Executive pay practices have recently drawn scrutiny from both Congress and the Obama Administration. Last week, Nell Minow of The Corporate Library testified before the US Committee on Financial Services on "Compensation Structure and Systemic Risk."
In her June 11 testimony, as in her previous work, Ms. Minow emphasized that boards of directors bear ultimate responsibility for corporate pay practices. While many sustainable/socially responsible investors (SRI) welcome "say-on-pay," she spoke frankly about the limits of this and other tactical reforms:
"Even if I could come up with an ideal template for executive compensation at financial companies, we have to recognize that there is no structure that cannot and will not be immediately subverted. The corporate community and its service providers, including lawyers and compensation consultants, will always be more motivated and more agile than any legislator or regulator can anticipate."
Ms. Minow's testimony included an overview of how past and current reforms have been "subverted." Perhaps what's most notable about her speech, though, is her stark presentation of boards' culpability in "pernicious" rewards for questionable executive performance. She asserts that government's key role in reform is to "remove impediments to shareholder oversight of the board":
"We speak of this company or that company paying the executives, but it is really the boards and especially their compensation committees, and until we change the way they are selected, informed, paid, and replaced we will continue to have the same result. Until we remove the impediments to shareholder oversight of the board, we cannot hope for an efficient, market-based system of executive compensation. "The government has done a poor job of making it possible for regulated institutional investors like mutual funds, banks, money managers, pension funds, and foundations to cast proxy votes in an economically optimal manner. Due to the collective choice problem and conflicts of interest, proxy voting has too often been compromised and 'rationally ignorant.' "As we look at the 'supply side' of executive compensation, management and boards, we must also look at the 'demand side' to make sure our investor community has the information, tools, and ability to respond effectively."
For more "information and tools" for executive compensation reform:
Related KLD Blog articles:
Why Management Should Embrace Say on Pay: A Letter to Executives from Walden's Tim Smith
Piercing the Golden Parachute: The Impact of Government Bailouts on Executive Compensation
The Buck Should Stop with the Board: Nell Minow on the Risks of Poor Governance
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