A Principled Approach to Compensation Reform

Posted by John Seethoff    
Vice President and Deputy General Counsel

In the wake of the financial crisis of the past year, Congress is currently considering several bills that would regulate executive compensation and other aspects of corporate governance. It’s good that policymakers are focused on these matters. In May, I blogged about how strong corporate governance policies and practices can help restore public trust and solidify the foundation for a broad recovery.

But in the current debate on corporate governance, many stakeholders are pursuing varied and conflicting agendas. Much of the focus is on attempting to prevent repetition of some highly publicized compensation abuses and lapses in governance. It’s vital that policy be guided by principles that help the country move beyond economic crisis, through long-term value creation for corporations and investors. For that to happen, companies need to retain the flexibility to customize their governance arrangements.

Recently Ann Habernigg from Microsoft joined with five other members of the Task Force on Compensation Reform of the American Bar Association to co-author The Need for a Principled Approach to Compensation Reform in the BNA Corporate Accountability Report. The article urges avoiding prescriptive one-size-fits-all solutions that could stifle alternative approaches to reforming compensation practices. As Ann and her co-authors write, “the intricacies of determining the ‘right’ executive compensation across the diverse range of businesses and industries comprising corporate America defy a single solution, no matter how well intended and thoughtfully crafted.”

Instead, the article supports thoughtful application of principles, like those in The Aspen Principles, which provide boards with guidance and flexibility to tailor arrangements that most benefit companies and shareholders. The Aspen Principles, developed by the Aspen Institute’s Corporate Values Strategy Group, encourage boards to first define metrics for long-term value creation, and then focus on those metrics in communicating with investors and developing compensation policies.

Policymakers should consider such principles—and boards’ need for flexibility—in approaching governance reform. I believe principles-based guidance is the best choice for Microsoft and the thousands of other public companies in the United States. Each company is different in its stage of development, its competitive position and the strategies it pursues to maximize shareholder value. Over the years since our IPO in 1986, Microsoft has implemented significant governance enhancements voluntarily, guided by our board’s desire to pursue progressive governance practices that benefit our shareholders and are appropriate for Microsoft.

Our Board of Directors and management welcome thoughtful discussion on these and any other corporate governance issues. At any time, Microsoft shareholders may communicate directly with the Company’s Board of Directors, any committee of the Board, or any individual director by e-mailing us ataskboard@microsoft.com.

For additional information about corporate governance at Microsoft, please click here. I invite you to leave a comment on this blog below.

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