Tuesday, March 06, 2007

Shareholder activism on salaries for corporate executives


Shareholder activism is a significant path to curbing corporations in their unfettered search for profit.   Brethren Benefit Trust, an organization providing financial services to Church of the Brethren employees and members, currently manages investments of $415 million on behalf of members.  BBT has a commitment to gentle and persistent activism on behalf of their shareholders, guided by the values of the Church of the Brethren.

Here's a story about a recent BBT victory, related to CEO salaries.

If you have investments, who manages them?  Are your investment managers proactively representing your values?

~Matt Guynn
coordinator of peace witness
On Earth Peace


Brethren Benefit Trust and Boston Common celebrate Aflac's decision to give shareholders a say on pay
Feb.  28, 2007
Elgin, Ill.

It was a quack heard �round the business world.

On Feb.  14, Aflac Incorporated, the insurance giant famous for using a duck in its television commercials, announced that its board had approved a resolution making it the first major U.S.  company that will give shareholders an advisory vote on the compensation it pays its executives.

It was Brethren Benefit Trust�s shares as an Aflac investor and advocacy work by Boston Common Asset Management that helped prompt Aflac into agreeing to give its shareholders such a vote.

�This is a landmark decision pertaining to an issue of justice,� said Nevin Dulabaum, BBT�s director of Communications and interim director of Socially Responsible Investing.  �It is common to think of unfair wages being paid in developing countries, but one does not have to look beyond the U.S.  border to find salary and benefits inequities that rise to the obscene.�

In 1962, chief executive officers earned, on average, 24 times that of the average hourly worker, according to an Economic Policy Institute study.  In 2005, the ratio of CEOs� pay within the U.S.  to that of the average worker had skyrocketed to 262 to 1.

One of the recent jaw-dropping examples of compensation disparity was Home Depot�s Robert L.  Nardelli, who resigned as chairman and chief executive at the beginning of this year, taking with him a �golden parachute� retirement package worth in excess of $200 million.  During Nardelli�s six-year tenure, he received an additional $200 million in compensation and perks.  Although revenues grew 12 percent each year and profits doubled during that timespan, the company�s total return to shareholders was down 13 percent.

The issue with Aflac actually began last October when Brethren Benefit Trust and Boston Common Asset Management co-signed a letter with the 275-member Interfaith Center on Corporate Responsibility (ICCR) that was sent to about 150 large firms.  The letter asked for shareholders to be given a �say on pay,� that is, the opportunity to cast advisory votes on their respective company�s executive compensation report.

�We believe that there are real and significant concerns about excessive executive compensation practices that call for investors to become actively involved,� the letter stated.  �In some cases, escalating executive compensation appears to bear little relationship to company financial performance.  Additionally, consultant-driven compensation recommendations that advocate for top-tier pay packages create a spiraling-up effect.  These concerns are amplified against a backdrop of stagnant wage growth for the average employee.�

ICCR staff subsequently identified firms that did not respond to the letter and asked its member organizations to engage in dialog with one or more of the companies.  Boston Common picked Aflac, which long had been held in the BBT portfolio.  Boston Common is one of BBT�s eight investment managers and works closely with BBT on a number of socially responsible investing initiatives.

Dawn Wolfe, a social researcher and shareholder advocate for Boston Common, twice attempted to contact Aflac.  Receiving no response, Boston Common used BBT�s Aflac holdings to file a shareholder resolution to pressure the firm into giving shareholders a nonbinding say on pay.

�They were very surprised to receive the resolution from us,� Wolfe said.  �One of the reasons was that they believe they have exemplary practices when it comes to pay-for-performance, and so they believed our filing of the proposal was essentially unwarranted.�

Over the span of about a dozen phone conversations and many e-mails, Boston Common learned of the metrics the insurance giant uses in establishing its executive compensation.  Top Aflac officials, in turn, learned that the firm had not been targeted because they had a severe divergence between pay and performance, but because Boston Common believes shareholders have the right to express their views on executive pay.

The Aflac board ultimately decided to allow the shareholder advisory vote on executive compensation, but not until 2009 when new executive compensation disclosure rules by the Securities and Exchange Commission will be fully implemented.  Being the first Fortune 500 company to make this decision, the announcement made major headlines.  The story received page one coverage from USA Today, and was picked up by National Public Radio�s �Marketplace,� the Chicago Tribune, the Washington Post, and a number of other national, regional, and local media outlets.

�Aflac is the first major U.S.  company to agree to allow its shareholders to voice their opinions with regard to the firm�s executive compensation,� Dulabaum said.  �Shareholder advocates nationwide hope that Aflac�s move will prompt other companies to agree to such nonbinding votes as well.�

All companies make decisions as corporate citizens as to how they treat their employees, their suppliers, and the environment.  �I think it is important for shareholders to ask their firms to do more because these businesses impact our lives in so many ways,� Wolfe said.  �We need to hold them to high standards.�

The task can be daunting.  Those who engage in socially responsible investing initiatives can find the work to be long and tedious with often little to show from the endeavor.  That is why Boston Common and Brethren Benefit Trust celebrate Aflac�s decision.

�I think it�s a great story, what BBT�s ownership in Aflac enabled Boston Common to do,� said Wolfe.  �Without BBT�s consent to use its shares, we would not have been able to file the resolution that led to Aflac agreeing to allow shareholders to vote on a nonbinding executive compensation resolution.�

Brethren Benefit Trust manages $415 million for more than 5,000 Church of the Brethren Pension Plan and Insurance members and Brethren Foundation clients.  All of these funds are invested in a socially responsible manner, with investment screens and activist initiatives guided by Church of the Brethren Annual Conference statements and guidelines.



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