Challenging a Wall Street Giant on Pay

 A prominent shareholder activist is fed up with money manager BlackRock over the firm’s practice of rubberstamping obscenely large executive compensation packages at thousands of U.S. corporations. 

Investor and philanthropist Stephen Silberstein has set up a CEO pay showdown at the May 25 BlackRock annual meeting in New York City. The Wall Street firm’s CEO, Laurence Fink, is a classic example of “pay for nonperformance,” hauling in $26 million in compensation last year despite a significant drop in the company’s share price. But it gets worse.

As the world’s largest money manager, BlackRock holds shares in thousands of U.S. corporations. And when it comes time to vote every year on those corporations’ executive pay packages, BlackRock nearly always rubberstamps the proposals — no matter how bloated they may be. Silberstein has filed a shareholder resolution with BlackRock that would require management to come up with plans for “bringing its voting practices in line with its stated principle of linking executive compensation and performance.” Inequality.org co-editor Sarah Anderson talked with Steve about his strategy.

Investor Stephen Silberstein is pushing BlackRock to walk the talk on executive pay for performance.

Inequality.org: Why did you file this resolution?

Silberstein: I own shares in BlackRock and am concerned that my investment is “at risk” if the company does not do what it is required by law to do, namely to vote the shares of companies that it holds in trust for its customers in a fiduciarily responsible way reflecting the customers’ interests.

I am also a customer of BlackRock and am disappointed that they use my investments made through them to approve unnecessarily excessive pay packages to grossly overpaid CEOs. In this manner they are at least partly responsible for lower returns to shareholders for our investments in a wide variety of American corporations.

Inequality.org: What would you like to encourage people to do to support your resolution?

Silberstein: Anyone who has money in the market should let their financial advisors know of this shareholder resolution and ask them to vote for it. [Two of the biggest investors in BlackRock are Vanguard and Fidelity.] 

Inequality.org: BlackRock’s defense of their CEO pay rubberstamping is that they focus on direct engagement with corporate managers and this is more effective than “Say on Pay,” the Dodd-Frank provision that allows shareholders a nonbinding vote on pay packages. What do you say to that?

Silberstein: This is like telling people that voting is unimportant, and that the way to improve things is to either not vote or to always vote for whatever the bosses tell you. This position is not only wrong, it is profoundly un-American.

If BlackRock’s “engagement” policy has had any successes, they should tell us about them. The fact is that despite many years of investor “engagement,” American CEO pay keeps increasing and increasing — totally out of proportion to the wages of anyone else, or to shareholder returns, or to what CEOs earn in large and successful non-American multinational companies. A typical example is BlackRock’s own CEO, himself one of the most overpaid CEOs in America, according to As You Sow’s report “The 100 Most Overpaid CEOs.”

The CEO’s assistant, the president of the company, is also grossly overpaid — the two of them taking in almost $50 million in 2015. BlackRock’s stock was down five percent, its assets under management flat, and profits up by just over two percent last year. And yet the CEO decided that his pay should go up eight percent (from an already overpaid amount of $24 million a year). Where is the engagement on that? 

Inequality.org: Many people are skeptical about relying on the owners of capital to rein in CEO pay. We don’t rely on shareholders to handle other types of corporate excess, like dumping toxics or gender discrimination. We fight to pass tough regulations. What do you think of that line of argument?

Silberstein: Owners, like parents, have a fiduciary responsibility to monitor their investments (or children) to make sure that they are not doing stupid things that can detract from their value. Relying on the government to do this probably means that the costs for mistakes will be much, much higher than would otherwise be the case.

Inequality.org: What do you see as the most important actions Congress or financial regulators could take on executive pay? 

Silberstein: Excessive pay should not be subsidized (and indeed encouraged) through the tax code, as it now is. 

[pullquote]Excessive pay should not be subsidized through the tax code.[/pullquote]

Inequality.org: You’re probably aware that the coalition Americans for Financial Reform and others have been working to eliminate those kinds of subsidies, for example by closing the “carried interest” loophole, which allows billionaire hedge fund managers to pay a lower tax rate on their income than firefighters and teachers. They’re also going after another subsidy that allows corporations to deduct unlimited executive pay from their federal taxes, as long as it’s so-called “performance” pay.

Last year, these groups had a victory when the U.S. Securities and Exchange Commission finally approved a Dodd-Frank rule requiring that companies report the ratio between their CEO pay and their workers’ median pay. As you know, large U.S. corporations today have CEO-worker pay gaps that run more than 300-to-1 on average. What do you think would be ideal?  The financier JP Morgan believed that gaps larger than 20-to-1 would undermine business effectiveness. Peter Drucker, the founder of modern management science, wrote in favor of narrowing the gaps to no more than 20 or 25-to-1.

Silberstein: The ratios suggested by Morgan and Drucker are fine with me.

For more on the shareholder resolution fight at BlackRock, see Sarah Anderson’s article in The Nation.