Thursday, April 19, 2012

A Wake-Up Call From Shareholders

Citigroup shareholders’ rebuke of the $15 million pay package for its CEO struck several chords with me. It was a landmark development and possibly ushers in a new era.

Let me note that the authorization for shareholders to take this action came from the “say-on-pay” provision of the Dodd Frank Act; it is an expression of a sentiment, but not binding, unless the board passes it. Nevertheless, it is an invitation for shareholders to express their opinion publicly on an issue that previously had been sacrosanct. A key motivation for the action has been to make sure corporate leadership ties compensation to performance.

First, this was more negative publicity for Citigroup that has had its share of it as a result of the subprime loan crisis and the slow payback on TARP. Such negative publicity will no doubt put pressure on other companies, largely because Citigroup is the highest profile organization to have experienced such a rebuke.

Second, it will probably stir the shareholder rights crowd, and we will see corporations becoming more sensitive to shareholder demands. Greater transparency could result. For example, one friend told me of a bylaw in the proxy he received which asked shareholders to vote on a provision that would limit their ability to challenge certain things. Hopefully, from here on in, the opposite will happen. It has to, as most investors – professional and individual alike – tend to abhor bylaws that abridge their rights.

Third, and finally, it is interesting to note how communications and influence travel. The term “income inequality” has been in the news more times than I can count (e.g. at least thousands). As a result people are becoming conscious of the term. As it gained momentum, the government passes the Dodd Frank Act enabling “say-on-pay.” The communications line zig zags back to the streets via The Occupy Wall Street movement which addresses those victimized by income inequality as “the other 99%” and the popularity spreads further. A mere few Fortune 100 CEOs pay attention to the group and meet with them. Most don’t. The term is now reinforced through shareholders rights groups. Bang! Citigroup happens.

I expect more Citigroup-type situations to follow, more corporate accountability on pay for performance, and more transparency on every aspect of shareholder engagement.

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