A Congressional Ultimatum for CEOs

12/14/2008 05:12 am ET | Updated May 25, 2011

Passage of a financial bailout with flimsy constraints on executive compensation has invigorated the public and policymakers alike to take action to curb excessive executive pay. Just this morning, Senator Chris Dodd warned that Congress might take a step that would send shivers down the spines of every CEO: federal caps on executive pay.

But another tool to limit executives' pay is also gathering legislative strength. "Say on pay" provisions grant shareholders a vote -- often nonbinding -- on executive compensation. The vote encourages corporate compensation committees to communicate with shareholders and explain compensation packages to ensure that shareholders understand how (and why) executives are being compensated in the manner they are. The U.K. has laws requiring say on pay and a number of U.S. companies, most notably Blockbuster and Aflac, have adopted the policy.

At a Drum Major Institute forum earlier today Blockbuster CEO James Keyes, who will be subject to a say-on-pay vote in 2009, talked about his company's adoption of a nonbinding shareholder vote on compensation. Keyes said that say on pay encourages executives to think long term and emphasized that

there are clearly consequences for companies that ignore the voice of shareholders. Boards of directors cannot ignore this type of voice...[We would] loose shareholder confidence over time.

For all his talk about maintaining shareholder confidence, Keyes seemed unfazed by the growing anger of most Americans about the lack of corporate regulation.

Fellow panelist William Thompson, New York City Comptroller, stressed just how upset the public is. Thompson noted that last year the House passed legislation to require all publicly traded companies to allow a nonbinding vote on executive compensation packages. The President-elect himself introduced similar legislation in the Senate last year. A perfect storm is mounting for say-on-pay legislation, according to Thompson.

But Keyes persisted: "Self-regulation over time works." Legislation, he lamented, could create disastrous unintended consequences. Presumably he is referring to a consequence more severe than the ever-expanding financial meltdown.

Timothy Smith, vice president at Walden Asset Management, a socially responsible investment firm, reminded the panelists that the legislation proposed in the 110th Congress mandates only a nonbinding shareholder vote on compensation. The vote is a "caution" to a compensation committee that does not require the blunt - and expensive and often drawn-out - route of sacking the board of directors.

As Keyes emphasized, executives generally oppose say-on-pay provisions and "left to their own devices" hope the provisions will just "go away".

But Vonda Brunsting of the SEIU Capital Stewardship Program suggested playing to executives greedier, survival instincts. Executives, Brunsting said, should adopt say-on- pay for cynical, self-interested reasons even if they don't agree with it. If they don't act on their own soon, Congress will legislate and, as Dodd's warning this morning suggested, the legislation might not stop at a nonbinding shareholder vote.

Blockbuster CEO Jim Keyes on Self-Regulation vs. Legislation