The rules are changing

The government’s intervention to stabilize the economy has put significant taxpayer dollars into the hands of public companies. This in turn has driven populist and regulatory reaction in terms of board oversight generally, and compensation issues in particular. As if these challenges weren’t enough, a new wave of regulatory change is upon us, including say on pay, the end of broker voting and the likely advent of proxy access. 

Even before the recent regulatory focus, trouble was brewing in terms of retail proxy voting. While retail voting was never strong, Broadridge reports that it dropped by more than 50 percent in the first year of notice and access compared with accounts receiving full sets of materials – specifically, there was a 50 percent decline in retail shares voted and a 75 percent decline in retail accounts voted.

Elimination of broker discretionary voting in director elections could be extended to all other proposal types. If this occurs, retail-owned companies may have difficulty in achieving quorum, and all companies may have difficulty in gaining approval of other proposal types. In response, companies may feel compelled to engage in more vigorous retail solicitation campaigns.

Under the SEC’s proposed proxy access rules, shareowners may soon face a real choice as they select from a broader list of nominees for available board seats. This could apply either to all US companies (14a-11) or to individually targeted companies (14a-8). In this scenario, board candidates and their supporters will be forced to wage true election campaigns. They’ll need to differentiate their candidates from dissident nominees, not just because they have management’s recommendation, but also to assure voters they are the best qualified stewards and have the best interests of shareowners at heart. Companies should prepare now and not wait for late rule-making that could limit their ability to prepare and respond effectively.

This presents both a choice and an opportunity for companies with respect to disclosure about their directors: continue the traditional practice of disclosing no more than what’s strictly required, or go beyond the current disclosure requirements and gain credit for your openness and transparency. Remember that investor expectations for best practice in terms of disclosure, governance and transparency are ever-escalating and not bounded by regulatory requirements.

Exceed expectations

Rather than responding only to regulators, proxy advisers and the media, companies should talk to their largest shareowners: identify their need for information and then exceed their expectations. Otherwise dissidents and others may fill that information void for you, setting the tone for the debate. Consider the role and impact of proxy advisory firms and their regular practice of recommending withhold votes from director candidates for any number of reasons. Director withhold votes are gaining sharper teeth as companies move from plurality election to majority election standards. Combine this with broader proxy access and the loss of broker discretionary voting, and an environment emerges where a director withhold recommendation has a strong chance of swinging the outcome of the election away from management candidates.

It’s understandable that companies, their boards and outside advisers are uncomfortable stepping outside their comfort zone in terms of disclosure and investor engagement, but consider the alternative: more regulation, legislation, proxy fights, expense and divided boards. And if you are not going to advance the candidacy of your nominees, is this not a disincentive for current and potential new directors to serve? 

Advice for coping with new election reality

• If your company does not have one, convene a ‘SWAT team’ focused on institutional investor governance and compensation views and proxy voting procedures. Internal contributors may include general counsel and the corporate secretary, CFO, investor relations officer and HR. External contributors may include your proxy solicitor, IR agency, stock surveillance firm and outside compensation consultant. If your company has such a team but you have not traditionally been involved, get a seat at the table.
• Analyze your ownership base from the perspective of governance and proxy voting, including identifying the governance heads and proxy voters of your top institutional investors.
• Determine which of these investors subscribes to and reviews the vote recommendations of leading proxy advisers such as RiskMetrics, Glass Lewis, Proxy Governance and Egan-Jones.
• Work out which of your investors typically reviews this information as part of a comprehensive and thoughtful vote evaluation process, rather than rigidly following these vote recommendations.
• Determine which investors are amenable to dialogue and engagement with their portfolio companies, including in the pre-proxy stage as well as during solicitations, and practice flexible voting so that this direct issuer/investor engagement may actually help to inform and guide their vote.
• Recognize that indexed – or passive – investors are active voters. As you may have no preexisting relationships or points of entry with such investors, identify the governance heads and proxy voters, introduce yourself and start the relationship-building process.
• Speak with the approachable, flexible, thoughtful voters at least once each year outside of proxy season. Ask them about their hot-button issues and any recent changes in their focus, and learn about their information needs and preferred means of receiving this information (proxy statement, proxy adviser reports, company IR website, and so on).
• Once you have undertaken significant effort at voting due diligence and identified these investors’ information needs, take what you have learned back to senior management and the board. Work out how you can best balance your company’s proxy agenda and objectives with investors’ information needs, in both the annual proxy materials and year-round IR messaging.
• During the solicitation, return to the contacts you have made and point out to them areas where their expressed concerns and interests are addressed in the proxy materials, thus making your board candidates and other proposals deserving of their support. Indicate that you and senior management are available to them if they have any questions or concerns prior to voting.