The Association of Senior Human Resource Executives
April 18, 2007
The Honorable Spencer Bachus
U.S. House of Representatives
2246 Rayburn House Office Building
Washington, DC 20515-0106
RE: HR Policy Opposes H.R. 1257, Shareholder Vote on Executive Compensation Act
Dear Representative Bachus:
On behalf of the HR Policy Association, I am writing to urge you to vote no on H.R. 1257,
the Shareholder Vote on Executive Compensation Act, when the House considers it this week.
We believe that the bill will have significant negative effects on corporate governance and will
not appreciably increase shareholder input into the executive compensation process.
HR Policy Association is a public policy advocacy organization representing the chief human
resource officers of over 250 leading employers doing business in the United States.
Representing nearly every major industry sector, HR Policy members have a combined U.S.
market capitalization of more than $7.5 trillion and employ more than 18 million employees
world wide. Our members are especially concerned that a shareholder vote would undermine the
authority of the Board of Directors with respect to compensation and is unnecessary as a tool to
increase communications with shareholders.
At the outset, it is important to note that last year, the U.S. Securities and Exchange
Commission completed an overhaul of its executive compensation disclosure regulations. The
full effect of these changes on executive compensation practices will not be known until after the
2009 proxy season, the first year in which companies will have to present three years of data. At
a minimum, the House should defer any action on the legislation until after the effect of the new
rules can be fully evaluated.
The Association believes that H.R. 1257 would seriously erode the authority of the Board of
Directors to determine appropriate executive compensation levels. Under our system of
corporate governance, the Board manages the company on behalf of the shareholders. In turn,
the shareholders have the right to vote on strategic matters, such as mergers, and remove
directors if they believe the corporation is not being managed in the shareholders’ best interests.
This delegation of authority is necessary because of the considerable amount of detailed and
confidential information that Board members must consider when making decisions regarding
corporate strategy and executive compensation. Providing a shareholder vote on compensation
would be unprecedented because it would provide a referendum on the results of the Board’s
decision, rather than on a framework for making decisions, as occurs in the case of shareholder
authorization for equity compensation or mergers.
More importantly, a shareholder vote would potentially open up other Board decisions to a
shareholder vote, such as the decision to pursue merger talks or settle certain lawsuits, thus
substantially slowing the ability of the Board to make quick decisions and undermining
The Honorable Spencer Bachus
April 18, 2007
Fundamentally, an advisory shareholder vote would not provide meaningful information to
companies about the practices shareholders find objectionable. It is simply an up or down vote,
with no explanation attached, leaving substantial questions about its meaning. Under current
law, shareholders already may file advisory resolutions with any publicly held company seeking
changes in specific executive compensation practices. There is no need for legislation adopting a
mandatory framework that will have a negligible impact on most of the 15,000-plus publicly
Counter to arguments made in support of the bill, new mechanisms of communications
between companies and shareholders are not necessary. Most large companies already hold
periodic meetings throughout the year with their largest shareholders on a variety of subjects,
In addition, the shareholder vote concept has been imported from the United Kingdom, but
the U.K. regulatory and legal systems are substantially different from those in the U.S., and the
results of a shareholder vote are likely to be fundamentally different. In the U.K. the two largest
investors control roughly 30 percent of the market while in the U.S. ownership is more diffuse,
making shareholder consensus much more difficult. The U.K. has voluntary corporate
governance standards with less rigid standards for Board member independence, and Board
members may avoid all liability with an advisory shareholder vote. In the U.S., Board members
have fiduciary liability, and are subject to shareholder derivative actions, regardless of a
shareholder advisory vote. The threat of litigation acts as a check on Board actions.
The U.K. shareholder vote requirement also has had significant negative effects that would
negatively impact the management of U.S. companies. These effects include encouraging
executives to seek positions with private equity firms; making pay arrangements more
standardized, rather than customized to the company; increasing diligence among compensation
committees similar to that already occurring in the U.S.; and, increasing the power of the proxy
advisory services and hedge funds as institutional investors outsource their compensation
research, engagement with boards and vote administration duties. These negative effects
outweigh the benefits of a shareholder vote.
For all of these reasons, we oppose H.R. 1257 and encourage the House to reject it. If you
have any questions, please do not hesitate to contact Tim Bartl of our staff at 202-789-8670.
Thank you for your consideration.
Jeffrey C. McGuiness