Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, April 7, 1991 TAG: 9104050013
SECTION: BUSINESS PAGE: E/4 EDITION: METRO
SOURCE: ROBERT J. MCCARTNEY THE WASHINGTON POST
DATELINE: NEW YORK LENGTH: Long
Now, for the first time, this practice is being challenged by virtually the only people who potentially have enough clout to have an impact: pension funds and other big shareholders who own stakes in the companies.
Though still in its early stages, their campaign has quickly gained support, particularly among pension funds managed from a somewhat populist perspective, such as those of retired state employees or labor unions.
"There is rising interest" among investors in putting pressure on companies where executives' compensation seems out of line with performance, said Peg O'Hara, director of the corporate governance service at the Investor Responsibility Research Center, an independent, non-profit firm based in Washington.
The effort has sent ripples of concern through American boardrooms. With support from the Securities and Exchange Commission, corporate managements have always strongly opposed any attempts by outsiders to influence the sensitive issue of executive pay.
This year, however, the California Public Employees' Retirement System, called Calpers, already has successfully pressured two of the nation's largest companies - W.R. Grace & Co. and ITT Corp. - to adopt corporate bylaws designed to strengthen the independence of the committees of the boards of directors that set the pay for top executives.
Calpers, one of the nation's largest pension funds, targeted those two companies because it said their chief executive officers had the unwelcome distinction of having both generous pay packages and mediocre performance records.
The pension fund said the cash compensation paid to Grace's top executive, J. Peter Grace, more than doubled during the 1980s to more than $1.5 million per year, while the company's earnings were virtually unchanged over the decade at about $3 a share before extraordinary items. The pension fund also questioned the payment to Grace of company stock worth about $7 million between 1986 and 1989.
At ITT, Calpers noted, ordinary earnings per share declined five out of the past nine years, but chief executive Rand V. Araskog's total cash compensation fell only once during the period. Calpers charged that Araskog's pay package of more than $6 million in 1989 was double what he deserved, taking into account ITT's size, performance and other relevant factors.
W.R. Grace and ITT strongly disputed Calpers's allegations and said the fund's analysis was misleading. An ITT spokesman said Araskog was rewarded in part because he had rescued the company after taking charge when it was in "very difficult shape" in 1979.
W.R. Grace said in its defense that Calpers itself had admitted that its performance data was erroneous.
In another sign of the trend, the United Shareholders Association, an increasingly influential shareholder activist group, has chosen corporate performance and top executives' pay as two of the three criteria that it uses for selecting the companies it challenges at annual meetings. The third criterion is the quality of shareholders' rights at the company, and especially whether management has sought to "entrench" itself in power with anti-takeover devices.
"Compensation [of executives] has always been an issue for shareholders, but it is increasingly so," said Ralph V. Whitworth, president of the association. "The issue with us is not so much what managers get paid, but that the pay is tied to performance."
It is difficult for the association, or any investor, to directly challenge executives' pay through a proxy fight. That's because longstanding SEC rules say it is part of the ordinary business of management and the board of directors to set compensation and therefore the issue is not a legitimate matter for shareholders to raise at an annual meeting.
But the association has managed to get around this roadblock by using the compensation issue as a way of deciding which companies should be challenged in proxy fights over other issues. These typically are over shareholders' efforts to win a secret ballot or to force companies to drop anti-takeover defenses such as "poison pills."
Because managements normally want to avoid proxy fights over any issue, companies frequently prefer to reach a compromise with the dissidents to stave off a fight. The United Shareholders Association has cut seven deals this year, including with W.R. Grace, which agreed to adopt confidential voting by shareholders in the interest of avoiding a confrontation.
The battle also has been spurred by a steadily growing body of academic research that suggests executive pay has little, if any, relationship to the job managers do.
A particularly intriguing aspect of the debate is that the critics of executive pay have not at all been limited to those with a liberal ideological perspective. Conservative-oriented academics also have protested strongly that executives are paid in such a way that there is little individual economic incentive for them to do well.
"In most publicly held companies, the compensation of top executives is virtually independent of performance," wrote Michael C. Jensen and Kevin J. Murphy in an article in Harvard Business Review last year.
"On average, corporate America pays its most important leaders like bureaucrats," they wrote. "Is it any wonder then that so many CEOs act like bureaucrats rather than the value-maximizing entrepreneurs companies need to enhance their standing in world markets?" Jensen and Murphy are prominent market-oriented business professors, Jensen at Harvard University and Murphy at the University of Rochester.
by CNB