Employee-Shareholders Take up the Cause of Executive Pay

By Cydney Posner

Coincidentally, Wal-Mart is also one of the subjects of a Gretchen Morgenson column in Sunday's New York Times.  The column discusses the signs of a trend for groups of employees to band together to submit shareholder proposals. Apparently, this year a small group of Wal-Mart employees submitted a shareholder proposal centered on executive pay: "The employees want the board to do an annual analysis, ensuring that Wal-Mart's pay plans are set up to discourage top management from making capital investments that hurt returns. Wal-Mart's return on investment is, in fact, falling: it has dropped to about 18.6 percent this year from nearly 20 percent in 2007.

"Referring to Wal-Mart's compensation committee, the proposal states: ‘We are concerned that recent decisions by the committee may overemphasize sales growth even when that growth is resulting in declining rates of return on investment, and in some cases does not produce returns that cover the cost of capital.'

"The employee-shareholder proposal comes as the company has been lowering the bar for executive performance pay. Last year, after Wal-Mart's same-store sales had been in decline, it began using the benchmark of total sales growth, which had been rising. This year, Wal-Mart reduced the threshold for its return on investment needed to generate incentive pay."

The employees behind the proposal were all long-term employees and shareholders who wanted to hold the company "accountable" and "had grown concerned about the lackluster performance of Wal-Mart's stock…." They sought guidance from an analyst at the Union in crafting the proposal. Now, they are holding "proxy parties" to explain the process and the proposal to other employees.

Verizon also has an employee group whose workers — in this case, retirees — are active in proxy matters. The "Association of BellTel Retirees has rattled the company's cage over pay and other governance practices for the last 16 years."

Over that time, the group, which began with four former employees and now has 128,000 members, has submitted eight proposals, many related to executive pay. In two instances, they won a majority vote of shareholders, and in the other cases, Verizon agreed to make changes to accommodate them. The group originated with some retirees who were concerned about cutbacks in benefits. They each contributed funds and engaged counsel to help: "Now the group sends letters to its members every year, advising them how to vote their shares. Broadening its influence, the retirees also communicate with Verizon's largest institutional shareholders and pension funds.

"This year, the retirees are objecting to the fact that Verizon senior executives can receive 50 percent of their target incentive pay even if the company performs below the 30th percentile in its peer group.

" 'In school, that would be a "D" or an "F"; you certainly wouldn't get a pat on the head for it….Our recommendation is that performance should be at least at or above the median in the peer group.' "

One commentator noted that social media were facilitating participation by workers in their companies' governance processes: " ‘[w]e see more and more cases of employee shareholders and shareholders in general discovering ways to stimulate knowledge of governance issues at companies and encourage critical voting.' "

This content is provided for general informational purposes only, and your access or use of the content does not create an attorney-client relationship between you or your organization and Cooley LLP, Cooley (UK) LLP, or any other affiliated practice or entity (collectively referred to as “Cooley”). By accessing this content, you agree that the information provided does not constitute legal or other professional advice. This content is not a substitute for obtaining legal advice from a qualified attorney licensed in your jurisdiction and you should not act or refrain from acting based on this content. This content may be changed without notice. It is not guaranteed to be complete, correct or up to date, and it may not reflect the most current legal developments. Prior results do not guarantee a similar outcome. Do not send any confidential information to Cooley, as we do not have any duty to keep any information you provide to us confidential. This content may be considered Attorney Advertising and is subject to our legal notices.