Across the Board: Shareholders Get a Say on Pay
Now that SEC rules let investors vote on compensation and more, here’s what to do.
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E-mailKEY TAKEAWAYS FROM EARLY PROXY VOTES
“Say on Pay” Results
That’s because say on pay is just the beginning, corporate governance officials agree. Investors will soon be weighing in on a variety of topics as regulators continue to promote increased disclosure and investor input. The NYSE’s amendment to Rule 452, whereby brokers are no longer allowed to vote on compensation matters without specific instructions from their clients, is another factor to consider when planning a communications strategy. In this new environment, the most successful boards will be those that get in front of their shareholders with a compelling message and are willing to open new lines of communications that encourage feedback before the do-or-die proxy vote, says Patrick McGurn, special counsel at Institutional Shareholder Services, a subsidiary of MSCI Inc. (MSCI), a global provider of investment decision support tools. The NYSE Euronext panel recommends the following best practices to help close the communication gap between stakeholders and boards.
1. Publish Readable Proxies
Too often proxy statements are viewed as — and written like — legal documents, says Kenneth Bertsch, president and CEO of the Society of Corporate Secretaries and Governance Professionals. It’s been five years since the SEC began mandating broader disclosure in the Compensation Discussion and Analysis section of proxy statements, he says, but too many companies still try to cram too much information into too few pages with very little explanation about compensation policies and how they were developed.
When that happens, Bertsch says, companies miss out on a critical investor communication tool. More important, with issues such as say on pay and say on frequency now on the agenda, confused readers can easily become disgruntled voters, he warns. “You need to give the explanation in a precise and attractive way so that people read it and understand what you are saying.”
Bertsch points to General Electric Co.’s (GE) proxy as a model. The company began expanding its CD&A section several years ago, and in its 2010 proxy, 10 full pages were dedicated to spelling out exactly how — and why — its executive compensation package was good for investors. “It’s very straight-forward and readable,” he says.
2. Launch a Campaign
A well-orchestrated road show can go a long way toward building a long-term partnership with your institutional shareholders, says Brown of TIAA-CREF. It starts with the board of directors ensuring that the company is sending out the right team with the right message, he adds. That team should include the senior person in charge of governance and board matters who can speak knowledgeably about how compensation packages are planned and designed. “We also would like to have an independent board member or the chair of the executive compensation committee attend the road show,” Brown says.
In the absence of a personal representative, it is important to have someone in the room (or on the phone) who can speak for the board and can follow up directly with the board. For example, when Avon Products Inc. (AVP) scheduled a meeting with TIAA-CREF in the fall of 2010, Brown worked with the company’s investor relations team ahead of time to create the agenda and to ensure that TIAA-CREF’s top issues would get equal weight with the company’s program. Then the meeting was led by Avon’s general counsel and included the company’s senior executives for compensation, investor relations and SEC disclosure.
3. Welcome Shareholder Views
A company truly committed to developing a dialogue with shareholders should invite them for a visit, recommends McGurn of ISS. Pfizer Inc. (PFE) started doing this several years ago, he says, by inviting portfolio managers to sit down with the company’s top compliance executives for open-ended discussions. That has led to more one-on-one interaction between institutional investors and company management, he adds.
Another recommendation is for companies to schedule a fifth analyst call every year — one that doesn’t deal with quarterly financial reports, McGurn says. This call would include board members, and the discussion would focus on such issues as executive compensation, succession planning and corporate governance, he explains. “This is a suggestion that has been out there for a while,” McGurn notes, adding that with shareholders’ increasing voting power, now would be a good time to institute such a program.
To watch the NYSE Euronext Webcast and hear more from the panelists on the issue of voting frequency, click here.
>> Say on Golden Parachutes
As of this year, shareholders will also have a say on executives’ so-called “golden parachute” deals. Under the SEC’s new rules:
- Companies must disclose all compensation arrangements with executives in connection with merger transactions, including any specific agreements and understandings that the acquiring and target companies have with the named executives of both companies.
- Disclosure also is required in connection with other transactions, including going-private transactions and third-party tender offers, so that the information is available for shareholders regardless of the structure of the transaction.
- Public companies may, however, ultimately avoid a golden parachute vote if they fully disclose their arrangements and include them in a general say on pay vote, provided that the arrangement is not modified after its prior approval.
