In the past couple weeks, American corporations have seen the first and second instances of shareholders rejecting proposed CEO salary packages. Though that may not seem like an earth-shattering event, it does set a new precedent that could change the way corporations run their operations (and who they listen to). Previously, shareholders had little to no right to vote on pretty much anything. Sure, they were able to vote for directors, but the ballots usually only contained one set of candidates- that proposed by management- and a shareholder could either vote "yes" or "no." With directors and CEOs basically answering to themselves and each other, executive pay spiraled out of control, following a constantly rising "average."
However, with the advent of shareholders voting on executive salaries, corporate boards have now been pulled back, albeit slightly, from their direct-with-impunity model and reminded that the shareholders are supposed to be the owners of the corporation (it is their money, after all!). We've seen executive pay come up in the past year or so especially in the context of bailed-out corporations who continued to pay astronomical sums even to executives who ran their companies into the ground. But this trend goes well beyond the bailed-out companies and could be better for American corporations in general; for if less corporate money goes to a CEO who has been practically incentivized not to care how his corporation does, that means all the more capital for the corporation to invest in operations, maximizing shareholder returns.
The Economist says:
However, this assessment may not be fully considering what has happened in recent weeks. First, we may not have to see more corporations limited by shareholder votes to see CEO pay go down, as boards who fear shareholder disapproval may simply propose lower packages to begin with. Also, reining in the "greediest outliers" has an overall lowering-effect in that it brings down the average CEO pay, which is what many boards use to set their executive pay grades.
Certainly, this is not a complete makeover for corporations as bastions of democracy. The fact remains that if shareholders want to propose their own directors they have to pay an incredible amount of money in creating their own proxy list. Also, until "golden parachutes" are done away with by shareholders and until they demand some link between performance and salary, CEOs are still given almost carte blanche to run a corporation any which way they like. However, with these new votes (and, presumably with more to come) at least they'll be making slightly less ridiculous salaries as they do so.
However, with the advent of shareholders voting on executive salaries, corporate boards have now been pulled back, albeit slightly, from their direct-with-impunity model and reminded that the shareholders are supposed to be the owners of the corporation (it is their money, after all!). We've seen executive pay come up in the past year or so especially in the context of bailed-out corporations who continued to pay astronomical sums even to executives who ran their companies into the ground. But this trend goes well beyond the bailed-out companies and could be better for American corporations in general; for if less corporate money goes to a CEO who has been practically incentivized not to care how his corporation does, that means all the more capital for the corporation to invest in operations, maximizing shareholder returns.
The Economist says:
Another test will be how widespread shareholder activism on pay becomes. Saying no to the greediest outliers may have little impact on remuneration at the average firm. “I’d have liked to see more No votes at other companies,” says Nell Minow of the Corporate Library, which conducts research on corporate governance. She had expected pay at firms bailed out by the government to come under close scrutiny from shareholders, but so far that particular dog has failed to bark.
However, this assessment may not be fully considering what has happened in recent weeks. First, we may not have to see more corporations limited by shareholder votes to see CEO pay go down, as boards who fear shareholder disapproval may simply propose lower packages to begin with. Also, reining in the "greediest outliers" has an overall lowering-effect in that it brings down the average CEO pay, which is what many boards use to set their executive pay grades.
Certainly, this is not a complete makeover for corporations as bastions of democracy. The fact remains that if shareholders want to propose their own directors they have to pay an incredible amount of money in creating their own proxy list. Also, until "golden parachutes" are done away with by shareholders and until they demand some link between performance and salary, CEOs are still given almost carte blanche to run a corporation any which way they like. However, with these new votes (and, presumably with more to come) at least they'll be making slightly less ridiculous salaries as they do so.
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