Among the many corruptions underpinning escalating CEO pay, highlighted in the newly released AFL-CIO PayWatch website report, are the mutual fund voters failing to relay common outrage at executive compensation.
Consider the basics: CEO pay rose 14 percent in 2011 over 2010 to an average of $13 million for Fortune 500 CEOs, the AFL-CIO survey finds. The average CEO earned 380 times the average worker in 2011, up from 343 in 2010; that multiple was only 42 times in 1980. Studies show such disparities harm employee morale and productivity.
How are mutual fund managers exercising their ownership responsibilities as stewards for average investors? Irresponsibly, according to a new feature in the national union’s authoritative annual survey.
In “say on pay” votes, a Dodd-Frank Wall Street Reform provision, where voters register a non-binding referendum on the pay package, mutual funds vote “no” an average of only 11.5 percent of the time. The largest funds counted among the worst: Vanguard voted “no” only 1.3 percent of the time against the pay package; Blackrock 3.3 percent; American Century 8.3 percent; State Street 8.9 percent.
Critics point to an inherent conflict: mutual fund companies often manage portfolios for these same corporations and may not wish to complain about the pay of the official who ultimately selects them.
However, there are several signs of hope. This week’s game-changing rejection of Citigroup’s pay package at its annual shareholder meeting offers one example. With a 44 percent decline in the share price in 20111, and 93 percent collapse since the financial crisis, many mutual funds obviously joined the 55 percent majority in rejecting a pay package built on low profit goals.
Another can be found at a set of mutual funds that demonstrate stiffer spines. The AFL-CIO report found that Federated Investors voted against pay packages 74 percent of the time. Schwab voted 24 percent of the time against pay packages.
The problem stretches beyond the votes of mutual funds. According to AFL-CIO President Richard Trumka, the system is “rigged,” and back-scratching boards of directors tend to approve pay above peer averages.
In addition, Washington regulators sometimes make matters worse. For example, the Securities and Exchange Commission continues to sit on a reform from the Dodd-Frank legislation which directs all firms to disclose CEO pay as a ratio of the median paid employee. The firestorm of corporate lobbying against the implementation of this simple disclosure demonstrates the zeal that CEO’s apply to sustain their pay-escalation scheme. Nearly two years after approval of the law, the SEC accedes to corporate claims that determination of employee pay is too complicated. Not only is that untrue, but it is especially demoralizing for an agency charged with protecting investors; As the PayWatch report lays bare, outrageous CEO pay depends on mutual support—from mutual funds, bought boards, and even regulators. Each deserves reform.
Bartlett Naylor is Public Citizen’s financial reform advocate. Check out the work of Naylor and the Public Citizen research team at: https://www.citizen.org/two-cents-report