The comprehensive measure--the “Corporate Executive Compensation Accountability and Transparency Act”--would, like Obama’s bill, also mandate an advisory vote on any executive severance packages in the case of a merger or acquisition, beginning in 2009, and would limit the amount of money that an executive could set aside under a deferred compensation plan to $1 million. In the bill, Clinton is also asking for increased disclosure by public firms of their contracts with pay consultants, and would prohibit consultants that do outside contract work for a company for consulting on executive pay for the firm. Other provisions in the bill would mandate greater pay disclosure on the part of companies that receive government contracts. The bill, which has so far garnered no co-sponsors, was sent to the Senate Finance Committee.

While corporate lawyer Martin Lipton, the Business Roundtable, and other corporate advocates have opposed pay vote legislation, some executives have become more receptive to advisory votes. In a January survey by accounting and consulting firm BDO Seidman, 61 percent of chief financial officers at 100 U.S. technology firms said shareholders should be able to vote on executive compensation.  According to a survey of top executive officers, released April 15 by consulting firm Korn/Ferry International, 80 percent of company executives said they support some type of “say on pay” for shareholders at their firms.

At the same time, some corporate governance watchers worry that shareholders may not always have the right information to make an informed judgment on complex executive pay packages. Broc Romanek, author of TheCorporateCounsel.net weblog, expressed concern that “most shareholders [might] blindly vote in favor of pay packages, thereby arguably providing directors a shield from liability for the poorly designed pay packages they give a CEO.”

Regardless of the outcome at Aflac on May 5, the CII’s Amy Borrus says corporate governance advocates will be examining what the company does following the vote. “If it’s less than 95 percent favorable, will management seek out shareholders who were disgruntled and seek there input as to where the company stumbled on this?” she said. An Aflac spokeswoman told R&GW that the company would not comment on its expectations for the vote in advance of the meeting. 

“‘Say on pay’ is a catalyst for conversation,” Professor Stephen Davis of Yale University’s Millstein Center for Corporate Governance and Performance, told R&GW. “The most important factor is the dialogue between shareowners and companies.” He also said companies could possibly avoid negative votes on pay packages if they spoke to their major shareholders before setting pay policy.

“Say on Pay” in the Future

In addition to Aflac, six other U.S. public companies have adopted policies that will allow shareholders to vote on pay practices. The majority of these firms, including Verizon Communications, Blockbuster, and Par Pharmaceuticals, will put a management-sponsored “say on pay” resolution on the ballot next year.

Bond insurer MBIA and gaming company Littlefield also plan to hold pay votes. MBIA will hold its first “say on pay” vote in 2009, CEO Jay Brown wrote in a Feb. 25 letter to shareholders. On May 21, investors at Austin, Texas-based Littlefield will vote on two management resolutions that ask investors to indicate whether the total compensation received by the CEO, president, and directors in 2007 “is within 20 percent of an acceptable amount.”

On June 4, RiskMetrics Group will ask its investors to vote on a trio of advisory proposals. According to the company’s proxy statement, shareholders will vote on: 1) the company’s overall executive compensation philosophy; 2) whether the board executed these principles appropriately in making its 2007 compensation decisions; and 3) the board’s application of its compensation philosophy and policies to the company’s 2008 performance objectives.

Meanwhile, shareholders have filed more than 80 proposals this year asking companies to hold annual pay votes. (For details on how those proposals have fared so far, please see this week’s “Early Season Trends” analysis.) Among the upcoming meetings where “say on pay” is on the ballot are Motorola on May 5; PepsiCo on May 7; and Tenet Healthcare, CenturyTel, and Windstream on May 8.