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April 27, 2012
Power of the Proxy Confirmed at Citigroup
    by Robert Kropp

In the aftermath of the shareowner vote against Citigroup's executive compensation package, Mark Regier of Everence Financial talks with about the evolution of say-on-pay.

Last week, shareowners at Citigroup's annual general meeting delivered a resounding vote against the executive compensation package proposed by management, as 55% turned down a proposal to pay CEO Vikram Pandat $15 million, despite the fact that Citigroup's share value fell by 44% last year. The historic vote marks the first time that a say-on-pay proposal by management was defeated at a so-called too big to fail bank.

For years, sustainable investors have been calling attention to the growing discrepancy between executive compensation and both firm performance and the overall state of the economy. They were among the leading voices calling for the mandatory vote on say-on-pay that the Securities and Exchange Commission (SEC) implemented last year. It may have taken mainstream investors a year to acknowledge an important evolutionólast year, investors supported management proposals more that 90% of the time, according to Institutional Shareholder Services (ISS)óbut the vote at Citigroup indicates that they have begun to join with sustainable investors in articulating shareowners' concerns.

ISS recommended that shareowners vote against the compensation package at Citigroup, stating, "Pandit's 2011 incentive pay and multiple retention awards are substantially discretionary in nature or lack rigorous goals to incentivize improvement in shareholder value."

Everence Financial, a faith-based provider of financial services headquartered in Indiana, has been on the front lines of the debate over executive compensation and other proxy access issues for at least a decade. talked recently with Mark Regier, Director of Stewardship Investing for Everance, about the Citigroup vote and the evolution of shareowner action on executive compensation in general.

"Ten years ago, SRI mutual funds began publicly disclosing our proxy votes and the policies we use to cast them," Regier said. "Now it's a requirement that investment advisors have a proxy voting policy and make their voting records available to those that request them. So we've brought a level of transparency and accountability that had been lacking to the investor community. Access to the proxy and having the right to vote has become part of the assets and maybe part of the fiduciary duty that we as investors carry."

"Right before the financial collapse, social investors were bringing forward voluntary say-on-pay resolutions at corporations," he continued. "Then we had the financial collapse and corporations had to agree to say-on-pay resolutions on their proxies until such a time as they regain shareholders' trust. Now that's grown into a requirement. You have a rolling up of accountability, from the investors and through the policies they've put into place."

Among the first engagements with which Everance was involved following the financial crisis was at Goldman Sachs, which, Regier pointed out, even admitted that its actions contributed to the collapse.

"They were preparing to return their bonus system to pre-collapse levels. How could that possibly be?" Regier asked. "We saw that they were going to give more money in bonuses to the staff than shareholders would take."

In an increasingly centralized global economy, Regier observed, corporations wanted to lavish unreasonable rewards to executives instead of providing health care to its rank-and-file workers, for instance, or contribute to the communities in which they operate.

"Now you're seeing a burst of information from a variety of research houses that help us know what to say, now that we have say-on-pay," he said. "In a world where everyone is paying attention to pay for performance, faith-based investors are asking if that's sufficient. Is paying someone millions of dollars a year really about whether the company made money or not? Or do we need to say that paying someone twenty million is unnecessary?"

Even in the UK, where behind-the-scenes engagement is far more prevalent than the filing of shareowner resolutions, "The Church of England has voted on a number of remuneration packages purely on a justice basis," Regier said. "So the question will be where people are going to draw the line."

"I think this is only just beginning," he said. "Knowing that you have serious investors willing to say no, that are willing to go against the grain, opens the door for new arguments and assessments to be put on the table. It used to be that compensation consultants were the only party having any say about how much executives get paid. But we're now at a point where there are other voices in this process. At the end of the day, the votes are advisory, but corporations are coming to recognize how powerful those other voices can be."

"I expect there will be more of these negative compensation votes going forward."

Whether a trend has indeed been established will become clearer on May 9th, when shareowners at Bank of America vote on the compensation package for CEO Brian Moynihan. Bank of America has also struggled financially in the last year.


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