White House Opposing Key Measure in Shareholder v. Bank Executive Pay Reform Fight

Well, the BP disaster, in particular the intense press coverage of this week, appears to have provided the Administration with some very useful air cover, by diverting public attention from the final rounds in the battle to reform Wall Street.

One of the common arguments against the need to create mechanisms to moderate corporate and in particular financial services compensation levels is that that burden falls on shareholders, and they don’t seem to be doing much about it. That’s a major misconstruction.

Public companies represent a major agency problem. How, exactly, are fragmented investors supposed to discipline managements that overpay themselves? It isn’t as if this is a new problem; then star Wall Street analyst, Sallie Krawchek, remarked in the early 1990s, when bonus levels were much tamer than now, that it was better to be an employee than a shareholder of an investment bank. Pay for performance is also a myth. Numerous studies have found that correlation is negative, and particularly highly paid executives are typically at companies that underperform.

Why does this situation persist? Investors have the deck stacked against them. Merely making noise has no impact; for instance, unhappy institutional investors met with Goldman last year to protest its expected record 2009 bonuses, to no avail. Mounting a battle to install new directors is costly and almost always fails (virtually all companies have staggered director elections, so even a successful campaign one year, a rare event, is not sufficient to change how the board votes. It’s cheaper to sell shares than fight, and with most equity investors having to be diversified by sector (and often having specific sector weights), institutional investors can’t escape practices they deplore once they become well entrenched.

And don’t fool yourself: management has stacked the deck in its favor. Board rely on compensation consultants, which are recommended by the human resources department, which reports to the CEO. For reasons I cannot fathom, most boards have been persuaded to set the target pay for their CEO in the top half, sometimes the top third or quarter, of their peer group. This assures constantly escalating pay. When companies drops into the bottom half, they must raise pay levels, which moves the average for that group up, which will put some other firm(s) in the bottom half, who must raise pay, again raising the averages…..

Huffington Post today describes how Team Obama threw its weight behind the financial oligarchs:

The White House is intervening at the last minute to come to the defense of multinational corporations in the unfolding conference committee negotiations over Wall Street reform.

A measure that had been generally agreed to by both the House and Senate, which would have affirmed the SEC’s authority to allow investors to have proxy access to the corporate decision-making process, was stripped by the Senate in conference committee votes on Wednesday and Thursday. Five sources with knowledge of the situation said the White House pushed for the measure to be stripped at the behest of the Business Roundtable. The sources — congressional aides as well as outside advocates — requested anonymity for fear of White House reprisal…..

The White House move pits the administration against House Speaker Nancy Pelosi (D-Calif.), who told Barney Frank (D-Mass.) to stand strong against the effort.

“I met with the Speaker today and she said, ‘Don’t back down. I’ll back you up,'” Frank, the lead House conferee, told HuffPost. “Maxine Waters is very upset, as are CalPERS and others.”

Advocates said that the corporations fought the issue primarily over executive compensation concerns. Given proxy access, investors could rein in executive salaries. The Business Roundtable is a lobby of corporate CEOs…..The investor-protection language was stripped and replaced by an amendment from Sen. Chris Dodd (D-Conn.), who leads the upper chamber’s negotiations in the conference committee…

The SEC is planning to issue rules related to proxy access. Those rules would be made meaningless by the language currently being pushed.

Yves here. I suggest you read the entire piece. This conduct is a disgrace, and should settle any doubts as to whose interests Obama really serves. Hint: it isn’t yours and mine.

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  1. Francois T

    “This conduct is a disgrace, and should settle any doubts as to whose interests Obama really serves.”

    It should settle any doubts…in the mind of intelligent people. Apparently, it is in shorter supply than I thought possible.
    I posted at the HuffPo forums something very critical of this move; there were still a fair number of Obamabots who descended on me like I was Karl Rove or David Addington.

    It is obvious that too many people drink several cups of stupid every day.

    1. O. Notbot

      don’t ever forget FT, many of the bots over there are getting paid to descend on all criticisms and paint you in “pug” colors. HuffPo is a battleground for the hearts & minds of the base that the political black ops will defend at all costs. who knows, it may be the future location of Axelrod’s Last Stand.

  2. John

    You really have no idea what you’re talking about here. First, your title is misleading. WH out to block shareholder say on pay suggests that they are actually out to block “say on pay”- a precatory vote on exec comp.

    What they have compromised on is proxy access, which more directly affects board elections.

    Comp. provisions remain in the bill. E.g. independent comp comm, say on pay, comp consultant independnece.

    1. Yves Smith Post author


      The “independent comp committee” provision merely provides that the comp committee consist solely of independent directors (and includes a broader look at their financial ties to the company). Given how well independent audit committees have worked post-Enron, this sounds all well and good but substantively will make little difference.

      I don’t see confirmation of your assertion re the independence of comp consultants (as in it may be called “independent” but substantive independence seems wanting), which if done properly, could make a difference. This report is as of June 9 :

      Both bills require the SEC to issue rules directing national securities exchanges to mandate that listed companies address the independence of compensation consultants and other advisers to the compensation committee, but do so in different ways. The House bill requires compensation consultants and “other similar advisors” to the compensation committee to meet standards of independence, which the SEC will determine in rules. The Senate bill, on the other hand, does not actually mandate the use of only independent compensation consultants or other advisors. Rather, it only requires compensation committees to take into consideration certain independence factors, which the SEC is to identify in rules, prior to selecting a compensation consultant, legal counsel, or other adviser. These factors include:

      * The provision by the adviser’s firm of other services to the issuer
      * The amount of fees received from the issuer as a percentage of the adviser firm’s total revenue
      * The policies and procedures of the adviser’s firm that are designed to prevent conflicts of interest
      * With respect to the adviser himself or herself (as opposed to the advisor’s firm), any business or personal relationship of the adviser with a member of the compensation committee and any stock of the issuer owned by the adviser

      Under both bills, the compensation committee would have the authority to retain independent compensation consultants, legal counsel, or other advisers and be responsible for their compensation and oversight.


      Comp consultants, as I outlined, have long advocated policies that lead to escalating CEO pay. Are board about to start hiring firms that will rattle the cage or espouse new philosophies, particularly when director pay has risen along with CEO comp? Doubtful.

      Comp consultants’ job is primarily if not solely to serve as a liability shield for the board. It most certainly is not about making “better” comp decisions. Boards will continue to hire established brand names (that’s essential from the window dressing standpoint) and those brands will continue to offer conservative, executive-suite flattering advice. When I see a prominent comp consultant saying that boards should target pay in the bottom 50% of the company’s peer group, then I’ll believe we are seeing real change. That doesn’t mean that many if not all of the directors are sincere; most people don’t get into that sort of position by bucking convention, and they are likely to be true believers in badly flawed conventions.

      I will modify the headline, since “say on pay” has come to have a specific meaning in corporate governance circles; most readers would read that to mean shareholder influence on pay, not the more restricted meaning it has come to have among experts, but “say on pay” is merely a symbolic vote in any event. The White House is out to gut one of the few substantive provisions.

      1. John

        Thanks for responding. I agree that the provisions on compensation may not be of great consequence. However, the Senate and the House have devised the bill’s language, and on executive compensation, the WH remains supportive of the drafted language.

        Proxy access isn’t central to the pay debate. The SEC drafted a rule last year that would establish ownership requirements for access to the proxy. The ownership requirements be related to a firm’s mkt cap. I think beginning with a 1% threshold and increasing to 5%.

        The administration intervened and set the threshold at 5%. So, essentially, no investor group could nominate a director on the company proxy. They don’t own that many shares.

        Huffpo is sensationalist. Not very credible. Tied compensation into the discussion for hits.

        1. Yves Smith Post author

          This is where I differ with you. I come at this from an M&A perspective, and the inability of shareholders to have ANY influence over board composition is one of the key mechanisms that makes boards and management not accountable to shareholders.

          1. John

            I’m not so sure we have a strong disagreement on this point. I agree that board accountability is a major issue today, but I disagree with (some) federal solutions.

            Delaware (more than 60% of public corporations are incorporated there) passed legislation last year on proxy access. It allowed companies to amend their bylaws to establish proxy access/proxy reimbursement. Reimbursements the key.

            I’m a supporter of private ordering and federalism in corporate governance. Proxy access is a really difficult issue to solve federally. If you’re interested in some good material on governance/proxy access:



            Lastly, comp is a tough issue. The legislation addresses board, particularly comp committee, composition (independence).

            What else can the federal government do? I’m not so sure. Past attempts have had unintended consequences. E.g. 162(m).

    2. wersbo

      John, your first comment begins, “you really don’t know what you’re talking about”‘ and slaps Yves for, among other things, her post’s title (which she changed, although it was perfectly defensible); your last comment concedes that you don’t really disagree with her, after all. Learn anything?

  3. alex

    So much for the “capitalism” excuse. In that system it’s the owners who have control.

    What really gets me is this line from the article:

    On Thursday, Sen. Chuck Schumer (D-N.Y.) fought back, attempting to amend the language to strike the five percent requirement.

    When Sen. Wall St. opposes something as too “business” friendly, you know you’ve really gone too far.

    1. Z

      schumer has said a ton of shit that he never followed up on, so please let’s not play charlie says becoz what charlie says don’t mean shit. I think good old loyal wall street call boy charlie put on some made-for-tv kabuki theatre today in making his “valiant” … but predictably fruitless … effort to rein in wall street ceo pay becoz he knows damn well the senate is in the tank for the white house on this and the votes aren’t there.


  4. John


    Schumer has supported proxy access for more than a year. He has support from unions with this.

    For Schumer, apparently, unions > wall st on this one. I’m not sure his reasoning though.

  5. Jon Claerbout

    My retirement funds are in Vanguard mutual funds. Think there might be any hope in getting mutual funds to look out for our interests? How might we proceed on that front? either directly with the mutual fund organization, or by means of some legislation that requires them to look out for our interests?

  6. mg

    The good news is the repugs will give us a new president in 2012, errr, hold on…

    The President has unfortunately gone a long way in supporting the accusation of being Bush’s third term. There is no answer to the dilemma we face in this country but austerity and a virtual police state will go a long way in erasing any doubt that the system we have created is tremendously foul. Stay small and make your life as sustainable as possible.

  7. Z

    But, but, but … he’s just deluded, he doesn’t know what he does. That’s why when he lies to us, he’s not really lying … you see. He’s congenitally well-intentioned but he thinks that it’s best for the country to keep this wonderful power structure in place that has resulted in about a 20% real unemployment/underemployment rate and silly millions for people that have practically blown up the world’s financial system with their unethical practices. And he thinks it’s best … for us, and the entire country, of course … to make us pay private entities for health care insurance with little or no cost controls. And he’s so sure of it that he’s going to have the irs enforce penalties on us if we don’t. And he thinks it is best … for us … that social security gets cut while these corporate leaders keep stacking their corporate boards with pals and lackies that will grant them obscene compensation packages practically conditionlessly.

    No one can doubt the pope of hope’s noble intentions … that’s indisputable. He’s just this daffy harvard law school grad that just happened to climb to the top of the nation’s power structure at the age of 47 years who just keeps getting fooled into doing what his biggest campaign donors just happen to want. But it’s not intentional or anything, he’s really got the best interests of the country at heart … at least we know that … becoz he tells us.


    1. Tao Jonesing

      Obama’s supporters have gone from admirers to enablers in a nasty co-dependent relationship.

      Yeah, he’s beating you because he loves you.

      Keep on thinking that, and see how it turns out.

  8. MichaelC

    I argued in the past (and was admonished for making a case that was counterfactual) that shareholders of firms like GS are perfectly happy with the payout policies of these firms. Perhaps I didn’t make a clear case, or perhaps my case is counterfactual but I’ll present it again for consideration.

    1. The turnover in shares for these companies is so volatile that long term shareholders are always at the markets mercy, and the market favors huge payouts as long as the franchise promises outsize returns. Gov’t garantees to backstop assure the franchise will deliver and corp management is geared to deliver market expectations.

    2. If Buffet, as a major shareholder in GS, for example, can’t (or won’t even attempt to) control outsized bonus payouts, no one will. Do the Middle Eastern sov wealth funds demand CITI cut its bonus payouts?

    Shareholders are subordinate to bondholders. The reality is, they’re spectators (or speculators) as far as the firm is concerned. Speculators don’t mind outsized bonuses. Investors do, and mom and pop investors don’t count.

    Shareholder’s don’t own anything, really. Their rights are extremely fragile, and corporate governance that gives lip service to shareholders is a sham in effect, if not in law.

    1. Anonymous Jones

      Your thoughts are well taken, but just because someone decides that a battle is not worth the cost in no way means that person is “perfectly happy” with the situation.

      The executives in charge of these companies have hostage rights, and even Buffett doesn’t want to test whether the executives would rather just blow up the whole thing rather than take less pay.

      In negotiations, the battle over dividing the spoils is as hard fought as the battle over allocating the risks and downsides. What leverage is acceptable in these negotiations and what leverage is not? There is no “correct” answer, but many of us can identify situations that we would consider unconscionable.

    2. Yves Smith Post author


      With HFT and algos, average turnover stats have become meaningless. Yes, you have a lot of pure speculators who look for fleeting profits, but there are still a lot of fund managers and retail investors who hold stocks for longer periods, in particular taxable investors who want at least a one-year holding period to get long term capital gains tax treatment.

      So you’d need to pull the quick trigger traders out and look at average holding period ex that to understand the behavior of the relevant universe.

    3. F. Beard

      “Shareholders are subordinate to bondholders.” MichaelC

      And those bonds are owned by the government backed fractional reserve banking cartel? Am I wrong?

  9. Z

    Also, don’t believe that this is all the white house and that the senate and house dems are blameless. This kabuki has probably been planned by the rahmbama team for months. First of all, the senate does not have to do what the president tells them to do. The house and the senate can pass a bill and make obama veto it … which I doubt he’s got the guts to do. Personally, I think it is more than a coincidence that the democratic party happened to find a way to keep wall street and corporate chieftains happy prior to the mid-terms … and that the white house, which isn’t up for election until 2012, and the senate, of whom only 1/3rd are up for reelection this year, takes the hit while the house, with every member up for election, comes up principled, but forced into settling for the best wall street bill they could under the circumstances.


    1. Z

      This kabuki bullshit is rahm’s specialty … this is why obama hired him: to provide him with cover to service his corporate clients.

      obama had been much worse than I thought he’d be and I was expecting a lot less than most.


  10. gigi

    Obama voting for TARP settled the question before he was even elected. Obama has provided the same answer multiple times, for example appointing Geithner despite tax evasion, ignoring the Lehman report, escalating the Afghan conflict and increasing military spending, his behavior to date with BP, etc.

    The two party system is broke. We need a third party. And fourth. And fifth.

  11. i on the ball patriot

    This is almost comical;

    Yves says: “Why does this situation persist? Investors have the deck stacked against them. Merely making noise has no impact; for instance, unhappy institutional investors met with Goldman last year to protest its expected record 2009 bonuses, to no avail. Mounting a battle to install new directors is costly and almost always fails (virtually all companies have staggered director elections, so even a successful campaign one year, a rare event, is not sufficient to change how the board votes. It’s cheaper to sell shares than fight, and with most equity investors having to be diversified by sector (and often having specific sector weights), institutional investors can’t escape practices they deplore once they become well entrenched.”

    Its the same problem scamerican voters face. A corrupt electoral process that is non responsive to the will of the people. Installing new directors is like trying to start a third party — doomed to fail before you can even think about it. Selling shares rather than fight is like not voting or leaving the country. And discussing corporate structure remedial plans — in a far more Orwellian jargonized bullshit speak — for non responsive entrenched corporate ears is soooooo similar — a time wasting energy sink!

    So … the folks with a little loot to invest are having the same problems in their corporate closet nation states — created to avoid the rules, regulations and taxes in the big open public nation states — as the general public peons in those big open public nation states they have banded together to avoid. Well, my heart fucking bleeds for them all! This is all sooooooo sad!

    Yes — comedy — with an irony kick in the ass!

    But do we not all clearly see the now more rapid incremental escalation in the breakdown of the now blatant scam rule of law?

    Why does this situation persist you ask?

    No balls! No brains! No freedom!

    Deception is the strongest political force on the planet.

  12. craazyman

    A large part of the problem is that institutional investment managers (shareholder’s agents, but for all intents and purposes a stand-in for shareholders) themselves are also ridiculously overpaid relative to what they really do.

    Any widespread rebellion against bank executive pay would ricochet like a bullet right back up their asses.

    I mean, really. Why rock the boat when you’re bringing home 7 figures for sitting at a desk, reading reports, playing golf and going to meetings. Best to just say “tut tut” every once and a while and then duck. Am I being too harsh?

    I don’t think so. Try to make it as a “smart guy” in the real economy and see what happens.

  13. dzoner

    don’t forget this is all happening with the spectre of DECLINING worldwide oil production starting in earnest in 2011-12 hanging over us all.

  14. petty crooks

    > Bill Owens, Mike McMahon and the used car salesmen: McMahon (D-NY), also part of the Ackerman initiative, and Owens have put together a letter signed by 62 House Democrats supporting the auto dealer exemption in the House version of the bill. That would exempt car dealers from oversight from the federal consumer protection agency which will either be independent or housed at the Federal Reserve. The White House strongly opposes the exemption, but it passed the House and a nonbinding “motion to instruct conferees” in the direction of the exemption passed the Senate with 60 votes. Exempting car dealers from oversight, Pat Garofalo notes, gives an unfair advantage to them over credit unions and other sources of auto financing, and exempts one of the biggest financial transactions that most people ever make.

    From: http://news.firedoglake.com/

  15. F. Beard

    WTH! Can’t corporations set up their own rules that would attract investors instead of abuse them? So the Congress intervenes into what should be a private contractual matter? And we call this capitalism? The shareholders should be god in a corporation. They are the owners for Pete’s sake! So the employees have taken over via government interference? Am I missing something?

  16. Alan

    Thanks for the info. I’ve wondered for some time if there is anything shareholders can do to influence executive salaries. Now I know there isn’t. Proxy voting for the board is nothing, since the board is usually comprised of other executives who feel like they’re entitled to big salaries also. I’ve always wondered if proxy votes are rigged or not anyway, since they’re performed under the aegis of the board and management.

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