Shareholders have struggled to enforce corporate director accountability. Beyond contested board elections, shareholders today have little practical, direct impact on directors.

On one important subject, director pay, at almost all U.S. companies, directors have absolute authority over their compensation. They design and approve the structure (cash, equity) and amount of annual pay, with no accountability to the shareholders they serve. This long-standing practice represents the highest form of director conflict of interest and the most egregious compromise of director independence.

We seek a new means of accountability: a mandatory board director say-on-pay vote. At several companies in 2024, we submitted proposals providing for a binding shareholder vote on director pay. The proposal requires companies to:

1. disclose director compensation in advance of the fiscal year in which they will pay it,

2. submit that compensation to a shareholder vote at an annual or special shareholder meeting, and

3. win a majority vote.

We propose a bylaw amendment instead of a precatory proposal. It operates prospectively, so shareholders approve director pay for the fiscal year following the shareholder meeting. Company bylaws generally prescribe how directors design and approve their own compensation. A straightforward bylaw amendment codifies those three steps.

We modeled the proposed bylaw amendment after a similar shareholder vote at Tesla. The Tesla board agreed to this vote as part of a historic settlement of a shareholder lawsuit on director pay.

Under this system, boards design whatever compensation plan they wish in whatever structure and amount they choose. They must then submit that plan for shareholder approval. They have a material incentive to design a plan that will win that shareholder vote.

Compensation remains the distinctive benefit of board service and the principal reason why independent directors join corporate boards. While independent directors also do so for experience and prestige, if the company doesn’t pay them, they won’t serve. Of course, company executives and significant shareholders also join boards. Executives do so as part of their job and typically do not receive board compensation separate from executive compensation. Significant shareholders usually serve on a board to oversee their investment and frequently forego compensation paid to other directors. Thus, this new oversight mechanism provides a meaningful incentive for independent directors to represent shareholders diligently and faithfully.

Realistically, we expect most companies will win shareholder support for director pay, like shareholder support in director elections. In companies with serious business and corporate governance problems, or ones with excessive or unfair director pay, we expect shareholders to vote against proposed director pay. A company whose director pay fails to win the needed vote will likely restructure the proposed pay and resubmit it to shareholders at a special shareholder meeting before the coming fiscal year.

We expect this new mechanism will benefit shareholders in two ways. First, it will result in fair and reasonable compensation packages. Second, it will end the conflict of interest in directors setting their own pay. It creates a proper oversight relationship between shareholders and the directors they elect to represent their interest in a company.

Michael Levin
Independent activist investor and advisor