Fidelity Uses Voting Threats To Fight Excessive CEO Pay
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Fidelity Investments has a message for companies that it feels overpay their top executives: Enough already!
"We're concerned about grossly excessive CEO compensation," says Eric Roiter, general counsel at Fidelity Management & Research Co., the investment arm of the giant Fidelity Investments mutual-fund company that oversees more than $800 billion in assets. While changes aren't imminent, and may not even happen at all, the fund firm is reviewing how to use its ballots in shareholder votes to protest outsize corporate pay packages, according to Mr. Roiter.
One avenue that Fidelity is considering is to withhold its votes for corporate directors that have approved executive compensation plans deemed overly generous by Fidelity. Shareholders don't have the option of voting against board nominees, but they can withhold their ballots or sometimes vote for rival slates of directors to those backed by management.
While withholding votes can send a protest message to company managements, such moves have little more than symbolic value because the management's slate invariably is elected, some critics contend. Fidelity's vote could have more impact, they add, if it also publicly identified companies whose executive compensation it deems excessive. But Fidelity, in accordance with a longstanding policy, doesn't disclose how it votes on individual ballot questions, a practice that isn't expected to change.
"The direct result of a withheld vote is nothing," says Sarah Teslik, executive director for the Council of Institutional Investors, an activist group consisting mostly of public-employee and labor pension funds. While a vote of no-confidence from a large shareholder like Fidelity gets directors' attention, she says Fidelity funds "could do more if they announced their decisions," which could then encourage other shareholders to take similar actions against excessive management pay.
Nevertheless, Fidelity's latest stance on excess compensation marks a tougher line by the world's largest mutual-fund manager, which holds positions in about 5,000 different stocks, according to FactSet Research Systems Inc. In the past, Fidelity has preferred to work behind closed doors in prodding managements to improve their corporate behavior, saying it could be more successful in obtaining results that way.
Fidelity hasn't settled on how it will define "excessive" compensation, but the Boston fund company is likely to take a comprehensive view, considering everything from stock options to annual pay to bonuses. Another complaint from shareholders recently is that executives can often sell their options quickly, giving them an incentive to boost the stock for short periods even if it leads to a big decline that hurts long-term shareholders.
Fidelity's new stance on executive compensation is the most recent move indicating some large investors are doing more to signal their displeasure with what they consider corporate abuses. During the bull market, for example, shareholders turned a blind eye to executive pay plans, even if extremely generous, as long as they felt the interests of management were aligned with the interests of shareholders. Rich stock-options plans proliferated, often giving top executives large packages of stock and options that could be worth tens of millions of dollars and sometimes much more.
But such payouts have been seen in a new light since major stock indexes began slumping in 2000. In recent years, Fidelity recommended to a New York Stock Exchange committee that all stock-options plans be submitted for approval to shareholders. In 1999, the fund company also started to withhold its funds' votes for directors that worked at companies that had recently repriced stock options without shareholder approval.
Many of Fidelity's votes against management's recommendations involve stock-options plans, Mr. Roiter said. The company usually objects to plans that dilute the shares outstanding by more than 10% at large companies or more than 15% at smaller companies, he added.
Mr. Roiter said a small minority of Fidelity's votes against management actually involve withholding support for directors. Since the 1980s, Fidelity has withheld support for directors at companies that have approved poison pills -- antitakeover measures that shareholders generally dislike -- and those who grant departing executives with large compensation packages, or golden parachutes.
In past eras, many fund companies, including Fidelity, simply sold their shares in companies when they didn't like management practices. But big investors increasingly don't like being forced to sell their stakes, a move that can have tax consequences and limits the universe of stocks available to the investors.
In addition, issues such as excessive compensation affect so many companies that selling by big investors -- known as "voting with their feet" -- is impractical, fund managers say. So since they are going to remain as owners in these companies and given tough market conditions, big investors increasingly are taking the view that they need to curb management excesses that reduce gains available to shareholders.
The fund industry has been under pressure recently to do more about improving corporate governance. Harvey Pitt, chairman of the Securities and Exchange Commission, urged fund executives at a recent conference to "join with us in advancing the interests of America's investors." And veteran investor and Berkshire Hathaway Chairman Warren Buffett said in a CNBC interview this week that institutional investors need to do more to prevent high management compensation from eating away at shareholder returns.
Last month, the NYSE proposed rules requiring stock-options pay packages be submitted to a shareholder vote. The rules would apply to NYSE-listed companies only, but might eventually be applied more broadly if the Nasdaq Stock Market and SEC also go along.
Refusing to vote for directors is an unusual step for mutual-fund companies, but corporate accounting scandals of late have prompted more big investors, such as Legg Mason Value Trust manager Bill Miller, to consider taking more drastic steps than they had in the past. Activist institutional investors, such as the California Public Employees Retirement System, known as Calpers, are also withholding support from directors to protest specific corporate practices such as hiring auditing firms that also do consulting work for a company.
Mr. Miller, who this year refused to vote for directors at six companies, said Tuesday at an investor briefing in New York that corporate governance will be more important in the future. In his remarks, Mr. Miller also referred to the compensation of SBC Communications Inc. Chairman Edward Whitacre Jr. His compensation hit an estimated $65 million last year -- including options -- as the stock fell 18%. Mr. Miller, who doesn't own shares of the company, said the telecommunications company appeared to be an example of how corporate directors have let compensation spiral out of control. An SBC spokesman said SBC stock has outperformed its telecom peers during Mr. Whitacre's 12-year tenure as head of the company, and he adds that "a whole host of CEOs made a lot more" than Mr. Whitacre.
Indeed, Mr. Miller cited statistics Tuesday showing CEO pay increasing 535% since 1990, far surpassing the 297% gain in the S&P 500 stock index, the 116% jump in corporate profits and the 32% bump up in workers' pay. "This is what has the average person up in arms," he said.
Write to Aaron Lucchetti at aaron.luchetti@wsj.com
Updated June 12, 2002 |
