Many of us thought that if a fair vote by shareholders on executive pay were ever allowed, a number of CEO pay proposals would be voted down. Last year, the Dodd-Frank Wall Street Reform Act made such votes mandatory for publicly traded corporations.
Recently, Citigroup shareholders voted against the board proposal for a $15 million pay package for their CEO. The vote is not binding, but you could feel the tremors throughout the executive suites on Wall Street. The Citigroup vote may be the first step in a long-overdue reversal of the erosion of shareholder rights that has been going on for the past few decades.
Most working people understand that they are held accountable if they don't do their jobs well. They don't get raises. If they continue to perform badly, they get fired.That's true of elected officials too. Our president and members of Congress will be held accountable by voters this November.
So how have so many corporate executives been able to avoid being held accountable?
Back in the 1960s, when I was in business school, we believed one of the things that made America different was that we used democratic principles throughout our society, including our corporations.
A major rationale for the corporate entity was to provide a way for innovative ideas to be funded by the sale of stock to the general public. The resulting capital was to be used to test whether the ideas would survive in the crucible of the market place. If they did, the shareholders who funded the venture would act like voters and maintain real control of the corporation. They would select a board of directors whose job would be to oversee a business run by managers that would report to them. The ultimate decision-making power always resided in a majority vote of the shareholders.
Somewhere along the line, in part because of some new laws and court decisions, in part because of shareholder inertia and the complexity of running a large corporation, all of that changed. In many cases, the managers who were supposed to work for the board of directors began to handpick the people who sat on their boards. Those friendly boards were less likely to question management decisions.
Not only do CEOs have a major say about who is on their boards, they also influence the choice of board members who sit on the compensation committees that decide how much they should be paid. No wonder then, that in 2011, the average chief executive of one of 300 of the S&P 500 companies that filed annual proxy reports was paid $12.9 million, almost 400 times the pay of the average American. Worse, many of them got raises even though sales, profits, and/or share prices were down.
In the case of Citigroup, shareholders had seen the value of their shares fall by 80 percent since the financial crisis. Many of them, no doubt, had either lost their jobs in the meanwhile or were working overtime to make the same amount they had made in 2008. And this guy who had lost 4/5 of their money was getting a raise?
Back when Dodd-Frank was passed, many who opposed real shareholder involvement in corporate governance were not worried. They made sure that the mandatory shareholder votes on executive pay would not be binding. Even if shareholders worked their way through the complex labyrinth of corporate proxy voting and voted no, the corporate board could disregard their vote and give the CEO the pay increase anyway.
Well, we'll see. Citigroup's board is obviously considering their options. Can they ignore such a shareholder vote?
I doubt it. After years of not having to worry much about what their shareholders thought, the Citigroup vote was a wake up call for every corporate board of directors. It will be tough for them to go back to business as usual. Mike Mayo, an analyst with Credit Agricole Securities, agrees. He believes the Citigroup vote "is a milestone for corporate America."
Let's hope so. To maintain fairness and international competitiveness, accountability and democracy must be reinstated in the boardroom.
Ted Kaufman is a former U.S. Senator from Delaware. Please visit www.tedkaufman.com for more information. This piece first appeared in the Wilmington News Journal.