Oracle Corporation, like many Silicon Valley tech companies, makes no secret about wanting to do things differently.1 But their different approach to corporate governance is now getting an angry response.
On Tuesday, October 8th, CtW Investment Group, which advises union sponsored pension funds and is a substantial shareholder of Oracle Corporation, issued a letter to shareholders of Oracle encouraging them to vote against an executive compensation plan by the company.2 The letter also asks shareholders to vote against three directors of Oracle’s Compensation Committee, due to the board’s “unwillingness . . . to make significant changes to its executive compensation practices despite the clear signs of shareholder disapproval.”3 CtW takes issue primarily with CEO Lawrence J. Ellison’s compensation package, which they say is excessive, not suitably tied to performance, and higher than any peer CEOs, despite shareholder return having been below the median and mean for the same peer group over the last few years.4
In the most recent fiscal year, Larry Ellison received $78.4 million.5 In establishing an advisory vote to approve executive compensation, Oracle acknowledged that compensation for its executives was “significantly above the average of [their] peer group,” but said that it was justified as long as both profitability and stock price increased.6 Oracle said that total stockholder return experienced significant appreciation in recent years and outpaced the S&P 500.7.
CtW’s letter is a significant attack on Oracle’s board, which has a reputation for sky-high executive compensation packages.8 But this development is also significant for being one of the most high profile shareholder activist responses to the trends of executive compensation in Silicon Valley in general. Silicon Valley has long justified non-traditional approaches to corporate governance on basis of the unique role of entrepreneurs and the unique circumstances of the technology industry.9 While some Silicon Valley companies take the approach of entrenching entrepreneurs from board oversight by giving them a disproportionate amount of voting shares in their company10, another approach is to create lucrative compensation packages for high profile executives.
Oracle’s justifications for higher compensation mirror justifications for allowing entrepreneur executives to maintain disproportionate voting rights. One such justification is based on an emphasis of long-term performance over short-term benchmarks.11 In a recent proxy report, Oracle tried to take the emphasis off the traditional focus on quarterly earnings and short-term performance by noting longer-term trends in the company’s performance.12 Executives like Larry Ellison aren’t like traditional CEOs, the argument goes, so they should be allowed to focus more on the long-term and evaluated on that focus.13
Another justification for higher compensation for an executive like Ellison is that high-profile Silicon Valley CEOs have a higher market value. Larry Ellison is a founder of Oracle and has been its CEO throughout the company’s history.14 The argument is that a more lucrative compensation package is necessary to protect the continuity of management of a visionary entrepreneur.15 Oracle categorizes Mr. Ellison as just that, a visionary, whose “familiarity and knowledge of [the company’s] technologies and product offerings are unmatched.”16
Oracle attempts to alleviate concerns about this value justification by doubling-down. Larry Ellison owns about 25% of the company’s common stock, which the company says “directly align[s] his interests with those of all of our stockholders.”17. If indeed Mr. Ellison is overvalued, then he himself will bear 25% of the brunt of any decline in value through his compensation package. This governance strategy is based on a traditional justification of the value argument, which says that it makes more sense to place the benefit and control in the hands of those who value it more.18. Tying compensation to performance and value does this in the same way that creating disproportionate share structures does: it puts the incentive and the burden on the party who has the benefit of a larger stake.
The problem with these governance techniques is that they marginalize shareholder concerns. CtW talks of shareholder dissatisfaction with Oracle’s compensation structure, and notes that Oracle has remained stubborn in refusing to alter Ellison’s compensation practice.19 This is in the face of over half of Oracle’s shareholders rejecting a pay proposal in 2012.20
CtW’s letter is an important step toward realigning the interest of shareholders with Silicon Valley tech companies. Many companies make strong arguments in favor of non-traditional governance approaches, and there is data to support the risk of investor short-termism21 as well as the value of visionary Founder-CEOs.22 But shareholders are still being marginalized, and CtW is bringing much needed volume to their voice in a non-traditional atmosphere.
See Letter from Dieter Waizenegger, Exec. Director, CtW Investment Group, to Oracle Shareholders (Oct. 10, 2013), available athttp://ctwinvestmentgroup.com/wp-content/uploads/2013/10/CtW-to-Oracle-Shareholders-10-7-13-final.pdf. ↩
See Id. ↩
See Michael J. De La Merced, Shareholder Advisor Plans to Escalate Fight Over Oracle Chief’s Pay, N.Y. Times (Oct. 7, 2013), http://dealbook.nytimes.com/2013/10/07/shareholder-adviser-plans-to-escalate-fight-over-oracle-chiefs-pay/. ↩
See Oracle Corporation, Proxy Statement 14(a) (2013) [hereinafter Proxy], available athttp://www.sec.gov/Archives/edgar/data/1341439/000119312513373325/d569485ddef14a.htm#summ569485_2. ↩
See Id. ↩
See Dan Hart, Oracle’s Ellison Highest-Paid Chief as CEO Pay Gains, NYT Says, Bloomberg (Jun. 30, 2013), http://www.bloomberg.com/news/2013-06-30/oracle-s-ellison-highest-paid-chief-as-ceo-pay-gains-nyt-says.html. ↩
See Steven M. Davidoff, In Silicon Valley, Chieftains Rule WithFew Checks and Balances, Dealbook (Jul. 4, 2012), http://dealbook.nytimes.com/2012/07/04/in-silicon-valley-chieftains-rule-with-few-checks-and-balances/. ↩
See Id. ↩
See John Bussey, Dual-Class Shares, A Two-Edged Sword, The Wall Street Journal (Aug. 18, 2011), http://online.wsj.com/news/articles/SB20001424053111904292504576484971843643158. ↩
See Proxy, supra note 6. ↩
See James Surowiecki, Unequal Shares, The New Yorker (May 28, 2012), http://www.newyorker.com/talk/financial/2012/05/28/120528ta_talk_surowiecki; see also Davidoff, supra note 9. ↩
See Proxy, supra note 6. ↩
See Daniel R. Fischel, Organized Exchanges and the Regulation of Dual Class Common Stock, 54 U. Chi. L. Rev. 119, 137 (1987). ↩
Proxy, supra note 6. ↩
Proxy, supra note 6. ↩
See Fischel at 136-37 ↩
See Merced, supra note 5. ↩
See Peggy Hsieh, Timothy Koller & S.R. Rajan, The Misguided Practice of Earnings Guidance (2006), available athttp://www.mckinsey.com/insights/corporate_finance/the_misguided_practice_of_earnings_guidance ↩
See Rüdiger Fahlenbrach, Founder-CEOs and Stock Market Performance 2 (January, 2004), available at http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.197.5961&rep=rep1&type=pdf. ↩
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