In reporting on the SEC decision, Bloomberg News cited an enthusiastic official from "an association of labor unions with pension assets of more than $1 trillion." The Washington Post likewise cited a happy official from the Council of Institutional Investors ($2 trillion). The Post somehow listed even the Consumer Federation of America among "shareholder groups" that "lobbied hard" for the new rules.
"Shareholder groups" must not be confused with groups of shareholders. A Dow Jones story called such them "investor advocates," which was equally naive. In reality, such phrases refer to lobbyists bankrolled by organizations of well-paid fund managers who have neither the information nor the incentive to negotiate on behalf of actual corporate owners.
Managers are not owners, nor advocates of owners. Indeed, actual owners often have no practical choice but to invest in these politically powerful union and government pension funds regardless of how poorly their investments perform. If you work for the State of California, you're stuck with CalPERS -- the huge California Employees' Retirement System. And, as with anything having to do with the California government, I wish you lots of luck. You'll need it.
You want to see who really wins and loses from the SEC's new scheme of "shareholder approval"? Take a look at CalPERS -- arguably the biggest winner of all.
A few days before the SEC ruling, CalPERS announced that it will only vote to support executive stock option plans if 5 percent or fewer of the stock options go to the company's top five executives. As columnist Michel Kinsley recently noted, stock options have become "an obsession of high-minded bores." But this seemingly romantic effort of CalPERS big-shots to use the leverage of other peoples' money to encourage firms to pay lower-level employees with stock options is inefficient and evil.
People who get more pay from options necessarily get less in salary and benefits. To say that 95 percent of stock options should go to lower-level employees is to say such employees should bear most of the risk for managerial decisions over which they have no control.
The critical distinction between mangers of politically connected pension funds and actual stockholders eludes most journalists, but not astute business school profs. A 1997 study by Marilyn Johnson of Michigan State, Susan Porter of the University of Massachusetts and Margaret Shackell of Notre Dame noted that "pension funds like CalPERS appear to be more attuned to what is typically viewed as ‘political concerns' about compensation than to what is typically viewed as ‘shareholder concerns' about pay-for-performance."
A later study by Andrew Prevost and John Wagster of Wayne State University found that firms targeted by CalPERS responded by paying their executives like bureaucrats: "CEOs at target firms are compensated for a decrease in pay by a reduction in the riskiness of their remaining pay." Fewer stock options were traded for more cash, perks and bonuses, so the CalPERS message to their favored CEOs was to play it safe and take it easy. But minimizing CEO incentives is bad news for investors, particularly for poor souls dependent on a politicized fund like CalPERS.
In short, what the SEC means by "shareholder approval" is to enhance the already awesome power of organized institutional fund managers to block executive incentives to cater to shareholders. This is more proof that whenever the SEC is in the headlines, or offers to help, watch your assets.