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House-Passed Executive Pay Bill Flawed: Could Spur Costly Lawsuits

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House-Passed Executive Pay Bill Flawed: Could Spur Costly Lawsuits

Statement by John Berlau, Director of the Center for Entrepreneurship

Washington, DC, April 20, 2007—

“With bipartisan concern about so many issues -- such as the onerous mandates of Sarbanes-Oxley -- it's a shame that this simplistic, one-size-fits-all mandate was the first piece of corporate governance legislation to come out of this House session.

At its best, this 'say on pay' bill sponsored by House Financial Services Committee Chairman Barney Frank (D-Mass.), which mandates that public firms conduct an annual advisory shareholder vote on executive pay, would be redundant. And it would divert a company's resources away from producing better returns for shareholders. At its worst, it will spur costly lawsuits and drive the most talented executives to private firms with super-wealthy investors.

Shareholders have their say when they vote on a company's directors and on the basic design of executive compensation plans. So shareholders having an additional non-binding annual vote on the pay package of each executive is totally unnecessary. It's comparable to voting on the prices of computers and TVs. With these products and with CEO pay, the market is the ultimate vote. Shareholders 'vote' for CEO salaries when they buy and sell their stocks.

Most disturbingly, the bill contains nothing to limit liability from a negative vote on executive pay. This raises questions on about how 'advisory' the vote will really be.

Facing this and other uncertainties, will the Jack Welches and Meg Whitmans of tomorrow sign on to public companies, where their talents will benefit all investors? Or will they go to hedge funds and private equity vehicles available only to the very rich? House members such as Rep. Scott Garrett, (R-N.J.), and Rep. Tom Price (R-Ga.), should be commended for raising these concerns in the House debate. These are questions the Senate needs to ask before it rams through similar legislation.

It is also worth noting that shareholders of six companies recently voted down 'say on pay' provisions on company proxies. Investors at these six firms -- Morgan Stanley, Citigroup Inc., United Technologies Corp., U.S. Bancorp, Wachovia Corp., and Coca-Cola Co. -- have stated their wishes that executives concentrate on the bottom line and not be diverted with an annual 'say on pay' show trial. Yet the House today overrode the wishes of these shareholders and voted to impose this procedure on every public company in America. Talk about undemocratic!"