The CCGG’s model policy states that say on pay resolution should be seen as part of overall efforts between companies and shareholders to have regular and active dialogue with one another. “A lot of drafting and consultation went into this policy,” CCGG director of research Paul Schneider told Risk & Governance Weekly.

The CCGG prefers a case-by-case approach when analyzing against votes, taking into account the base of each company.

Recently, some of Wall Street’s largest firms have experienced strong earnings and rebounding trade revenues–including substantial bonuses. “Some of it is just you’re going to have to rely on the industry’s own self-restraint, and unfortunately a lot of them don’t seem to be too self restrained right now,” she said.

Bair emphasized that shareholders should influence the curb of excessive pay practices, however, she added that such “say on pay” influence be limited to long-term investors. “Some of the short-term shareholders might like the juiced up returns. They’re in and they’re out,” Bair said.

What we also discovered in putting the list together was that in some instances, it became impossible to separate the captain from the team. This year’s D100 is a case in point: Our editors and board of advisors were nearly unanimous in our selection of President Barack Obama as this year’s most powerful corporate governance influence. And yet, to do justice to the seismic shift his policies have brought about in the boardroom, we also had to recognize the many other  “New Voices” in the Administration who are now leading the greatest financial reform of American business since the 1930s.

So, we ask that in the pages ahead you pay more attention to who counts, and less to how we count, in arriving at our final selection of individuals and institutions that have met the requirement to be “most influential.” We think you’ll agree it’s an intricate and impressive mosaic where the whole equals much more than the sum of its parts, which may or may not be greater than 100.

Regulators & Rulemakers

Team Obama
It is often written that reasonable people may disagree, and with Americans and their Presidents, it is practically a way of life. But even an unreasonable person could only conclude that this President and his Administration are having a profound and lasting influence over the boardroom. President Barack Obama has demonstrated an enormous capacity for calm in uncertain times. His relative youth leads to frequent comparisons to John F. Kennedy and his communications skills to those of Ronald Reagan. But it is his aggressive response to the unparalleled economic challenges that greeted him at the dawn of his young presidency that harkens back to an earlier figure of towering influence,  Franklin D. Roosevelt.

FDR’s massive social and financial reform programs—the creation of Social Security as part of the New Deal, the establishment of the Securities and Exchange Commission (SEC) and the Federal Deposit Insurance Company (FDIC)—helped restore confidence in the nation’s banking system coming out of the Great Depression. One could plausibly take major portions of FDR’s New Deal and substitute his name with President Obama’s.  The implementation of the $787-billion American Economic Recovery Act one month after Obama took office, coupled with his handling of the Troubled Asset Relief Program (TARP), which sought to strengthen the financial sector by buying up the assets and equity from troubled banks, has clearly helped the nation avoid further financial disaster and put the economy on the path to recovery.

And finally, turning again to the FDR playbook, Obama assembled a team of wise men and women, formidable economic and business minds, whose decisions are having a lasting effect on the role of the corporate director. Preeminent among them was the choice of Rahm Emanuel as chief of staff. Described as a veritable “influence machine,” within the Administration and Congress, the former Congressman from Obama’s home state of Illinois is known as a hard-charging, brutally candid, sometimes combative, acutely intelligent man who can get things done and knows the ways of the Capitol and the boardroom.

The Enforcers
Perhaps second only to Obama in terms of her influence on boards and corporate governance, career regulator Mary Schapiro heads up the 75-year-old SEC. Before the crisis, the agency’s very existence was in question: “Obsolete,” “out of touch,” and “behind the times” were just some of the many terms uttered by detractors. The Commission, under former chairman Christopher Cox, was pilloried for missing the Madoff scandal.

As former SEC chairman and Directorship 100 Hall of Famer, Arthur Levitt described her: “She has the skills, the intellect, and the character to be a superb SEC chair.” But Schapiro will face a new kind of challenge in the role, not just that of proving her own qualifications, but also instituting a significant remodeling of the SEC itself, as she works to bring it into the new regulatory era.

Moving swiftly to address regulatory concerns in the wake of the financial crisis, the SEC has rolled out a series of proposals that could embody the biggest change to the rules of the game for directors in some time. Schapiro, who is no stranger to the boardroom, having served on the boards of Duke Energy and Kraft Foods, has overseen proposed rule changes on proxy access, broker voting, say on pay, and new requirements for disclosure on executive compensation and director qualifications. It’s now up to her and fellow commissioners Kathleen Casey, Elisse Walter, Luis Aguilar, and Troy Paredes to determine the final regulations that emerge from the proposals.

Other key players Schapiro has brought into the SEC include Senior Advisor Kayla Gillan, Chief Accountant James Kroeker, and Director of Enforcement Robert Khuzami. Gillan was a founding board member of the Public Company Accounting Oversight Board (PCAOB) and former general counsel to CalPERS. Kroeker joined the SEC as deputy chief accountant in 2007 from Deloitte and Touche where he had been a partner in the firm’s national accounting services group. Kroeker recently said that the proposed road map for the convergence of International Financial Reporting Standards,pushed to the back burner amid the larger issues of market reform, would be restored as another top priority. Khuzami is a former federal prosecutor, has pledged to improve the SEC’s enforcement performance by creating specialized units to provide “structure and resources for staff to ‘get smart’ about certain products, markets, regulatory regimes, practices and transactions.”

TARP Overseers
Another example of Obama’s preference for brains over politics was his reappointment of Sheila Bair to chair the FDIC. Another fiscally conservative Republican, on Bair’s watch alone this year, 94 banks have failed, creating a new challenge:  how to replenish the fund. Bair has also been an integral part of the team overseeing TARP. Neil Barofsky is a former New York assistant attorney general confirmed by the Senate in December as special inspector general. Dubbed the “TARP Cop,” his job is to figure out how and where the $700-billion TARP funds are spent, reporting directly to the President and providing updates to the Congressional Oversight Panel chaired by bankruptcy expert and Harvard Law School professor, Elizabeth Warren. COP’s first report, released in February, casti-  gated then-Treasury Secretary Henry Paulson for his performance and lack of transparency, reporting that the Treasury Department  had overpaid by $78 billion for the assets it bought from banks.

Interestingly, while Obama sponsored and was a strong proponent of  “say on pay” legislation while a senator, since appointing Kenneth Feinberg special master of compensation, he has appeared unwilling to make the issue a top priority. Feinberg, who has immersed himself in some of the country’s most troublesome and high-profile cases, is considered a superb choice, both in terms of skill and temperament, by Capitol Hill insiders. His most noteworthy case was the 33 months of pro-bono work he did following the 2001 terrorist attacks to determine how much each victim would receive from the federal government’s September 11th Victim Compensation Fund.

Feinberg may in fact be perfectly suited for a job that most compensation specialists see as thankless, and possibly as a “no win” situation. As the Obama Administration’s comp expert, Feinberg was called on to monitor the compensation of executives in what were once some of America’s most prestigious corporations, now TARP recipients, including American International Group (AIG), Bank of America, Citibank, Chrysler, GMAC, and General Motors.

Fed to the Rescue
To prevent American capitalism from spiraling deeper into the abyss, nine months after President Obama made his first Cabinet announcement, he re-nominated Ben Bernanke as Federal Reserve chairman. The former Princeton economics professor was selected by Bush in 2005 to succeed Alan Greenspan. In 2008 after the market crashed, Bernanke invoked emergency powers, slashed interest rates, and spent trillions of dollars to right the financial system. Just last month, he declared the recession “likely over.” Though he seldom gives interviews, Bernanke is never far from the public eye and has been a stalwart in the transition between presidential administrations and in the effort to stem the economic slide.

When then President-elect Obama named his economics team, it included players who, like Bernanke, were already steeped in the crisis details, demonstrated a studied understanding of Depression-era economics, or some combination of both. Enter Treasury Secretary Timothy Geithner and Chief White House Economic Advisor Lawrence H. Summers. Geithner, who is currently pushing legislation to provide more systematic regulation of financial institutions, including new limits on executive compensation, recently told one interviewer that he is optimistic major reforms will be passed.

Prior to his appointment replacing Henry Paulson, Geithner was president of the Federal Reserve Bank of New York and part of the team central to the critical negotiations that resulted in Bear Stearns being tucked into JPMorgan Chase, Merrill Lynch going to Bank of America, Lehman Bros. disappearing, and Citigroup and other struggling banks getting a lifeline.

Summers, the former Harvard University economist who became its president following his tenure as Treasury Secretary to President Clinton, is director of the Cabinet’s National Economic Council. The group was established in 1993 to coordinate and ensure that the President’s economic policy agenda is carried out.

Rounding out the team, Paul Volcker, the former Fed chief under Clinton, was selected to chair the president’s economic recovery advisory board. And Christina Romer, a former UC Berkeley economist, who administration sources suggest is well- regarded by both parties, chairs the Council of Economic Advisers. Her appointment was seen as a further triumph of brain over politics in Obama’s approach to talent recruitment.

“You don’t get a sense that there’s been a change of culture and behavior as a consequence of what has happened. And that’s why the financial regulatory reform proposals that we put forward are so important,” Obama said in a PBS interview in July.

On Capitol Hill, the so-called Shareholder Bill of Rights introduced by Senators Charles Schumer (D-NY) and Maria Cantwell (D-WA) incorporates proposals already proposed by the SEC, and then some. Its far-reaching provisions include say on pay, majority voting, and proxy access; annual director elections; splitting the role of the chairman and CEO; and the creation of a separate risk committee.

Against this backdrop, it is widely accepted that an annual nonbinding advisory vote by shareholders on executive pay at all publicly traded companies will become the law of the land. The measure was approved by the House in August and is expected to be taken up in the Senate.

In addition, the SEC has issued two sets of proposals—now subject to public comment until September 15—that would require greater disclosure on several fronts and “enhance” proxy disclosure and solicitation. Specifically, the SEC proposals include:

• Broader-based pay disclosures to provide more information about compensation policies beyond the named officers in the Compensation Disclosure & Analysis (CD&A).
• Disclosure on director qualifications including the experience, attributes, or skills that qualify them to serve on the board or specific committees of the board.
• Greater explanation of the company’s leadership structure, including why it is best-suited to the company and why the CEO and chairman’s roles are combined or split.
• More disclosure on the board’s role in risk management.-Disclosure of fees paid to comp consultants and services other than compensation consulting for officers and directors.

If adopted, these rule changes would become effective for proxy filings for a fiscal year ending after December 15.

The SEC also voted to approve an NYSE proposal to eliminate broker discretionary voting for all elections of directors, whether contested or not. This rule change would apply to shareholder meetings held next year.

On Capitol Hill, the so-called Shareholder Bill of Rights introduced by Senators Charles Schumer (D-NY) and Maria Cantwell (D-WA) incorporates proposals already proposed by the SEC, and then some. Its far-reaching provisions include say on pay, majority voting, and proxy access; annual director elections; splitting the role of the chairman and CEO; and the creation of a separate risk committee.

The Business Roundtable called the bill an “unnecessary intrusion into matters governed by state corporation law, the SEC, stock exchanges, and public company boards.”

“All of these measures are well intended, but they are misguided,” says Marc Rosenberg, a partner at law firm Cravath. He says they give more authority to shareholders, who don’t have a legal obligation to look out for the best interest of the company.

Others, including Thomas Quaadman of the U.S. Chamber of Commerce’s Center for Capital Market Competitiveness, argue that federal legislation is not about improving the corporate governance of poorly run companies, but rather “liberalizes rules so that activist investors can avoid costly proxy fights and elect their own directors instead.”

On July 31, 2009, the House of Representatives approved the Corporate and Financial Institution Compensation Fairness Act of 2009. Rep. Barney Frank (D-MA) introduced legislation that would require an annual, non-binding advisory shareholder vote on pay, as well as increasing regulatory standards related to compensation committee independence at all public companies. Certain provisions will also apply to certain financial institutions that intend to discourage excessive risks by imposing significant new restrictions on the use of compensation incentives.

The provisions on say on pay are expected to take effect during the 2011 proxy season. This would apply a year later than legislation proposed by the Treasury, attached to the Investor Protection Act of 2009, also introduced in July.

Key provisions of the House-approved bill are summarized below.

Say on Pay
Annual Shareholder Approval of Executive Compensation: All public companies must give their shareholders an annual, non-binding vote on executive compensation matters disclosed in the proxy statement for named executive officers, including the Compensation Committee Report, the CD&A, the compensation tables and any related
materials.

• PM&P Observation: Congressional opponents of this provision unsuccessfully sought to replace it with a triennial shareholder vote, rather than an annual vote – a concept originally proposed by the pension fund of the United Brotherhood of Carpenters and Joiners.

Shareholder Approval of Golden Parachute Arrangements: In the event of a change-incontrol transaction (i.e., acquisition, merger or asset sale), shareholders of public companies must be given a non-binding vote on any compensation agreements related to the transaction with named executive officers. This information must be provided in the transaction’s proxy statement in a “clear and simple form.”

Disclosure of Institutional Shareholder Votes: Any institutional investment manager owning at least $100 million of equity at some point during the preceding 12 months must annually report any vote it cast on an executive compensation or parachute arrangement, unless such vote would be publicly reported elsewhere.

Potential Exceptions: The SEC has discretion to exempt certain filers. As an example, the Act cites the potential impact on smaller reporting issuers (historically defined by the SEC as companies with a public float of less than $75 million).

Effective Date: The SEC must issue rules within six months of the Act becoming law. Shareholder votes would be required to be included in any proxies filed on or after six months following the promulgation of the rules.

• PM&P Observation: Importantly, mandatory Say on Pay for most public companies may well be pushed into the 2011 proxy season, unless the dates are amended as the bill is considered in the Senate.

Compensation Committee Independence
Stricter Standards of Independence for Members: To be considered independent, Committee members cannot accept any consulting, advisory, or other fees outside of pay received for their board service.

Compensation Consultants: Any compensation consultant retained by the Committee must be independent within standards to be established by SEC regulation. Importantly, such regulations must be “competitively neutral among categories of consultants” and preserve the Committee’s ability to retain the services of members of any such category.

Disclosure: Companies must disclose in their proxy materials whether the Committee retained and obtained the advice of a compensation consultant meeting SEC standards for independence. Interestingly, the final Act does not include language from an earlier draft that would have required an additional potentially awkward disclosure as to why a
Committee chose not to hire an independent consultant.

Authority of Committee Relating to Compensation Consultants, Counsel and Advisors: The Committee retains sole authority (but not the obligation) to hire, compensate and oversee the work of independent compensation consultants, counsel and other advisors. However, the Act is clear that the Committee is free to accept or reject the individual’s advice, and members remain obligated to exercise their own judgment in fulfillment of their duties.

Potential Exceptions: As with Say on Pay, the SEC can exempt certain filers from these requirements as it deems appropriate, giving consideration to, as in the earlier example, smaller reporting issuers.

Committee Funding: Companies must provide adequate funding, as determined by their Compensation Committee, for the hiring of independent compensation consultants, counsel or other outside advisors.

Study and Review: The SEC will conduct a two-year study, to be submitted to Congress, examining the use of independent consultants by Compensation Committees.

Effective Dates: Companies must meet the member and outside advisor independence standards within nine months of the passage of the Act, or risk delisting from the respective stock exchange. The disclosure requirements are effective for proxies filed on or after the first anniversary of the passage of the Act (in most cases, the 2011 proxy season).

Enhanced Reporting and Regulation of Compensation Incentives at Financial Institutions
Applicability and Definitions: This requirement only applies to “covered financial institutions,” defined as any depository institution, registered broker-dealers, credit unions, investment advisors, Fannie Mae, Freddie Mac and other institutions that the Federal regulator determines should be subject to this section. The Act defines a “Federal regulator” as the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Board of the FDIC, the Directors of the Office of Thrift Supervision, the National Credit Union Administration Board, the SEC and the Federal Housing Finance Agency.

Disclosure of Incentive Programs: Covered financial institutions must disclose to the appropriate Federal regulator the structures of all incentive-based compensation arrangements sufficient to determine whether they: (i) are aligned with sound risk management; (ii) account for the time horizon of risk; and (iii) meet other criteria deemed appropriate by the Federal regulator to discourage overly risky employee behavior that could threaten the safety and soundness of the company or seriously adversely affect economic conditions or financial stability.

Prohibition on Certain Incentive Arrangements: The appropriate Federal regulator will issue regulations prohibiting any incentive arrangements or features determined to encourage risks that could threaten the safety and soundness of the company or have serious adverse effects on economic conditions or financial stability. There is a limited grandfathering rule that would protect from government recovery any incentive compensation paid under an arrangement that is in place when the Act is passed and does not extend for more than 24 months.

Exceptions/Clarifications: Covered financial institutions with assets of less than $1 billion are exempt from the disclosure/prohibition requirements. The Act specifically states that companies are not required to report compensation provided to any individual employee, and also clarifies that companies do not need to make disclosures under this section if they do not have incentive-based payment arrangements.

Study: The Comptroller General will study the relationship between compensation structures and excessive risk taking, focusing on: (i) compensation structures used between 2000 and 2008; and (ii) a comparison of companies that failed, or nearly failed, to companies that remained viable throughout 2007 and 2008, including the compensation practices of such companies. The Act defines companies that “failed or nearly failed” as those that received “exceptional assistance” under the TARP (AIG, Citigroup, Bank of America, Chrysler, GM, GMAC and Chrysler Financial), and companies that participated in the AIFP, TIP, AGP and SSFI Programs. It also includes Fannie Mae, Freddie Mac and companies that participated in the SEC’s Consolidated Supervised Entities Program as of January 1, 2008.

Effective Dates: Federal regulators will complete regulations for these requirements within nine months of the Act’s passage, and the study of incentive use will be completed within one year of passage.

Conclusion
A battle is anticipated over the details of this House-passed bill, particularly the regulation of financial sector compensation incentives, when it is considered by the Senate this fall. While Say on Pay is not a new concept, having passed the House by a substantial margin two years ago, the regulation of compensation incentives in the financial sector–especially for those companies that did not receive government assistance–is expected to be a significant stumbling block. Government interference in private contracts (as in the recent AIG saga) remains a highly controversial issue and one the Treasury chose not to attach to its own draft of Say on Pay legislation. We will continue to closely monitor and update the status of this legislation.

Pearl Meyer & Partners is an independent compensation consultant.

“I am shocked that in this time of extreme financial crisis for the bank that you would spend the time and legal expenses to challenge a resolution of this sort when the bank could simply ask the proponent to withdraw in light of the fact that you were now implementing the advisory vote,” wrote Tim Smith of Walden Asset Management in a letter to BofA executives. Walden was behind one of the say-on-pay proxy initiatives. “Is this a sign that bank executives don’t even know how to have a simple conversation with their shareowners to work out a basic agreement?” he scathed.

The BofA case highlights a well-known fact in the relationship between boards and shareholders: what we have here is a failure to communicate. The financial crisis and swooning stock market have heightened investors’ hunger for more information on corporate governance issues. Frustrated shareholders unsatisfied with structures in place for executive compensation, CEO succession planning, board nominations, and other hotly debated governance issues, are calling for a forum to voice their concerns directly to the board. “The collapse of the economic system has everyone talking about corporate governance… boards need to have a rational dialogue with shareholders,” says Stephen Brown, director and associate general counsel of corporate governance at TIAA-CREF.

Currently, the majority of boards do not have an open forum in which both sides are receptive and willing to meet to hear the other side’s concerns. Proxy resolutions, viewed today by some activists as a way to “knock on the door” of boardrooms, could instead become a last resort should changes be made in how investors and directors communicate with one another.

The news is not all bad. According to a recent survey by Spencer Stuart, data collected over the past 10 years from proxy reports filed by S&P 500 companies and surveys of corporate secretaries and general counsels found that 45 percent of respondents reach out to shareholders in some way. However, despite this number, only recently has progress been made toward regular dialogue that seeks to find middle ground between boards and investors. Pfizer was something of a test case in 2007, when it planned a meeting with large shareholders to discuss governance issues. Last summer, UnitedHealthcare Group created an advisory committee to allow shareholders to suggest new directors. PepsiCo signed a broad set of governance guidelines last June known as the Aspen Principle, which includes a promise to facilitate more communication with their shareholders. The boards of Home Depot, Hewlett-Packard, and Northrop Grumman have held dialogues with shareholders on compensation issues or even to discuss board nominees.

The Reg FD Effect

These companies are still the exception rather than the rule. Over the last several years, major changes have occurred that have curtailed the amount of information disclosed to investor groups. Barry Genkin, partner at Blank Rome, who has advised CEOs, boards, and audit and compensation committees in proxy battles, believes a lot of the unrest began when regulation prevented the amount of information companies made public, known as Regulation Fair Disclosure or Reg FD. “Companies used to meet with analysts and those analysts would write up reports,” says Genkin. “After new regulations intended to prevent ‘selective disclosure,’ companies were limited to only information they could place in an 8-K or press release.” Instead of working out other ways to inform investors, companies simply sent out less information, he says.

Edward E. Lawler III, a professor at the University of Southern California Marshall School of Business and founder and director of the University’s Center for Effective Organizations, believes that the SEC’s more recent efforts to push companies for more disclosure has backfired. “In a failed effort by former SEC chairman Christopher Cox, who pushed for more disclosure—what he got was more paper,” argues Lawler. “It backfired. With 30-page proxy statements, I don’t think people became more knowledgeable.”

“Information didn’t dry up,” adds Genkin. “But it wasn’t as robust.” Overall, Genkin agrees that companies have not dealt well with the disclosure requirements to investors. “A constant communication mechanism needs to happen,” says Genkin. “Enlightened companies who are aware of their company’s communication shortcomings need to be very aggressive.”

Some experts think that boards will soon have little choice but to communicate better with large shareholders. “Early on, investors were rebuffed because they were coming from a single direction,” says Patrick McGurn, special counsel at proxy advisory firm RiskMetrics Group’s ISS governance services unit. “Investors were reaching out and directors did not reach back.” McGurn emphasizes that the old way of communication is being absolved. He advises boards to open the door to large investors, and he says progress is being made, with some boards more actively connecting with their largest shareholders and telling them the changes their board is looking to make. “[Directors] want to stop any backlash that might happen when such information is actually disclosed in a proxy statement,” says McGurn. Establishing an open line of communication could help directors and investors avoid lengthy and costly proxy battles later on.

Last year, the National Association of Corporate Directors assembled a blue-ribbon commission on board and shareholder communications. Among its many recommendations was that the governance committee should have oversight of board and shareholder communications and make efforts to ensure that they are open, candid, and productive.

Pfizer’s Breakthrough

The concept of open communications is not new. As far back as 1992, Martin Lipton, a partner at Wachtell, Lipton, Rosen & Katz, and an opponent of “excessive” input by investors, and Harvard Business School professor Jay Lorsch called for the boards of U.S. companies to “meet annually in an informal setting with five to 10 of the larger investors of the company,” according to the paper, Talking Governance: Board-Shareowner Communications on Executive Compensation, co-authored by Stephen Alogna of Deloitte & Touche and Stephen Davis, project director at the Millstein Center at the Yale School of Management and the founding editor of Global Proxy Watch.

“The collapse of the economic system has everyone talking about corporate governance…boards need to have a rational dialogue with shareholders.

- Stephen Brown, TIAA-CREF

“It’s still a very slow and very rare process in the United States for boards to open up dialogue,” says Davis. “The investor relations function tends only to get investors to buy shares when pushing out information, but a two-way dialogue is what is needed.”

An important step toward opening the lines of communication occurred in 2007, when pharmaceutical giant Pfizer’s board decided to plan a meeting with larger shareholders for the sole reason of discussing governance issues. “When it comes to finding channels and pioneering ways of opening dialogue, Pfizer is a good example,” says Davis. Pfizer’s board met with 30 of its largest investors and took questions from them on corporate governance issues. “This is not about strategy, and it’s not about a dog-and-pony show,” Margaret “Peggy” Foran, former senior vice president of corporate governance, associate general counsel, and corporate secretary of Pfizer, said at the time. “[The board] just wants to gather as much information as possible to make the best decisions. I never thought of listening as a dangerous sport.”

Foran, now vice president, general counsel, and corporate secretary of Sara Lee, believes that eventually Sara Lee will follow the example set by Pfizer. She believes informal “listening exercises” involving large investors, lead directors, the CEO, and executives like herself, can lead to an official meeting, such as Pfizer’s. With many issues investors are seeking to address, boards realize that shareholder groups are diverse—and not everyone is going to leave the table happy.

Pfizer director Suzanne Nora Johnson agrees that creating a dialogue can be a positive step in building trust between boards and stakeholders. Yet, she says, the board serves a broad range of sometimes competing stakeholder interests, and it cannot select the ideals of a few at the expense of the many. “There are many different types of stakeholders,” says Nora Johnson. “You have to listen carefully and best evaluate whether the stakeholder has both short-term and long-term interests.” Since the 2007 meeting, the Pfizer board has not met again with shareholders apart from the annual general meeting, scheduled for April. But Nora Johnson says the board found the experience to be beneficial and says it will hold similar meetings again in the future, either annually or biennially.

“I think you will see a lot more informal [meetings between shareholders and directors],” says Foran. “For the past five or six years, boards have gotten more involved, with the help of shareholder proponents like RiskMetrics.” Moreover, Foran says, it’s becoming noticeably routine that all board members are attending annual meetings rather than only a select few.

Yet some directors do not agree that such meetings can be productive. Ashok Shah, a director at Sapient, a technology consultancy, thinks that opening the lines between directors and shareholders could create static. “I believe strongly that the relationship with the shareholder should be with one body in the company,” he says. “Today it’s mostly the CEO and the management team, and having that one relationship with the shareholder is the most productive and healthy method, rather than introducing one more conversation with the board. Otherwise, you have two teams talking with shareholders, which could lead to confusion and contradiction.”

J. Thomas Presby, a director who serves on multiple boards, including American Eagle Outfitters and Tiffany & Co., isn’t sure if greater communication is the answer. “At this moment, I’m not persuaded. I’ve attended a lot of annual meetings; most are orderly, and there are some but not a lot of questions. No one has stood up and said they need more communication,” he says.

To be sure, shareholders are a varied lot, often equipped with competing agendas and different views on governance. Genkin warns of the shareholder wolves in sheep’s clothes—the investor who is only interested in short-term performance. From his experience, there are shareholders out there looking to pursue their own aims under the guise of everyone’s interest. He notes that boards can hone in on who is legitimately concerned with the company’s long-term well-being and those looking for fast returns. Careful listening is required. “I’ve had activist shareholders approach boards saying ‘we’re your friends,’ while offering views that could be useful to the board,” says Genkin. “Some of the ideas of activist shareholders have become beneficial to the company and it becomes a win-win.”

Good Listeners

Many directors are warming up to the idea of establishing better communications with investor groups. Last fall, Bonnie Hill, a director at Home Depot, told a gathering of directors at an NACD conference: “Directors are accountable to—and should be responsive to—shareholders.” She said it should be the lead director or committee chairs who meets with large shareholders and that the talks should be structured and well planned. “The chairman or CEO should be the first point of contact. Then I think there are directors who might be clearly involved, such as the chair of the compensation committee. But it’s important to identify in the boardroom what kind of communication will take place—and who will do what.”

Some directors say that any outreach should be more of a listening exercise for boards than engaging in a back-and-forth dialogue. “It would certainly benefit the company if there were a more open line of communication between shareholders and directors,” says Charles “Randy” Whitchurch, a director at SPSS and Scan Source. “But this should be more of a one-way conversation, the board ought to be hearing the shareholders. I do not think the board should be the voice of the company speaking to shareholders; that’s the role of management. I think the danger of having a conversation is that it will become more of a two-way debate. Directors aren’t always as tuned into what the company’s message is. You run the risk of directors going off message…having been a CFO of a public company for 17 years, it was very important that we followed clear protocols on who and how we communicated with shareholders.”

Thomas C. Wajnert, lead director at Reynolds American, agrees that the focus should be on gathering feedback from shareholders. “Yes, they should be communicating, but I think it should be in the context of listening,” he says. “I think where the board has to draw the line is engaging in a debate—the board needs to be in listening mode.” Governance Road Show Opening the lines of communication means going beyond a telephone call or email. TIAA-CREF’s Brown suggests a “governance road show,” where a combination of general counsels, corporate secretaries, and lead directors, go out to meet with their investors. The hope is that relations will improve and become more accessible if investors know senior leaders in the company are interested in their concerns. “One firm we work with sends its general counsel to make the rounds with its large investors,” says Brown. “The feeling on our side is: we have access and feel as comfortable picking up the phone as he does.”

“I think the dangers of having a coversation is that it will become more of a debate. Directors aren’t always as tuned into what the company’s message is. You run the risk of directors going off message.”

- Charles “Randy” Whitchurch

Boards are expected to enact a more proactive role in listening to issues concerning shareholders. Experts believe that boards who refuse to adjust their communications strategy risk repercussions during proxy season. “The boards who are worried [about lack of communication with shareholders] are who should be least worried,” says Nell Minow, editor and co-founder of The Corporate Library. “Those who aren’t worried…they’re in trouble.” Minow advises that boards be open to more frequent dialogue, even if that means overhauling the way business is done.

Once the doors to dialogue are opened, rather than a lot of “babbling,” says Foran, it is better to seize the opportunity and narrow the criteria. “Shareholders should use the dialogue constructively— not micromanage,” she warns. “If boards allow shareholders to use the opportunity to talk as a weapon, boards are not using their fiduciary duty in the correct way.” Foran believes that in most cases, investors are trying to learn and understand—not attack. She notes some companies are initiating dialogues before a crisis rather than fending off shareholders made angrier because they feel ignored.

There may be another reason to for boards to seek more open communications with shareholders: majority voting. Some experts think that shareholders may withhold votes for directors who they perceive to be unopen to hearing their concerns. “There is a carrot and stick equation with communicating—with majority voting being the stick,” says McGurn. “If companies don’t dialogue when they’re approached by investors, they’ll see some effort to withhold or vote against.” If that begins to happen, some directors may be putting their largest shareholders on speed dial.

U.K. Treasury chief Alistar Darling noted that while the current regulatory framework for the banking system would remain largely unchanged, new rules and stricter punishments will ensue, reports The Wall Street Journal.

Darling’s plan will cost banks more, which will need to set aside more capital to cover losses. Banks will have to build up capital buffers during good economic times in order to accrue a cushion should the economy falter going forward.

The government also backed a newly created code on banker’s pay that was devised by the U.S.’s financial regulator, the Financial Services Authority. The code is designed to alighn pay with long-term profit by deferring bonus payments—however it will not cap pay.

Politicians and some analysts are worried that there aren’t enough changes as the system was designed 12 years ago by Prime Minister Gordon Brown—which allowed the crisis to occur with its failure to curtail excessive risks and debt.

Obama’s recent appointment of an executive compensation czar to oversee pay at companies that have received federal assistance could result in the government’s eventually dictating executive compensation practices for all companies, reports the Dallas Morning News.

“This is the type of thing that could be a nice great experiment, and they may decide that if the rest of America can’t get its act together, there may be something similar coming through,” said Bruce Ellig, author of The Complete Guide to Executive Compensation. “This could be a broad-gauge extension across industries.”

Kenneth Feinberg is the new czar who will set the pay for 175 top executives at seven companies that received federal assistance.

While Feinberg may not be concerned with the 100 largest companies in Dallas-Fort Worth, Congress might directly influence executive pay.

The top paid Dallas-Fort Worth executive was Keith Hutton, CEO of XTO Energy, a Forth Worth-based natural gas company. Hutton was paid a total of $29.7 million, which includes his base salary, cash incentives, long-term stock or option awards, change in pension value, nonqualified deferred compensation and any other compensation.

Feinberg’s recent appointment may be the first step in which the government has more oversight over executive compensation.

Sprinkled with debate over pollution and the company’s human rights record, Exxon Mobil and Chevron’s shareholders rejected all proposals at their annual meetings. Chevron CEO David O’Reilly told one group that its report on Chevron’s policies “deserved the trash can.”

Chevron’s shareholder meeting was much more eventful than Exxon’s as hundreds of protesters gathered outside, blocking the entrance. Protesters claim that Texaco, which Chevron bought in 2001, poisoned large areas of rain forest in Ecuador by dumping billions of gallons of waste, causing cancers and birth defects. Chevron said that Texaco spent $40 million on environmental cleanup and had been cleared of liability by the Ecuadorean government.

Proposals at Chevron for say on pay and a more detailed human rights policy were rejected. Exxon’s shareholders rejected a total of 11 resolutions, including separating the roles of chairman and CEO, say on pay, and detailed environmental plans to avoid climate change.

Exxon shareholders took the microphone to both negate the validity of global warming as well as provide support for it.

A rejected proposal asking for a detailed compensation report, presented by Mary Mather from an executive money management firm in Boston, asked why CEO Rex Tillerson’s compensation was so high in 2008. Such a report was voted down with only 11.6 percent voting for the measure and 88.4 percent voting against.

Despite public outrage at excessive executive pay, so far at this year’s annual meetings investors have generally voted in favor of company packages, reports the Cincinnati Enquirer.

“It turns out (U.S.) shareholders may be more accepting of how things work than the perception really is,” said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware.

Across the Atlantic however, five companies in England have lost shareholder votes on executive pay this year. The latest came today when oil company Royal Dutch Shell Group’s pay plan was rejected. While investor support remains strong in the United States, the number of shareholder proposals asking for a nonbinding investor vote on executive pay has doubled since 2007 to more than 100 this year.

The Securities and Exchange Commission proposed making it easier for shareholders to nominate directors for ballots of public companies. Investors owning as little as one percent of the 700 largest U.S. companies would be able to put their board nominees on the annual proxy ballot sent to all company shareholders, under the new SEC proposal.

The annual general meeting at Qwest Communications International concluded with the company’s shareholders rejecting a proposal to allow an advisory vote on executive compensation, according to CNBC.

Though the phone company’s vote drew an impressive number of proponents, with 31 percent of shares voting in favor of the amendment, it wasn’t enough to win passage.

The issue of special meetings also came close to approval, with 47 percent of shares voting in favor of a provision that would have given share owners with 10 percent or more of Qwest shares the ability to call special meetings.

Although the “say on pay” vote was advisory, had the vote gone the other way, CEO Ivan Seidenberg and other executives could have found themselves blanketed with embarrassment. A leading critic of the compensation said afterward that the 90-percent vote in favor of the package shows that most shareholders are pleased with Verizon Communications, which has posted consistent profits.

“They can always do better,” said Bill Jones, president of the Association of BellTel Retirees, which tried to marshal opposition to the pay package. “And this is one of the areas where we can continue to work with them.”

Seidenberg’s compensation was valued at $20.2 million in 2008, essentially the same as in the previous two years.

Verizon is one of 15 companies adopting its own provisions this year for allowing shareholders vote on pay.

Verizon Communications becomes the latest company to hold a “say on pay” vote, reports the Associated Press.

At Verizon’s annual meeting in Louisville, Kentucky, shareholders will decide whether they approve the pay package for CEO Ivan Seidenberg and other top executives at the phone company.

While the company isn’t obligated to do anything in response to a no vote, a rejection by shareholders could influence the board. Should a no vote be ignored, calls to oust board members could ensue.

Verizon is one of the 15 companies adopting their own provision for letting shareholders vote on pay this year. Troubled Assets Relief Program fund recipients are also required to conduct similar votes.

Seidenberg’s salary is not viewed as obscene especially in light of the company’s consistent profits. A no vote is unlikely. His salary was valued at $20.2 million in 2008, not varying much from the prior two years. He is the best-paid CEO in the U.S. telecommunications industry, though much of his compensation is in stock that has fallen in value since it was granted.

Shareholder advisory group RiskMetrics has supported a yes vote, to the company’s advantage. The group recently recommended a no vote at Motorola, which gave investors their first say on pay vote on Monday, but 64 percent voted yes.

Intel will also provide say on pay at its annual meeting on May 20.

A number of companies have reacted to shareholder and public criticism by reducing director pay. Some directors have made efforts to preemptively dock their own pay.

However, George Davis, partner at Egon Zehnder International, writes in The Wall Street Journal, that boards should not feel obligated to reduce their pay. The current economy has launched unparalleled problems for directors and companies must be able to recruit and retain qualified directors.

Davis argues that boards do not serve on boards for the pay. In fact, prominent directors have generally already achieved a high degree of success in their careers and have a lot more to lose. Reputations that took decades to build can be tarnished easily in a volatile economy.

He notes that much of the criticism geared toward directors is a result of a lack of knowledge of the type of personal investment of time and energy directors are required to utilize when serving on the board of a leading company.

Ultimately, if the best directors are discouraged from serving, it will have a domino damaging affect. While shareholders should make themselves heard, argues Davis, shareholders should focus on best corporate governance practices as opposed to only director compensation. He adds that directors should be applauded and compensated fairly for the time and effort invested.

Apple investors will get an advisory vote on executive compensation, reversing an earlier announcement in which the company said the “say on pay” proposal failed to get enough support at the most recent shareholder meeting, according to the New York Times.

The company said that the report it filed with the Securities and Exchange Commission reported voting percentages for several shareholder proposals incorrectly, including it’s voting percentages on say on pay.

The pay proposal was approved by about 52 percent of the shares cast, 266 million were in favor and 249 million were against. Apple will begin a say on pay vote next year.

France’s finance minister warned against hurried rules to curb excessive executive pay as President Nicolas Sarkozy told business leaders to change their behavior or face legislation.

“We should not rush into ill-informed, speedy and not necessarily efficient legislation,” Christine Lagarde, French finance minister, told the Financial Times.

Sarkozy has told business that if they do no agree to new guidelines to limit bonuses and options at underperforming companies by the end of the month, he will legislate.

Laurence Parisot, head of the employers’ federation Medef, argued there is no need for new curbs as the governance code agreed last October.

“It is not acceptable that executives who have failed or whose companies are in trouble leave a company with a payoff,” she said.

Her arguments have influenced some members of the government. “There are rules already that need to be enforced,” Lagarde said, referring to the code but also the government’s legislation on pay last year. “If anyone does not respect those rules we need to be strong and firm.”

Federal and state policy makers are advancing plans to give shareholders more power in corporate boardrooms, according to the Wall Street Journal.

The Securities and Exchange Commission, Congress, and legislators in Delaware are working on measure that would give shareholders more clout in the boardroom.

These steps could bring about the most significant corporate governance changes since the 2002 Sarbanes-Oxley law passed after the blunders of Enron and WorldCom.

The SEC is working on a series of proposals that would make it easier for shareholders to nominate directors. Congress has set its sights on executive say on pay and Delaware legislators are moving to amend the state’s corporate law to gear more power toward shareholders.

“Those two changes are an extremely big shift,” said Charles Elson, director of the University of Delaware’s Weinberg Center for Corporate Governance. “It changes the balance in the election process.”

David T. Hirschman, a policy executive at the U.S. Chamber of Commerce, the nation’s largest business lobby, told WSJ that proxy access could hurt companies. “The system is designed for shareholders to entrust the board to do the job right,” he said. “Anything that makes it harder for that to happen is a step backward.”

The SEC could propose a proxy-access rule by mid-May. It’s weighing three options, one that would allow certain shareholders to directly nominate directors on corporate ballots; allow those shareholders to submit proposals that if approved, would allow them to nominate directors; and it could also propose a combination of the two alternatives.

On Capitol Hill, House Financial Services Chairman Barney Frank is planning to introduce a bill that would give shareholders a nonbinding vote on say on pay. A new law requires say on pay at financial institutions that receive government aid.

Richard Ferlauto, director of corporate governance and pension investment at the American Federation of State, County, Municipal Employees, told WSJ that discussions on Capitol Hill about pay caps and bonuses “wouldn’t be on the table now” if boards better controlled compensation. “The boards brought this on themselves,” he added.

Edward J. Durkin, a governance official at the United Brotherhood of Carpenters, said say on pay will distract from “thoughtful investigative work on comp plans.”

Together “we”, the whole investment chain, are the owners of corporate America and we should act like it. “We” have ducked our responsibility to halt compensation excesses in the financial sector and, to a certain extent, sections of the rest of corporate America. Now that compensation has come front and center in the wake of a crisis which has not only exposed its flaws, but did so on national network television, activation is essential. Not just because compensation at excessive levels is unacceptable to most of the beneficiaries—us—(which is reason enough), but because compensation is a politically attractive ground for regulation.

We should act now to re-establish the public trust in business and our enterprises. If we do not, we will face a regulatory response that can never accommodate all the unique individual circumstances of every company and industry. I believe any regulation will be so “swiss cheesed” in content, or by innovative interpretation, as to be ultimately ephemeral and ineffective.

“We” have ducked our responsibility to halt compensation excesses in the financial sector and, to a certain extent, sections of the rest of corporate America. Now that compensation has come front and center in the wake of a crisis which has not only exposed its flaws, but did so on national network television, activation is essential.

But unless we act swiftly, history teaches that regulation seems inevitable given the public anger at excessive compensation. This is not just because it is a part of the economic downturn, but because it is the part the public understands best.

There seems to be a natural recurrent cycle for corporate governance crises: crisis, regulation; another crisis, more regulation; yet another crisis, and still more regulation. Today’s crisis involves the one issue the public is in total agreement about, excessive executive compensation, so naturally, regulation is hovering.

The regulation which followed each crisis might have been avoided. Boards of directors would have needed to be attuned to, or at least just aware of, the temper of the times and perhaps, simply, a common sense of right and wrong.

Examples abound but I will just mention two. The Foreign Corrupt Practices Act of 1977 was enacted following an SEC investigation and subsequent public disclosures of bribery. Was a statute carrying criminal penalties needed to convince boards that bribing was not an acceptable method of doing business? More recently, the regulatory response to crisis included passage of the Sarbanes-Oxley Act in 2002, an event which is particularly painful to me. Just a few years before Enron, John Whitehead and I chaired a Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees. The Committee unanimously recommended improvements in audit committee practices to reform the growing bookkeeping gyrations that were in use at the time. The recommendations were not generally adopted. Then came Enron et al. and the Congressional hearings that ensued. What began as our suggested voluntary practices quickly became legislated “musts” for board audit committees.

And here we are again. Who didn’t know that compensation practices had grown out of hand? Certainly the public did and complained, to no avail. As did a number of major shareholders often derided as “activist” troublemakers, but they were essentially ignored. Meanwhile all forms of compensation, in and beyond the financial sector, continued to grow, as did the distance in compensation between executive management and the factory floor.

Why did many boards fail to respond? Principally because, I believe, they chose to be tone deaf, and paid little attention to the too quiet voice of shareholders. Instead they were complicit, relying on the easy “everyone else is doing it” excuse during the high-flying era which has just collapsed.

Now the new crisis, and the bonus practices of some top-drawer bankers has brought in a troubled President ready to act on our behalf. The President, quite understandably, set forth new regulation containing direct compensation caps and related restrictions for bailed-out corporations.

Moving forward, it would be useful for us to remember the end of the ownership chain is the board of directors, the ultimate fiduciary for shareholders of every stripe. Compensation has always been the board’s responsibility. If they cease to be tone deaf, boards across the corporate spectrum will pick up the challenge and voluntarily bring compensation back to earth, before Congress, which isn’t tone deaf on this issue, moves in with broader “reforms.”

What may it take to drive spine into the board room on the compensation issue? First and foremost, pressure from the institutions that represent all of us as their beneficiaries. Those institutions, individually and as a group, generally own enough stock, directly or indirectly, to be “heard” by their investees. And we, the provider of savings to the institutions have the voice, and legs, to encourage them to be heard.

Communication with boards is available to the institutions through informal and more formal means such as proxy resolutions. Majority voting is available to shareholders of many corporations to remove compensation committee members. Public bull horns are effective. A nudge from government may come in legislated rights for shareholders to have a “say on pay” which I believe is useful, but not critical, for those institutions who seriously want to communicate with a Board. Those institutions need not await legislated “access” to place their own directors on a board, if they are serious about protecting us, their beneficiaries, rather than the boards and managements of their investees.

We know that all shareholders and taxpayers have the voice to act on compensation now.

Do they have the will?

Ira M. Millstein is the senior associate dean for corporategovernance at the Yale School of Management, and senior partner, Weil,Gotshal & Manges LLP. He is a member of the board of the National Association of Corporate Directors and has lectured and written extensively on corporate governance.