SUPPORT FOR SEC PROPOSAL ON SAY ON PAY

Dear Colleagues,

I enclose a copy of a letter submitted by Walden today to the SEC in support of their proposal to mandate an Advisory Vote on executive compensation.

The letter is detailed and summarizes some of the history of work on the Advisory Vote as well as calling for the SEC to move to mandate the vote to companies beyond TARP recipients. I hope you find it informative. The SEC comment period of 60 days ends on Sept 8 so letters of support are in order.

Please feel free to contact me with any questions or if you wish a clear PDF copy.


July 14, 2009, , Timothy Smith of Walden Asset Management, comment letter to the U.S. Securities and Exchange Commission regarding its July 1, 2009 proposed rules [Release Number 34–60218, File No. S7-12-09]: “Shareholder Approval of Executive Compensation of TARP Recipients” (8 pages, 48 KB, in PDF

July 14, 2009

Ms. Elizabeth M. Murphy
Secretary
U.S. Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549-1090
Re: Release Number: 34–60218, File No. S7-12-09
Dear Secretary Murphy:
We write to submit comments on the Securities and Exchange Commission’s (SEC)
proposed rule issued July 1, 2009 as Release Number 34–60218, File No. S7-12-09
entitled “Shareholder Approval of Executive Compensation of TARP Recipients.” We
strongly support the proposed rule requiring TARP recipients to provide shareholders
an annual Advisory Vote on executive compensation. We further suggest that the
SEC extend the Advisory Vote requirement to all publicly traded companies.
Walden Asset Management (Walden), a division of Boston Trust & Investment
Management Company, integrates environmental, social and governance analysis
(ESG) into investment decision-making on behalf of our investment clients. We
manage approximately $1.4 billion in assets. Over the last three years, Walden has
actively advocated for the Advisory Vote through shareowner engagement with
portfolio companies. We believe, as we know you do, that a breakdown in good
corporate governance, including poorly designed executive compensation practices,
contributed to the economic upheaval that we continue to experience today.
Leveling the Playing Field
Walden has been in discussion with scores of companies on the Advisory Vote (also
known as “Say on Pay”), including, but not primarily with, TARP recipients. Many
companies commented that they understood and were sympathetic to our rationale
for this governance reform. Yet one of the most frequently repeated arguments
against voluntarily putting Say on Pay into effect was the concern that complying
companies could be at a competitive disadvantage relative to competitors that did not
provide the Advisory Vote. Regardless of the merit of this argument, it was an oftreported
concern within the financial services sector.
A Division of Boston Trust & Investment Management Company
One Beacon Street, Massachusetts 02108 617.726.7250 or 800.282.8782 fax 617.227.3664
Ironically, that argument underscores the need for a uniform requirement
promulgated by the SEC. A mandate calling for all companies to have an annual
Advisory Vote levels the playing field: No company would be at a disadvantage
competitively. Moreover, at present, companies that have benefited from several of
the recent extraordinary government interventions and have repaid their TARP
funding, such as Goldman Sachs and State Street, are not required to implement an
Advisory Vote. This is the case even though reasonable shareholder concerns over
executive compensation at these firms has not been abated.
Broad-based Investor Support
It is also important for legislators and the SEC to understand that there is broad
investor support for this change. As described in the enclosed Appendix, Investors
Demonstrate Strong Support for Advisory Vote on Executive Compensation,
shareholder votes for Say on Pay averaged 47 percent in 2009 (generally ranging
from 40-55 percent), with 19 companies garnering majority vote support to date.
Thus far this season approximately 25 companies have voluntarily adopted the
reform as company policy. In addition, all TARP recipients included Advisory Votes
in their 2009 proxy statements.
Investors with well over $1 trillion in assets under management have encouraged the
adoption of Say on Pay in dialogues with boards of directors and managements and
many filed resolutions requesting this reform. Among these investors are TIAACREF;
state and city pensions such as CalPERS, CalSTRS, NYCERS, and the State
of Connecticut; religious investors such as the General Board of Pension & Health
Benefits of the United Methodist Church, the Marianists, the Unitarian Universalist
Association, Christus Health, and Catholic Health East; trade union pension funds
such as AFSCME, AFL-CIO, and Unite; and foundations such as the Christopher
Reynolds Foundation, Nathan Cummings Foundation, Needmor Funds, and the
Edward G. Hazen Foundation; as well as individual investors. In total, over 80
investors joined in dialogues or filing resolutions this past year. And votes ranging
from 40-60% clearly indicate voting support by many mainstream investment
managers and mutual funds.
Thus, Congress and the SEC can be assured that a Say on Pay mandate for all
publicly traded companies would not be implementing an agenda of a small group of
activist investors, as some critics erroneously claim. The Advisory Vote is widely
supported by shareowners that see it as good governance and one important tool to
strengthen corporate accountability and responsiveness on executive compensation
matters.
A Division of Boston Trust & Investment Management Company
One Beacon Street, Massachusetts 02108 617.726.7250 or 800.282.8782 fax 617.227.3664
Encouraging Enduring Reform
Opponents of Say on Pay have argued that Board Compensation Committees have
received the message and significant changes have been made in the last two years,
ending questionable percs and reducing the compensation spiral that detached
executive pay practices and incentives from the creation of long term shareholder
value.
However, we are concerned that the interest in pursuing such changes, often made
amidst the recent economic turmoil, may fade as the economy stabilizes. We are not
at all convinced that a wholesale rethinking of compensation philosophy and practice
has occurred in corporate boardrooms and believe that any modest changes we
have witnessed are easily reversible when the recovery takes hold if this reform is not
adopted.
Well governed companies have nothing to fear from Say on Pay. Those with a clear
description of compensation philosophy, appropriately linking compensation to
performance and without excessive perquisites, can be confident of a strong vote of
confidence from investors as they provide an Advisory Vote through management
sponsored resolutions. For example, the overwhelming majority of Advisory Votes at
TARP companies strongly supported management in their voting. As stated
previously, we support Congress and the SEC moving with dispatch to put Say on
Pay into place uniformly for all companies, and not solely for TARP recipients as
proposed.
Responses to SEC Questions
The Release also invites comments on several specific questions. Among them,
“Should we include specific requirements regarding the manner in which registrants
that are TARP recipients should present the shareholder vote on executive
compensation? For example, should we designate specific language to be used
and/or require TARP recipients to frame the shareholder vote to approve executive
compensation in the form of a resolution?”
We believe that the best way to provide an Advisory Vote is in the form of a
management sponsored resolution, just as TARP companies were required to do in
2009 and similar to the approach used to ratify Auditors. That said we do not believe
that the specific language of the resolution needs to be dictated by the SEC. On the
contrary, we believe there should be considerable flexibility for Compensation
Committees to test specific issues through the Advisory Vote, thereby affording
companies the flexibility to adjust the focus of their vote year by year.
For example, when MBIA announced the implementation of the Advisory Vote in
February (February 24, 2009 press release), it provided an opportunity for
A Division of Boston Trust & Investment Management Company
One Beacon Street, Massachusetts 02108 617.726.7250 or 800.282.8782 fax 617.227.3664
shareholders to vote on three elements of the Company’s executive compensation
program:
• One time extraordinary compensation awards to the NEO’s will be submitted
and subject to a binding vote.
• Annual CEO compensation for the just completed year will be submitted to
an advisory vote.
• Similarly the compensation for “senior executive officers as a whole” will be
submitted to an Advisory Vote.
MBIA CEO Jay Brown made a strong case for the Advisory Vote, in their February
press release stating, “The Board’s adoption of our “Say on Pay” policy fulfills the
promise we made to shareholders when I returned to MBIA last year. Giving our
shareholders the ability to directly express their views on executive compensation is
just another way that we hold ourselves accountable to them. We are committed to
maintaining the highest standards of corporate governance and will continue to
evaluate and implement those practices that best serve our shareholders and
employees.”
Prior to the shareholder vote, the MBIA press release noted, “The “Say on Pay
Policy” has been posted on the Company’s Web site at www.mbia.com. This year’s
proxy statement will contain two proposals seeking shareholder advisory votes on the
compensation actions taken in 2009 for Mr. Brown and other senior executive officers
for the 2008 performance year.”
While most TARP companies relied on a basic formula for the 2009 vote, other
companies such as Intel and Aflac presented the Advisory Vote in a slightly different
manner. We believe this flexibility better serves the needs of companies and
shareowners alike, helping to provide a needed platform for investor input.
With respect to the question about whether companies should disclose the reasons
why they are providing for an independent vote, we support the inclusion of a short
explanation. For example, most companies explain how the Compensation
Committee and Board will use shareholder feedback and affirm the advisory nature of
such input.
The ground rules for the Advisory Vote for TARP recipients are likely to become the
norm for all companies, given the apparent direction and support of Congress to
legislate a uniform mandate. Hence we believe it is especially important to provide
clear and precise direction during this round of the SEC’s process.
A Division of Boston Trust & Investment Management Company
One Beacon Street, Massachusetts 02108 617.726.7250 or 800.282.8782 fax 617.227.3664
Communicating with Shareowners is Essential
Finally, we hope that when this new Rule is promulgated, it is accompanied by
comments from Chairperson Mary Schapiro on the importance of improved
communications between shareowners, boards and compensation committees.
We understand that this feedback is outside of the scope of the Release, but we
believe that the Advisory Vote works most effectively in an environment of good
communication. In fact, we know that some opponents of Say on Pay point to the
lack of clarity about what a NO or ABSTAIN vote means. We note that this problem
exists in other areas too, for example, deciphering the meaning of WITHHOLD votes
in director elections.
This concern is easily addressed through improved forums of communication
between companies and shareowners. A number of companies have already
established innovative investor outreach programs including “traveling road shows”
(meeting investors in different cities), questionnaires, electronic forums, conference
calls, and email access to Chairs of Compensation Committees. Thus we would
encourage the SEC to urge companies to strengthen investor communication tools
as they implement the Advisory Vote.
To sum up, we understand that this request for comments focuses on the SEC’s
proposed regulation of TARP companies. We agree with Treasury Secretary
Geithner, who on June 18, 2009 publicly presented a set of guidelines on executive
compensation that explicitly supported Say on Pay legislation for TARP companies
authorizing the SEC to require them to implement an annual Advisory Vote on
Executive Compensation. And earlier he had also called for an Advisory Vote for all
companies, a position we heartedly endorse. The Advisory Vote is a necessary
governance reform for all companies.
Sincerely,
Timothy Smith
Senior Vice President
Walden Asset Management
Cc: Commissioner Mary Schapiro
Commissioner Kathleen L. Casey
Commissioner Elisse B. Walter
Commissioner Luis A. Aguilar
Commissioner Troy A. Paredes
A Division of Boston Trust & Investment Management Company
One Beacon Street, Massachusetts 02108 617.726.7250 or 800.282.8782 fax 617.227.3664
APPENDIX: Investors Demonstrate Strong Support for Advisory Vote on
Executive Compensation
For several years investors have been strongly supporting the governance reform
which would provide an annual Advisory Vote on executive compensation.
In the 2009 spring proxy season support continued to grow. As Congress and the
SEC discuss legislation authorizing the SEC to implement the Advisory Vote for all
large companies, it is important to recognize the vocal, broad-based support of
investors for this reform.
To set this trend in historical context, in 2006 AFSCME tested the waters by filing a
resolution seeking an Advisory Vote with 7 companies. Initial voting support was
encouraging, averaging 40%.
In the following year, 2007, a diverse cross-section of investors stepped forward to
work together to engage companies in private conversations and through
shareholder resolutions to advocate for this reform as one remedy to problems
associated with executive compensation. Fifty-one proposals resulted in an average
42.2% vote.
In 2008, investors filed resolutions seeking “Say on Pay” with 79 companies which
averaged 41.4% voting support, including a majority at 11 companies.
In 2009 approximately 75 investors with assets under management of over $1 trillion
filed the same resolution at approximately 100 companies. Support for the call for an
Advisory Vote grew still higher, with the resolution receiving over 50% votes at 19
companies and an average vote of 46%.
In addition, by 2009 twenty-five companies had agreed to voluntarily implement the
Advisory Vote including Aflac, Apple, Blockbuster, Ingersoll Rand, Intel, MBIA,
Motorola, Occidental Petroleum, PG&E, Valero and Zale. Also this year TARP
recipients were required to provide investors with an Advisory Vote; hence we have
experienced over 300 votes on management sponsored resolutions seeking
feedback on their compensation practices.
The management language in most proxies to frame the vote was similar to State
Street’s management resolution as follows:
VOTED: That the compensation of State Street’s executives, as disclosed pursuant
to the SEC’s compensation disclosure rules, as set forth in this proxy statement
A Division of Boston Trust & Investment Management Company
One Beacon Street, Massachusetts 02108 617.726.7250 or 800.282.8782 fax 617.227.3664
under the heading “Executive Compensation”, including compensation discussion
and analysis, the compensation tables and related material, is approved; provided,
that, this resolution shall not be binding on State Street’s Board of Directors and may
not be construed as overruling any decision by the Board”.
As expected, votes at an overwhelming number of companies were strongly
supportive of compensation packages, making this a relatively routine test of investor
opinion similar to the ratification of Auditors in an annual vote. Hopefully this
experience helped reduce company concerns that Advisory Votes would result in
high levels of “Against” votes by shareowners.
In addition, a number of companies such as Amgen, Intel, and Schering Plough
sought new and creative ways to inform and interact with investors on compensation.
Investors have long stated that the Advisory Vote should be linked to meaningful
communication with investors to help boards and compensation committees better
understand investors’ concerns or why they supported companies’ compensation
philosophies and practices.
Moreover, as public attention and frustration grew over executive compensation
abuses, compensation committees increasingly rethought their compensation and
revised their policies and practices accordingly.
In 2007 a group of investors and companies created a Working Group on the
Advisory Vote on Executive Compensation to study how such a practice could be
implemented in U.S. markets. The ensuing months of dialogue and study led to two
Roundtables, hosted by Pfizer, each time attended by approximately 125 companies,
investors and compensation experts. The Working Group and Roundtables were able
to identify and address issues and obstacles for companies investigating Say on Pay.
Investors were able to add insight in response to those concerns and inform
companies about the rationale for Say on Pay from their viewpoints.
Critics will quickly point to skepticism by companies and investors who are not
enthusiastic about the Advisory Vote or who feel it is a burden to implement. Clearly,
implementing an Advisory Vote requires a new level of responsibility by companies
and investors alike. Smart companies will establish tools to communicate with their
owners such as conference calls, dedicated email addresses, special websites or
questionnaires. Investors will have to decide which issues would stimulate an
“Abstain” or “Against” vote and how they will gather information to assess a
compensation practice that deserves further study. Fortunately, progress has been
made in both these areas.
Other critics of the Advisory Vote foolishly argue that voting results of shareholder
resolutions illustrate that investors are still not overwhelmingly supportive since fewer
than 20 resolutions have passed. Given the structure of proxy voting, this comment
seriously underestimates the difficulty of garnering majority votes. This is so
A Division of Boston Trust & Investment Management Company
One Beacon Street, Massachusetts 02108 617.726.7250 or 800.282.8782 fax 617.227.3664
especially when many institutional investors automatically (and we believe
inappropriately) vote with management. Within this concept, an average vote of over
45% is actually an enormous demonstration of investor support for a proposed
reform. The SEC and U.S. Congress can be confident that a large, cross-section of
individual and institutional investors support this proposal. Indeed, it often takes
several years before an issue like this “gets legs” and gains voting support from
mainstream investors. Only occasionally do corporate governance reforms gain the
nearly immediate recognition and backing that we have witnessed with Say on Pay.
We do not naively believe that Say on Pay is the all-important element in ongoing
work to address executive compensation. But we believe this governance reform
provides an important platform for investors, through the proxy voting process, to
signal approval or concern regarding company compensation philosophy and
practice. Particularly when coupled with a meaningful investor communications
program, the Advisory Vote is a helpful tool to help Boards assess investor
confidence in their executive compensation packages.