Navigating proxy season is a tricky business and negotiating with activists to get proposals withdrawn requires planning and expertise
An increasing number of US investors and their advisers are seeking non-binding ‘advisory’ votes on executive compensation at US companies, or, ‘say on pay’, a practice that has been 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 establishing shareowner advisory votes on compensation for all US public companies. With mutual fund holders likely to lobby their portfolio managers to support the issue in their proxy voting, it’s a volatile mix. Average voting support could exceed the low 40 percent level of the last two years for the 2009 proxy season, while 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 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 become legislatively mandated, it’s important companies strategize how to address concerns about compensation. Here are some thoughts:
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.
Recognize that perceived disclosure shortcomings might make companies targets for say-on-pay proposals, and drive voting support for such proposals. While companies may believe disclosure should be at 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. 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 disclosure as a compliance exercise, consider it a communication opportunity to convince investors that your compensation philosophy and corporate practices support the company’s business model and align with increasing shareowner value. This 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 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 recommendations, but committing to communicating investors’ concerns to senior management and the board should make your company less vulnerable to accusations it ignores shareholders. If there is a say-on-pay proposal on tap for 2009, collect a report card from investors, allowing time to prepare the management and board before the AGM when you receive your 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 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. Many leading investors prefer to conduct these discussions directly with their portfolio firms, rather than through surrogates such as proxy solicitors. Such agents can, however, provide road maps for 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 this proves difficult, senior management engagement is also effective.
Consider expanding your IR and proxy disclosures about the board, its independence and qualifications. A sensitive area, director contributions can be vital non-financial assets. Assertions of quality are not as effective as board engagement, which enables investors to assess.
Finally, remember: conventional tactics and messaging yield conventional results. Investors have likely seen the standard boilerplate proxy rebuttal arguments that may be fully baked into their voting policies. If your goal is to move the dial on the vote, act creatively to stand out.
The views expressed in this article are his own, and do not necessarily reflect the views of the Bank of New York Mellon.
