Will SEC's 'Say on Pay' Rule Do Any Good?

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golden parachuteAs someone who has sponsored "Say on Pay" shareholder proposals with companies like Boeing and Procter & Gamble, I wonder whether SEC-mandated votes on executive compensation will do any good. In fact, I worry that it may lead to a false sense of shareholder empowerment.

Yesterday, the Securities and Exchange Commission voted 3-2 to adopt a rule requiring public companies to hold an advisory vote on executive pay at least once every three years.

At Boeing in 2008, our "Say on Pay" proposal got 38% of the vote, an extremely strong vote for a proposal opposed by the company's management.  It had little impact. Management paid no attention to us and Boeing CEO James McNerney continues to be overpaid, even as the company experiences setback after setback.

Public companies should be controlled by shareholders, and their representatives, the board of directors. Unfortunately, corporate boards today are characterized by cronyism and back scratching. When we sponsored our "Say on Pay" proposal at P&G, none other than Boeing CEO McNerney, who chaired P&G's compensation committee, led the charge against it.

Here are my remarks, delivered at the 2008 P&G annual meeting in Cincinnati, with some additional observations about executive pay:

Our resolution would allow a vote by shareholders on executive pay. Although it would be advisory only, it would allow shareholders to have a voice on this issue, so much in the news now.

(Then-P&G CEO A. G.) Lafley is making over $25 million this year. I understand that he could walk away with another $95 million or so, if he were to exercise his stock options. This is too much. It doesn't matter that this is a profitable, well-run company. It doesn't matter that P&G's stock has not plummeted to single digits like so many others in the midst of this crisis.

I am not a socialist. I am not the AFL-CIO. I do want to live in a society where it is possible to become rich. What I am worried about is that Mr. Lafley and other executives are spoiling things for everyone else.

The public company should be viewed a marvelous institution. It allows ordinary people to have a stake in, and benefit from, the operation of an economic behemoth like P&G. But when the disparity between executives and their employees and customers becomes so dramatic, the moral underpinnings of capitalism are undermined.  The result is usually demands for increased state intervention in the economy, the result of which is always a reduction in individual freedom.

Case in point is the Alternative Minimum Tax. It was born in 1970 as a result of public outrage over the fact that 155 very wealthy taxpayers paid little or no federal income tax. With its usual foresight, Congress failed to index the tax to inflation.  Today, millions of taxpayers are swept up in the AMT net. If nothing is done, 20% of all taxpayers will be hit in 2010.

You will notice that in our supporting statement in the proxy we warned that unless corporations voluntarily tame executive pay, Congress will do it.  We were right. In fact, a bill sponsored by Barney Frank is referenced right there.  I would prefer that the issue be settled right here among shareholders, especially if crony-filled boards will not do their jobs.

There is another way excessive executive pay hurts shareholders and society in general. I believe it makes executive more susceptible to acquiescence to the demands of anti-business activists. The anti-corporate Left has a new strategy. Instead of seeking to put companies out of business, it now seeks to take them over, or at least their public relations departments.  Do CEOs allow this because these socialists are the natural critics of excessive pay, and they can be bought off by endorsing the Left's pet causes?

If you go to the P&G website, you don't find much about the free enterprise system or defending capitalism, the system that makes possible corporate profits. Instead, you see words like sustainability. When used by the activists who promote it, "sustainability" means that the world is running out of things so therefore the state must be empowered to substitute its decision making for that of the market.

P&G is a member of something called the Carbon Disclosure Project Supply Chain Leadership Council. This group is premised on the belief that we should release less carbon dioxide into the atmosphere, even though carbon dioxide is produced by many natural processes, including our own bodies when we exhale. The big companies who comprise the council impose this agenda on their suppliers, raising their costs.

Of course, the jury is still out on whether carbon causes global warming or even whether global warming is  taking place. The effort by Al Gore and others to monetize the air we breathe may turn out to be the biggest scam in the history of mankind. Time will tell. 31,000 individuals with science degrees have now signed a petition questioning global warming. I wonder if Mr. Lafley consulted with any of these people before P&G signed up for the Carbon Disclosure Project.

Mr. Lafley did put out a press release endorsing the $700 million Wall Street Bailout. He acknowledged that P&G had not been affected by the crisis but expressed concern that its suppliers were. Where was the concern for suppliers when P&G signed up for the Carbon Disclosure Project Supply Chain Leadership Council?

The head of the Carbon Disclosure Project recently called for a new Kyoto-style treaty that would be binding in international law to reduce carbon emissions. Such a treaty would be devastating to our economy, raise the energy costs of P&G, and hurt shareholders.

Of course, if you have already made such vast sums of money you really don't have to worry about lost opportunities for others. But it is not fair.