Fresh from her successful campaign to convince four major corporations to disclose details on how they set executive pay, Connecticut Treasurer Denise Nappier has trained her reformer sights on Citigroup and Merrill Lynch.
On behalf of the $26-billion Connecticut Retirement Plans and Trust Funds, a major shareholder in both Manhattan financial giants, Nappier has asked the companies to grant their shareholders a non-binding vote on whether to ratify compensation packages of its top executives.
Both Citigroup and Merrill Lynch have posted billions of dollars in losses stemming from the subprime mortgage crisis, and Nappier’s office has identified lapses in pay equity among high-ranking executives, as well as succession planning problems. Succession planning is “central to the long-term success of a company” and long-term shareholder value, said Meredith Miller, Nappier’s assistant treasurer for policy.
Last week, the CRPTF led a group of nine institutional and individual shareholders in submitting a request for “say on pay” disclosure from Citigroup. Its stake was the largest by far: 2,732,783 shares. The vote on the proposal came in at 38 percent in favor. Citigroup did not return calls requesting comment.
The Merrill Lynch proposal was led by the Unitarian Universalist Association of Congregations and was joined by CRPTF and one other institutional investor. The vote was held late last week. Results of the vote were not available at press time, however, Merrill Lynch spokesman William Halldin said that the preliminary results indicate the resolution was rejected.
‘Say On Pay’ Laws
“Say on pay” is already law in the United Kingdom and Australia, and it is supported by all three presidential candidates, Sen. John McCain, R-Ariz., Sen. Barack Obama, D-Ill., and Sen. Hillary Clinton, D-N.Y. It gives shareholders the ability — on an advisory basis only — to say whether they approved an executive’s compensation package.
The shareholders wouldn’t be able to change the executive pay package — only voice an opinion — even if the majority disapproves.
The policy is controversial, Miller acknowledged, because of the potential for shareholder-inspired action.
Last proxy season, about 160 companies adopted majority vote standards, which create “consequences for companies that ignore the majority vote,” she said.
In particular, Miller cited the recent resignation of Washington Mutual director Mary Pugh, which came amid shareholder anger over the company’s actions in the recent subprime crisis.
“This week was the first time we even saw any of this come to action,” Miller said.
Setting Precedents
The Citigroup and Merrill filings follow Nappier’s recent coup in the realm of executive compensation disclosure.
The CRPTF, for which Nappier is principal fiduciary, approached four other companies earlier this month in a bid to get increased disclosure on executive pay setting. The companies — retail clothing store Abercrombie & Fitch, supermarket conglomerate Supervalu Inc., printer R.R. Donnelley & Sons and construction equipment manufacturer Caterpillar Inc. — were targeted strategically, after the CRPTF analyzed years of their performance, disclosure practices and corporate governance, Miller said.
Disclosure Required
Miller said Nappier targets companies apt to set best practices in the hope that their actions will set precedents other companies will follow. The CRPTF was the primary filer for all four resolutions.
The four companies have all agreed to Nappier’s disclosure requests and have been “incredibly cooperative,” Miller said. “They know the treasurer has this reputation as a serious, committed investor.”
R.R. Donnelley & Sons and Caterpillar will disclose the relationship between compensation consultants engaged by their boards of directors and any additional work the consulting company performs for them.
Caterpillar set the bar, in terms of compensation consulting disclosure, Miller said.
It disclosed that Hewitt Associates received a fee of $500,000 for serving as a compensation consultant as well as up to $10 million in other management contracts with Caterpillar.
Conflict Of Interest
In a precedent-setting move, the company also divulged that Hewitt’s compensation consultant holds shares in Hewitt — and thus benefits indirectly from the $10 million in Hewitt management contracts.
That creates a potentially pricey conflict of interest.
A 2007 study from the U.S. House Committee on Oversight and Government Reform found that such a situation could result in executive pay roughly two-thirds higher than pay at companies where the consulting is independent.
Nappier is urging the Securities & Exchange Commission to require full disclosure of compensation consulting fees as well as the disclosure of any potential ownership interests.
As for Abercrombie & Fitch and Supervalu, both have agreed to disclose information relating to gaps in pay among top executives.
Red Flags
“Large gaps in pay between the chief executive officer and other [named executive officers] may signal that the CEO is earning an excessively large share of the compensation paid to top executives or that the pay is not tied to performance, and this is rightly of concern to shareholders,” Nappier said in a treasury press release.
“It may also be a red flag for inadequate succession planning, as wide pay differentials sometimes reveal significant differences in contribution and ability, and this too is troubling,” Nappier said.
For example, at Abercrombie, the CEO was paid six times more than the next highest ranking employee, Miller said. Supervalu paid its CEO four times more than the next in line.
Moody’s Investor Service has said a significant pay gap can negatively affect a company’s debt rating and cost of capital, since it may be a sign of leadership failures at the board level.
It can also be a signal that there is no obvious CEO successor, which could leave the company without a leader if its current CEO leaves, Miller said.
The issue is particularly important for companies ensnared in the subprime mortgage crisis, including Merrill Lynch and Citigroup.
“It’s a central key to the long-term success of a company,” Miller said.
