Blockbuster Gives a "Say on Pay"

The video retailer's shareholders adopt a resolution to gain some influence over executive pay. Will others follow?

In a proxy season marked by an increased focus on pay for performance, shareholders of Blockbuster (BBI) made a little history, approving a resolution that would give them an advisory vote on executive pay.

The "say-on-pay" shareholder proposal is the first to pass of more than 50 filed at companies ranging from Occidental Petroleum (OXY) to Merck (MRK) to Coca-Cola (KO). So far, those put to a vote have received relatively strong levels of stockholder support, but none before Blockbuster had garnered approval from more than 50%. (A May 3 vote at Verizon Communications (VZ) is currently being recounted, as the company said it was too close to call.) Experts say increased scrutiny of executive pay, combined with the May 9 Blockbuster approval, could nudge votes at companies such as ExxonMobil (XOM) and Home Depot in a similar direction.

The Blockbuster proposal, which calls for an annual advisory "yay" or "nay" shareholder vote on executive officer compensation, was supported by 57% of voting shareholders, according to the New York City Employees' Retirement System, which filed the resolution. However, the measure does not require company directors to adopt any means for such a vote. A Blockbuster spokesman said on May 11 the company would take the resolution "under advisement."

Not Much Obliged

In February, Blockbuster's board of directors found itself in the awkward position of publicly battling Chairman and Chief Executive John Antioco over the size of his bonus: Antioco wanted nearly $8 million after Blockbuster's performance improved in 2006, but the board offered less than $3 million.

In March, Antioco agreed to step down by the end of the year and accepted a lower bonus and lump-sum cash payout for 2006 than was outlined in his contract (see, 3/21/07, "No Blockbuster Deal for Antioco"). Two years ago, Blockbuster board member Carl Icahn tried to oust Antioco, calling his guaranteed severance at the time "unconscionable." Icahn holds a 16% stake in the company.

At this stage, it's unclear how effective say-on-pay proposals would be in practice. The nonbinding resolutions generally do not oblige compensation committees to lower a CEO's pay, and board's tendencies to fatten packages to attract top talent aren't likely to disappear overnight. But allowing shareholders to weigh in on a topic of such importance could open the dialogue on executive pay, experts say.

A Closer Look at Executive Pay

"We expect that boards will have to meet with institutional investors to talk about, if not negotiate, the pay vote," says Patrick McGurn, executive vice-president of Institutional Shareholder Services, a proxy advisory firm. "This is how it has worked out in the U.K. The policy encourages constructive dialogue and engagement, as opposed to confrontation and backlash after the fact."

Shareholder groups are presenting the say-on-pay proposals against a backdrop of heightened scrutiny of executive compensation. Last month, the House of Representatives passed a bill proposed by House Finance Committee Chair Barney Frank (D-Mass.) requiring public companies to give shareholders an annual nonbinding vote on executive compensation, and Senator Barack Obama (D-Ill.) introduced a companion bill in the Senate.

On May 11, Democratic White House hopefuls Hillary Clinton (D-N.Y.) and John Edwards also expressed support for the measure. Also this year, the Securities & Exchange Commission is requiring more information to be disclosed about executive pay on company proxy statements, along with a detailed explanation of the rationale behind the compensation package.

Rich compensation despite less-than-stellar executive track records—known as "pay for pulse"—has angered shareholders. One high-profile case is that of Home Depot (HD), where former CEO Bob Nardelli received compensation valued at $210 million after being pushed out for poor performance in January. Allegations of stock options backdating surrounding top executives such as Steve Jobs at Apple (AAPL) have further pushed executive pay issues to the foreground.

Assault on Board Power?

Shareholder activists' success at Blockbuster could turn the tide for say-for-pay proposals at other companies and lead to shareholder approval of such measures. Directors have responded to this threat by voicing concern that such intervention could hamper their ability to attract and retain top executive talent. They note that pay for performance is already part of the decision-making process at companies such as insurance firm Aflac (AFL), which adopted it in February.

"There's a fear that say-on-pay and other types of proposals are an assault on board power," says Claudia Allen, chair of the corporate governance practice group at Neal Gerber & Eisenberg, a Chicago law firm. "But it will be hard to stop the momentum in this overall push to tie pay to performance and hold boards more accountable for their decisions."

Allen says it remains to be seen how say-on-pay proposals will play out, but she predicts that more companies will face such resolutions in the wake of SEC rules that went into effect on Dec. 15 requiring more detailed information about executive compensation, including perks, stock options, and bonuses. "Overall, the movement is for boards to not only benchmark pay better, but also to tell the story of how they're doing it," says Allen. "Say on pay is part of the push for more of a two-way conversation."

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