The Issue: A CEO Cedes More Power to Shareholders

Individual and institutional investors want a say on executive pay, and Aflac agrees

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In November of 2006, Aflac (AFL) Chairman and Chief Executive Officer Dan Amos received a surprise proposal from one of the company's shareholders. Boston Common Asset Management, the socially responsible investment fund, presented the Columbus (Ga.) insurer with a "say-on-pay" proposal, a new trend in shareholder activism in the U.S. at the time.

If adopted, the proposal would give shareholders a chance to vote on a company's executive compensation package. While the resolution only called for an "advisory," or nonbinding vote, companies that adopted the proposal and then ignored a negative vote by shareholders would have a public and investor relations problem on their hands. "My initial reaction [was] they don't like us, or they don't like something about what we've done," Amos remembers.

To help determine why Aflac, which was known more for its quacking duck commercials than its executive pay, had been targeted, Amos asked the board if he could speak to Boston Common directly. After all, a hefty amount of his 2005 pay was tied to performance goals. Boston Common's response? "We don't have any problem with your comp," Amos recalls them telling him. "We just think [investors] ought to have the right."

Institutional Investors Approve of Proposal

Amos was still skeptical—he says he'd never heard a complaint about his pay—and knew he needed more input from key shareholders to decide what to do. So he asked the compensation committee if he could talk to individual and institutional shareholders to get their thoughts on the resolution. He knew that if Aflac adopted the proposal, any vote on compensation would be hard to ignore, as two-thirds of the company's stock is owned by institutional shareholders. "I didn't want to take any chances," Amos says. "There had been a lot of stuff in the papers about comp, and we work very hard [to be] transparent."

Individual shareholders didn't have strong feelings either way—several thought it made sense, but didn't push him. Institutional shareholders, meanwhile, thought Aflac should adopt the proposal. One large mutual fund was particularly positive on the idea. "Frankly, I was shocked," Amos says. "I thought they were going to say no."

Between that response and the recommendation for the resolution from Institutional Shareholder Services, which advises investors on proxy votes, Amos began leaning toward adopting the proposal. "If this major mutual fund thinks it's a good idea, this could be a domino effect," Amos remembers thinking. "I thought this was a chance for us to show our leadership [on being] transparent, and that we let people know exactly what we do."

The Risk Pays Off

The board gathered for three or four meetings to make the final decision, and in February, 2007, announced it would let shareholders begin to vote on Amos' pay in 2009. The board wasn't naive—they knew some investors would inevitably vote no. But they also found comfort in the fact the company had a high number of institutional shareholders whom they hoped would study the package diligently rather than vote on emotion. As a result, Aflac became the first company in the U.S. to adopt an advisory vote on executive pay. (The votes are common in a handful of other countries, including Britain and Australia.)

By early 2008, after receiving much attention for being the first to adopt the proposal, Aflac decided to move up the timeline. "There had been so much discussion about it we wanted to move on to other issues," Amos says now. It didn't hurt that the company's stock—up 38% in 2007—had soared in the year before. At the Aflac annual meeting on May 5, the company announced the results: More than 93% of shareholders approved the compensation package for the top five executives at the company. Amos' total 2007 compensation, according to the company's proxy statement: $14.8 million.

While Amos may be able to breathe easy now, when he made the call he wasn't sure how shareholders would react. Even his employees joked with him about their support. "They'll cut up in the elevator, and say 'I'm debating whether I'm going to vote for you,'" Amos says.

Still, a number of factors led him to believe investors would support his compensation. After 18 years in the job, Amos says he is the eighth-longest tenured CEO in the U.S. "My return to shareholders has been a compound growth of 22%," he told BusinessWeek back in March. "If we're not going to pass [a vote on pay], then who is?"

McGregor is BusinessWeek's management editor.