Five Questions: GMI's Nell Minow on Say on Pay

Heightened regulations, say on pay and a call for the separation of powers in the boardroom are having an impact on corporate governance like never before, says corporate governance expert Nell Minow. A board member of GMI, co-founder of its predecessor firm the Corporate Library, and former president of Institutional Shareholder Services, Minow spoke to Institutional Investor contributing writer Carrie Coolidge about how she can tell a lot more about the independence of a board of directors from its CEO compensation plan than from looking at the resumes of its members.

1. Do you think shareholders can have confidence in today’s corporate governance system?

Companies that understand the substance of corporate governance will improve the criteria and procedures for selecting, evaluating and compensating directors. No director will be permitted to serve without the support of a majority of shares voted. Nominating committees will be open to suggestions from significant, long-term shareholders and will be more transparent about the qualifications and contributions of board members. And pay will be evaluated and justified like any other asset allocation.

2. Should there be greater separation of powers?

The problem with CEOs acting as chairmen of the board is that it gives them control over the agenda and the quality, quantity and timing of the information provided to the board. I have no problem with the CEO serving on the board or even acting as chairman as long as the board addresses those issues.

3. Dodd-Frank has a lot to say on executive pay ratios and clawback policies to recover incentive compensation.

It sure does. I am encouraged by a recent ruling in an Ohio case challenging a pay plan based on a “no” vote toward say on pay and by the revisions some companies have made to their pay plans to avoid a no vote. But I am concerned that the pay-performance link is weakening overall. Clearly, meaningful change will not happen until members of compensation committees that approve poor comp plans are individually targeted. Their names are being mentioned in press reports on pay and I believe investors will begin to focus on removing them from boards.

4. What are the qualities of corporate boards that pose the biggest risk to investors?

I can tell more about the independence of a board from the CEO compensation plan than from looking at their resumes. In general, directors who do a better job in risk management have a substantial amount of their own capital at risk, are not overboarded, have strong business credentials and are not afraid to say no to the CEO.

5. What’s new with say on pay?

The experience of the first year of  say-on-pay votes showed that the fears of opponents to giving shareholders an opportunity for an advisory vote on executive compensation were unjustified. Lobbyists tried to jettison say on pay from Dodd-Frank, claiming that the business leaders who objected to giving shareholders a nonbinding vote on executive compensation were wrong. They said shareholders did not care and that they were not sophisticated enough to understand the complexities of executive compensation. But the evidence of the 2011 proxy season demonstrated conclusively that they do care and are able to tell the difference between a pay plan that may be excessive and one that has a material negative impact on shareholder value.