Posted: 06 Feb 2012 09:16 AM PST
Remuneration for pension fund managers has come under the spotlight as investors have taken aim over investment banking pay, according to a paper published by Keith Ambachtsheer at the University of Toronto?s Joseph L. Rotman School of Management.
While much attention in compensation strategy is focused on how pension funds should exercise their say on pay responsibilities as investors in the corporate sector, little has been written on how pension funds should pay their own people, according to the newly released whitepaper.?
Posted: 06 Feb 2012 01:46 AM PST
In the aftermath of the first proxy season of shareholder ?say-on-pay? votes under the Dodd-Frank Act, shareholders have filed derivative suits against the boards of several of the companies failing to win majority approval. Many observers have been quick to dismiss the plaintiffs? likelihood of success in these cases, given the well-established principle that decisions on compensation lie within the board?s business judgment. However, while a Georgia court, in the Beazer Homes USA litigation, relied on the business judgment rule to dismiss a say-on-pay shareholder derivative case, at roughly the same time a federal judge in Ohio reached the opposite conclusion, refusing to dismiss a say-on-pay suit involving Cincinnati Bell. In light of these unfolding and conflicting developments, how should directors and compensation committees assess and respond to the risk of suit?
In our view, boards would be ill advised to take too much comfort in the belief that the business judgment rule will always be held to immunize compensation decisions from shareholder attack in the face of a substantial negative say-on-pay vote. The time might be coming for courts to start applying a stricter standard of review in these cases. Analysis of the rationale underlying the courts? traditional deference to boards on compensation matters reveals that the unique circumstances presented by say-on-pay may lead to a different outcome.