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February 26, 2009 6:45 AM Age: 8 yrs

Accountability and Investor Involvement in Pay

Category: CG Commentary & Opinion, Exec Comp News, AC RSS, AC Whats New, Eleanor Bloxham
Source:  By Eleanor Bloxham

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In a letter to The Wall Street Journal today (February 25, 2009) Ira Millstein argues: “Institutional shareholders have the voice and capacity to put spine in the boardroom by communicating on compensation to compensation committees, filing proxy resolutions, and voting against directors believed to be improvident. Then, in turn, they should report to their beneficiaries what they have done.”

One response to this simple suggestion is to ask: If this is the solution why hasn’t it worked?

One reason it hasn’t worked to date is that many institutional shareholders don’t find it to be their job. Only a handful of institutional shareholders stand up and make their voices heard on this or any topic, which, of course, creates a classic free rider problem.

Until the customers of institutional managers, the beneficiaries, to use Mr. Millstein’s term, move their money from those who remain silent to those who will speak up, I think we will indeed continue to see that only limited change is possible, financed by the efforts of those who do speak up.

Mr. Millstein also states that: “Experts continuously present suggestions to link pay to performance through a variety of stock options and other mechanisms. None of them is impervious to the gaming which takes place, and none has halted the escalation.”

Clearly, current compensation schemes in place have not halted the escalation (everyone, including directors agree to that) and “institutional investors” (Mr. Millstein’s suggestion) to date haven’t either.

Does that mean that we give up?


There are two ingredients required for the solution:

One is Will – on the part of directors, institutional investors and their beneficiaries

Two is Knowledge – in how to prevent gaming (I spent several years in skunk works to develop approaches which were successfully implemented that examined the context for pay and minimized gaming, actually requiring executives to focus on value creation.  However, there has not been a large market for such an approach or even a large market for learning more.)

Both must be addressed and the two are somewhat co-dependent. Without knowledge, will is a sounding gong; in addition, knowledge helps to foster will because it provides a positive channel for its expression. Stated another way, communication between institutional investors and compensation committees can be a positive. The question is will it simply be hot air -- or will that airtime be channeled into a balloon that will rise up and take the conversation to a new vantage point and a place of perspective.

One area to address which could form the basis for the start of more knowledge on all sides is a constructive dialogue that answers two direct questions:

One question is: What are the risks created by our compensation plan and how have we minimized them? 

In other words, what gaming will result because of the way the plan is structured? What excess risks might be taken as a result?  What actions have we taken to mitigate these unwanted consequences? Failure to understand these answers means we don’t understand the plan.

The second question is:  How does our compensation plan relate to the risks of the business?

If certain risks increase, for example, how does that impact payouts?  Specifically, how does our compensation plan relate to our strategies – and thus our risks? Again, failure to understand these answers means we don’t understand the plan.

If will is missing, the SEC, on behalf of investors, could simply ask that these two questions be answered as part of disclosure.  More information on this approach will be found here:

This could then form the basis for effective dialogue. In addition, institutional investors, once educated themselves, could begin to educate their beneficiaries so that in fact, those who work for solutions can indeed gain market share and be paid for their efforts.

Say on Pay, of course, is another potential step forward in the dialogue. One company that seems to be a real success story here? Aflac. With more knowledge and will all round, plus answers to the above questions, say on pay could indeed be a sustainable force for positive change.

Eleanor Bloxham is an author, speaker and advisor. She is the CEO of The Value Alliance and Corporate Governance Alliance and may be contacted at

Copyright 2009. The Value Alliance Company. All rights reserved

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Published by: Corporate Governance & Accountability Advisors, Inc. Content & Concepts ©2008 by CG&AA, Inc. All rights reserved