Directors on board with say on pay, other shareholder causes
NACD conference reveals board members changing their stance on pro-investor proposals; 94% say CEO pay too high

The spotlight on CEO and CFO pay is starting to open some eyes in corporate boardrooms, as directors appear to be changing their minds on shareholder-friendly—but often hotly contested—proposals.

A number of board members attending the National Association of Corporate Directors conference earlier this week in Washington said they believed Congress would mandate non-binding advisory votes on executive compensation, known as say on pay, as well as proxy access, next year.

Three-quarters of the roughly 350 board members polled during the NACD conference expected increased shareholder communication to be mandated, either through regulation or legislation next year. This, even though more than half of attendees said their companies have had communication with shareholders other than via the proxy.

Sens. Barack Obama and John McCain have both indicated support for say-on-pay legislation, and some expect a comprehensive shareholder bill of rights in the first 100 days of an Obama administration, if he wins the election.

“Investors are angry. And when they’re angry, they sue somebody,” said Michael Smith, president of AIG Executive Liability, which markets insurance policies for directors and officers. He noted that institutional investor lawsuits, in particular—which may be waiting in the wings for companies hard hit by the market downturn—take longer to resolve and often aren’t settled out of court.

Other results from similar polls taken at the conference indicated a trend toward working with and allowing shareholders more say. Nearly half of respondents said they supported proxy access; two-thirds backed majority voting; and more than half were in favor of requiring shareholder support for “non-crisis” poison pills.

And 94% of the board members polled said they think CEO pay is either too high or somewhat high. None said it was too low.

But more than three-quarters opposed proposals to reimburse shareholders for the cost of putting forth a dissident slate—even if the dissident board members are not elected.

It is clear directors have seen the writing on the wall, especially with the recent government bailouts of Wall Street firms. Because the typical shareholder-management dynamic will likely change at those companies, governance practices may change there and elsewhere in Corporate America.

“Where do we go from here? How do we adjust our approach, because the government is in fact, as of last week, a significant shareholder in nine very large corporations,” said Charles Elson, chair of the corporate governance program at the University of Delaware, who also serves on the HealthSouth and AutoZone boards.

A blue-ribbon committee of board members and governance experts commissioned by the NACD recently stated that all directors should attend their companies’ public meetings and make shareholder communication a priority.

The NACD also this week released new governance principles for publicly traded companies. One encourages companies to adopt majority voting for uncontested elections and plurality voting for contested elections.

The new guidelines also called for shareholders to have “meaningful opportunities” to recommend board candidates.

Many board members at the conference, however, said that corporations should still limit their communications to only one a month at most, and to primarily larger shareholders with big blocks of shares. “Wealth has its privileges,” said Peggy Foran, general counsel at Sara Lee Corporation.

The NACD principles stated that boards should reach out to “large, long-term shareholders” about corporate governance issues and long-term strategy, and that such communications should involve one or more independent directors, preferably the lead director, in addition to the CEO.

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