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McCain Seeks Shareholders' Say on Pay

The GOP candidate's call to allow shareholders to vote on executive compensation is seen as an appeal to middle-class voters and the unions

John McCain threw a dash of populist pepper into an otherwise fairly traditional Republican stew of economic policies with his June 10 proposal to allow shareholders a vote on executive compensation. The idea, known informally among executive-pay activists as Say on Pay, put McCain into strange company: It has been promoted heavily by unions, and it was introduced in the Senate in April by none other than Barack Obama.

McCain tucked the corporate-pay proposal neatly into the middle of a speech he gave to the National Federation of Independent Business, a small business advocacy group. Early in the speech, he came out aggressively in support of lower corporate tax rates and free trade, criticizing Obama's plan to increase taxes on the top income bracket.

Then he shifted gears.

"For too long, government has been the voice of Big Business, not small business," McCain said. Referring to recent examples of executives at housing and finance companies who walked off with big pay packages just as their companies cratered, McCain denounced CEOs who left troubled companies and then were "packed off with another 40 or 50 million for the road." He said that under his proposed reforms, "all aspects of a CEO's pay, including any severance agreements, must be approved by shareholders."

Toward a Level Playing Field

McCain framed the plan as a way to even the playing field between large and small businesses. But his message seemed tailored to a different group of voters. "I think he's talking to Ohio, Pennsylvania, and Michigan," said Greg Valliere, the chief strategist at Stanford Washington Research Group, which tracks politics for investors. "I think that's where the election is going to be won. I think he wants to sound like he's not a typical Republican fat cat who favors CEOs."

Say on Pay would allow all public boards to vote on pay and severance packages for senior executives. The vote would not be binding, so the board could still approve the salaries independently if it didn't agree with the shareholder vote. Nonetheless, if the board rejected the shareholder vote, there would probably "be a campaign to change the board," said Richard Ferlauto, director of corporate governance at the American Federation of State, County & Municipal Employees, one of the unions that supports the initiative.

Unions like AFSCME and other activist investors have introduced more than 100 Say on Pay proposals at board meetings this year. Eight of them have won a majority of shareholder votes. In a bloodless victory for activists, Aflac (AFL) directors agreed on their own to allow shareholders to vote in early May on executive compensation. Shareholders overwhelmingly supported the company's pay practices.

But the proposals have run up against fierce opposition from other targeted companies, which contend that they tie directors' hands. Lloyd Blankfein, chief executive at Goldman Sachs (GS), argued at Goldman's annual meeting in April that taking responsibility for compensation away from directors could weaken the board. Charles Elson, the director of the Center for Corporate Governance at the University of Delaware, said he thinks CEO pay needs to be constrained, but he doesn't think Say on Pay is the way to do it. Instead, he favors proposals that would make it easier to remove an ineffective board.

Antagonizing Party Contributors?

AFSCME's Ferlauto believes McCain's support for Say on Pay is a political ploy designed to make him sound friendly to middle-class voters. Other corporate watchdogs give McCain more credit than that, seeing his latest move as a mixture of heartfelt outrage at hefty pay packages and political calculation. Elson called McCain "not your typical Republican senator" and said he has "taken positions that were much more activist," such as his support of Sarbanes-Oxley legislation that tightened the rules for corporate financial accountability. He also struck a populist tone while debating Mitt Romney in January, Elson noted.

Daniel Clifton, the head of policy research for Strategas, which tracks Washington politics for Wall Street firms, said McCain "does not want to be seen as the candidate of Corporate America."

But going after Corporate America could hurt McCain with donors, Valliere said. "It's a tightrope he has to walk," he said. "He runs the risk of antagonizing the base, and in particular his contributors."

Certainly, the proposal raised hackles among some groups. Ryan Ellis, executive director of the American Shareholders Assn., a project of conservative activist Grover Norquist's Americans for Tax Reform, said McCain was "a little naive" for backing Say on Pay. "I don't think it will really get him anything," Ellis said. "He's playing into union hands."

Salzman is an intern at BusinessWeek.

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