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YOUR MONEY: EXECUTIVE PAY REPORT

How investors can be influential

Do your homework on governance. Then vote for change, withhold support for the status quo or launch a resolution yourself.

May 25, 2008|Kathy M. Kristof | Times Staff Writer

The reversal last year of the long trend of rising executive pay came about in part because of growing activism by institutional investors, experts say.

But even if you're a small-time investor, you can make your voice heard regarding how the companies you own shares in are run. And with the help of others like you, your portfolio can benefit, corporate governance activists say.

"If you stand on the sidelines, thinking you are just one investor, you have to realize that there are hundreds of thousands of people who are like you," said Daniel Pedrotty, director of investment at the AFL-CIO. "If the majority of people are like you, you leave the governance of the company in the hands of people who want to preserve the status quo."

In fact, if you own stock through index funds, you may not have the option to do the "Wall Street walk" -- sell your shares in a company -- if you don't like its management or directors, said Michael Garland, director of value strategies at CtW Investment Group, which advocates for better corporate governance on behalf of the labor federation Change to Win.

"For us, demanding better governance is the only way to protect and create value," Garland said.

Here are answers to questions about taking a role in the companies in your portfolio:

How do I know whether a company is well-governed?

You can buy a report from Corporate Library ( www.thecorporatelibrary.com), a research firm that grades companies on an A-F scale. But with each report going for $495, individual investors may need to take a cheaper approach.

The do-it-yourself research method requires a copy of the company's proxy statement -- the document sent to investors before the annual shareholder meeting. You can get a copy of the proxy statement from the company or the Securities and Exchange Commission's database of filings at www.sec.gov/edgar.shtml. (Click on Search for Company Filings and then on Historical EDGAR Archives. When you get to the search bar, type in the company's name and "14a," which is the SEC's term for the proxy statement.)

What do I look for in the proxy statement?

The proxy includes a list of board members, a biography of each director, charts indicating how much stock company managers and directors own and charts showing the pay of the company's five most highly compensated officers.

Look for signs of bad governance, such as:

* The CEO is also the chairman. This suggests the company's boss is his own boss and answers directly to no one.

* A lack of independent board members. If the bulk of the board is made up of people who work for the company or have close financial or personal ties to managers, the directors aren't likely to feel independent enough to challenge management decisions. The proxy will make clear when a director is an employee. To learn of other relationships between a director and the company, look in the proxy under the heading Certain Relationships and Transactions.

* Multiple shareholder resolutions. When shareholders petition a company to officially change its practices and the company puts the resolution up for a shareholder vote at the firm's annual meeting, the proposal is printed in the proxy statement. Although a well-governed company may occasionally draw such resolutions, they are relatively rare at companies rated A on the Corporate Library's governance scale.

If the proxy contains a number of resolutions -- especially those involving pay, the election of directors and corporate provisions perceived as discouraging takeovers -- that could signal bad governance.

* Excessive executive pay. "Excessive," of course, is a relative term. The median annual cash-and-stock pay of a chief executive at a Fortune 500 company is about $10 million. It might be a warning sign if a CEO earns significantly more than that. (CEOs of smaller companies generally earn less.)

* Massive perks. The executive compensation table will include how much other pay top executives make and will spell out what "other" consists of. Most often, that category includes the cost of letting the CEO use the company jet to take his family on vacation, what the company pays to provide top executives with security systems, company cars or chauffeurs, country club memberships and financial planning services.

This information will give you an idea of how regally top officers are treated.

What can I do to change a company's policies?

* Vote. Every year shareholders have the right to vote on the election of directors and several other matters of importance to the company.

If you don't like how directors are paying company executives, you can "withhold" your vote against the members of the compensation committee. Some companies recently have adopted rules that require the resignation of a director who does not receive yes votes from a majority of shareholders.

If other shareholders have presented resolutions to reform company practices, consider voting for them as well.

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