Suggested strategies for preempting, responding to or defeating say-on-pay proposals
An increasing number of US investors and their advisers are seeking non-binding ‘advisory’ votes on executive compensation at US companies, also known as say-on-pay, a practice common in England and Australia for several years.
Intense investor, media and regulatory scrutiny of executive compensation in the midst of the declining financial market has created a regulatory fever. Legislators are on the verge of a regime that establishes shareowner advisory votes on compensation for all US public companies.
This development and the likelihood that mutual fund holders are lobbying their portfolio managers to support this populist issue in their proxy voting create a volatile mix. Where the issue is on ballots in the 2009 proxy season, it is reasonable to expect average voting support to exceed the low 40 percent level of the last two years, and declining stock prices may continue to exacerbate ‘disconnects’ between executive pay and performance, as measured by shareowner returns.
There are several ways investors can seek a ‘say’ on pay: direct dialogue with companies in their portfolio, voting against equity compensation plans that are sponsored by management, filing or supporting shareowner proposals on compensation, and withholding votes from members of the board’s compensation committee.
Whether say-on-pay proposals continue to be filed by individual proponents or the issue becomes legislatively mandated, it is important companies have a proactive strategy for addressing concerns about compensation. Here are some thoughts to consider:
Many companies were recalibrating their executive compensation program practices and disclosures to better reflect pay for performance considerations long before today’s economic turmoil.
Firms should publicize and take credit for any progressive, shareowner-friendly reform. Position your company to tell a credible story demonstrating that your board has been doing its job all along to ensure its CEO’s compensation is reasonable and properly aligned with investor interests.
Remain sensitive toward disappointed constituents.
The SEC, investors, proxy advisers and the media have expressed displeasure with many companies’ year-one and year-two responses to the enhanced proxy compensation disclosure requirements, including the compensation discussion and analysis. In 2009, armed with two years of aggregate frustration, these critical audiences will likely hold companies to an even higher standard.
In these audiences’ minds, firms have had sufficient time to adapt to the new rules. There will likely be a very public review of these disclosures, including ‘best-in-class’ and ‘worst-in-class’ assessments.
Recognize that perceived disclosure shortcomings may make it more likely companies will be targeted for say-on-pay proposals, as well as drive voting support for such proposals.
While companies may believe disclosure should be kept to the minimum required (in part out of competitive concerns), be mindful that investor expectations surrounding best practices in governance, compensation and transparency are not limited by regulatory requirements. For this reason, it is important to balance the potential risks associated with making expanded disclosures with the increased risk of being targeted for say-on-pay proposals if you do not do so.
Instead of treating such disclosure as a compliance exercise, consider it a communication and sales opportunity in which you convince investors that your compensation philosophy and corporate practices truly support your company’s business model, and are aligned with your commitment to increasing shareowner value. This enhanced disclosure may not deter proposal sponsors, but it might minimize the support they receive from mainstream investors.
Craft disclosures that speak to your investors.
Rather than simply responding to the well-publicized criticisms from the SEC, Riskmetrics Group and others, directly identify the expectations and desires of your largest investors and proactively engage them. Ask them what they do and don’t like about your existing pay philosophy, programs, administration and disclosure. If you are reluctant to open a potential Pandora’s box by requesting a critique of your company’s current practices, solicit their feedback in more general terms – ask for their perspective and concerns about executive compensation generally.
The mere act of asking their opinion sends a powerful message that you care, and the relationships you develop should have a pay-off at proxy time, when you can remind those same investors: ‘you spoke, we listened, and see how we have responded.’
When communicating with investors, keep in mind that many of them maintain dedicated proxy voting groups that you will need to include in this process. Also, talk to your largest institutional investors first, as far in advance of finalizing proxy disclosures as possible. The feedback your directors and others receive may prove invaluable, particularly if it’s early enough in the process that it can be acted upon.
With this strategy, you may feel pressure to adopt some of their recommendations, but if you simply commit to communicate their concerns and suggestions to senior management and the board, your company should be less vulnerable to accusations it is ignoring its investors. Further, if your company has a say-on-pay proposal on tap for 2009, it is probably in your best interest to collect a preliminary report card from investors, so there is ample time to alert and prepare the management and board before the AGM when you will receive your final grade in the form of investor voting support (or lack thereof).
Consider year-round engagement with investors on governance and compensation issues as a risk-mitigation exercise.
Rather than discussing these issues with investors once a year when you are asking for their vote, continual discussions may intercept criticism and lessen the likelihood of surprises at proxy time. With investor perception and voting policies changing year on year, you will also be ‘in the loop’, rather than blindsided by high votes for shareholder proposals or other forms of activism. Many leading investors prefer to conduct these discussions directly with their portfolio firms, rather than through surrogates such as proxy solicitors and investor relations agencies. Such agents can, however, provide road maps for effective engagement.
It really matters who conducts investor engagement.
Board-level engagement with top investors speaks volumes. Directors are shareowners’ elected advocates, and a direct interaction can increase investors’ confidence in the stewardship of their investment. Consider enlisting your independent directors, including members of the compensation committee, to lead this effort. If you are hesitant to directly involve them, and they don’t volunteer, senior management engagement can also be effective.
Also, consider expanding your IR and proxy disclosures about the board, its independence and qualifications. This is a sensitive area, but director quality and contributions can be vital non-financial assets. Company assertions of board quality are not as effective as direct board engagement, which enables investors to make that determination themselves.
Finally, remember that conventional tactics and messaging yield conventional results. Investors have likely already seen the standard boilerplate proxy rebuttal arguments many times, and these arguments are likely fully baked into their voting policies. If your goal is to move the dial on the vote, think and act creatively to stand out from the crowd.
Ron Schneider is a director of business development in BNY Mellon Shareowner Services’ proxy solicitation services group. The views expressed in this article are his own, and do not necessarily reflect the views of the Bank of New York Mellon.
