As Reuters reported Tuesday in a piece on Citigroup shareholders
voting against the $15 million board-approved pay package for
CEO Vikram Pandit, investors appear to be increasingly skeptical
of lavish pay for executives of corporations with
underperforming stock. With companies entering the second proxy
season in which shareholders can offer an advisory say on
executive pay, compensation and proxy experts are predicting
more votes against compensation packages than we saw in 2011,
when 45 companies got a thumbs-down from shareholder in say-on-pay votes.
Such votes are strictly advisory. Dodd-Frank mandated that
shareholders have a say on pay, but it didn't require boards to
do anything in response to their votes. Some boards took 2011
votes against approved compensation packages to heart; according
to a Feb. 21 Wall Street Journal story, a lot of the companies
that failed say-on-pay votes hired new compensation advisers and
improved communications with shareholders. The Journal also
noted that a quarter of the companies that failed shareholder
votes got new CEOs in 2011, a turnover rate that's twice as high
as overall corporate rates. (It's not clear whether that's
because the execs figured they could do better elsewhere or
boards interpreted say-on-pay rejections as a no-confidence vote
on management.)
But what happens if corporate boards simply ignore
shareholder say-on-pay votes? Based on the results of the first
year of say-on-pay litigation, not much.
About a dozen corporations that failed say-on-pay votes in
2011 were sued in shareholder derivative actions accusing board
members of breaching their duty. Only one of those suits has so
far survived a dismissal motion. Last September a federal judge
in Cincinnati denied Cincinnati Bell's motion to toss a say-on-pay derivative suit, ruling that the board's approval of
multimillion dollar bonuses for three execs of the struggling
corporation could plausibly constitute an abuse of discretion.
Shareholders' counsel from Robbins Geller Rudman & Dowd -- which
has pioneered the say-on-pay litigation -- subsequently ran into
some jurisdictional problems in the Cincy Bell case, but the
company agreed last December to settle a related state-court derivative suit based on the same say-on-pay allegations.
Cincinnati Bell is apparently the third company to settle a
say-on-pay derivative suit; according to a study last summer by
Drinker Biddle & Reath, KeyCorp and Occidental Petroleum also
settled. None of the Occidental terms were disclosed, but what's
known of the KeyCorp and Cincinnati Bell deals doesn't suggest
big recoveries for shareholders.
Meanwhile, at least five other say-on-pay suits have been
dismissed by state and federal judges. A Georgia state court
derivative case against the board of Beazer Homes was apparently
the first dismissal, last September. The first federal court
dismissal came in January, in a Portland, Oregon, case against
Umpqua Bank's board. Three more say-on-pay derivative suits got
the boot in March: a Los Angeles state-court suit against board members of Jacobs Engineering on March 6; a San Francisco
federal court suit against Intersil's board on March 7; and a
Baltimore federal court case against the board of Biomed, on
March 12. (Shareholders were granted leave to amend their
complaint against the Intersil board.)
That's not necessarily the end of the road for say-on-pay
litigation. There are a few more cases from last year still on
the books. Moreover, shareholders may be able to argue that last
year's say-on-pay votes put boards on notice that they can't
simply rubber-stamp generous compensation packages, which could
give shareholders a stronger argument for getting past the
procedural hurdles in derivative litigation. Nevertheless,
Citi's shareholders shouldn't count on it.
I emailed Darren Robbins of Robbins Geller but didn't hear
back.
(Reporting by Alison Frankel)
Follow us on Twitter: @AlisonFrankel, @ReutersLegal