Bill seeks shareholder say on pay

U.S. Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, introduced legislation that would require public companies to let shareholders vote on the pay packages of top officers.

The bill would provide for a vote on compensation awarded in the prior year to a company's five most highly paid executives, a list that typically includes the chief executive officer and chief financial officer. Because the ballot would be nonbinding, managers wouldn't lose pay in the event investors opposed their compensation.

Frank couldn't get similar legislation passed last year, when his party was in the minority. This year, as chairman of the committee, he has made executive pay one of his legislative priorities. A hearing on the topic is scheduled for next week.

"I do not understand those who argue that the people who make up our stock markets are collectively very wise, but at the same time are somehow incapable of rendering a coherent opinion of what they should pay those they employ to run the corporations that they own," Frank said.

The earlier legislation, introduced by Frank in November 2005 as the Protection Against Executive Compensation Abuse Act, said companies would have to hold a shareholder vote to approve compensation plans. Thursday's bill, the Shareholder Vote on Executive Compensation Act, makes clear that the required ballot wouldn't be binding and wouldn't overrule board decisions.

"It's a way of letting shareholders communicate with the board in a general way about whether compensation policy is headed in the right direction," said Cornish Hitchcock, an attorney who advises activist investors on corporate governance. "It's not to take money out of anyone's pocket."

The United Kingdom adopted a similar rule in 2002 that provides for a shareholder vote on "remuneration reports" issued by public companies there, said Amy Goodman, a securities attorney at the Washington law firm Gibson, Dunn & Crutcher. The requirement has led British companies to discuss compensation more with investors, Goodman said.

"There is differing research on whether it has held down executive compensation or not," she said.

Frank's legislation builds on rules adopted by the Securities and Exchange Commission (SEC) in July that require more detailed disclosure on executive compensation in annual proxy statements. The SEC rules require companies to give a figure for total compensation and provide more information on stock- option awards.

Frank also included a provision in the bill that would permit shareholders to vote on severance packages tied to a merger or takeover, also known as golden parachutes. The vote on severance arrangements, to be taken at the same time shareholders are asked to approve the merger, would be nonbinding.

Even before the legislation, investor advocates were pushing companies to adopt shareholder votes on executive pay. About 60 firms face votes on their annual ballots, including Home Depot and AIG, said Patrick McGurn, special counsel to Institutional Shareholder Services.