Corporate secretaries and investor relations officers must collaborate during proxy season.
When the Dodd-Frank Wall Street Reform and Consumer Protection Act became law last year, investor relations officers (IROs) and corporate secretaries kissed their free time goodbye. Mandatory say-on-pay and say-on-pay vote-frequency balloting, as well as majority elections for directors, meant extra work with proxy votes and investor outreach. Corporate secretaries and IROs had to collaborate.
This is the continuation of a trend. Over the last decade, governance has become a public sport. Shareholders vote on – and increasingly sue over – such topics as director elections and executive compensation. Proxy advisory firms Institutional Shareholder Services (ISS) and Glass Lewis are ‘de facto rule-makers’, according to Claudia Allen, chair of Neal Gerber & Eisenberg’s corporate governance practice group. Power is shifting from the board of directors to the shareholders.
Governance is fast becoming a product of board deliberation and the wishes of investors. Companies can no longer use a specialist approach toward governance, where directors make decisions, the corporate secretary or compliance officer provides input, the general counsel reviews the decisions for legal implications, and the investor relations (IR) department delivers the results to investors. Instead, governance now requires an integrated and collaborative team approach that combines best practices, strategic considerations, communications savvy and salesmanship.
‘We’re seeing much more collaborative work between departments,’ says Robin Ferracone, executive chair of compensation consultancy Farient Advisors. ‘Corporate secretaries have a very central role to play in this whole game of governance and executive pay design. They are the ones responsible for board processes, and the board processes have to do a very good job of bringing the right people in the room and getting them to have the right conversation.’
A shift of power
Norman Wolfe, CEO of Irvine, CA-based management consulting firm Quantum Leaders, says the passage of Sarbanes-Oxley in 2002 ‘marked a shift from the dominance of the CEO to a dominance of the board.’
Then, power began slowly shifting away from the board. According to Allen, less than 20 percent of the S&P 500 had majority voting for directors in 2006. By 2007, the figure had risen to more than two thirds. That same year, the SEC pushed for plain-English compensation discussion and analysis in proxy statements. Then Dodd-Frank made corporations even more beholden to the wishes of investors.
‘Dodd-Frank gave a lot of support to what we’ve been living with for a long time – shareholder activism,’ says Wolfe, who is also the chair of the governance committee for product design consultancy National Technical Systems of Calabasas, CA.
Some experts believe Dodd-Frank has also allowed power to shift more easily from the board to investors, who are not happy.
‘Given executive compensation and some of the massive failures that have occurred, some shareholders think that directors are not fully in charge,’ says Sanjay Shirodkar, of counsel to DLA Piper’s public company and corporate governance group and a former special counsel with the SEC.
Governance has now become a mechanism for institutional investors to vent their displeasure over practices they think are lowering the value of their holdings. ‘Institutional investors over the last three to five years have decided that one way they can make a difference is by choosing a corporate governance topic they think is important and pursuing it,’ says Laura Hewett, counsel at King & Spalding.
The increase in investor actions means governance is now an issue for IR as much as for corporate secretaries. Instead of being messengers, IROs have become brokers. They must explain the board’s rationales to investors and bring institutional investors’ views into the boardroom. Companies can’t afford to look bad in proxy votes like say on pay. A negative investor ballot on compensation is bad publicity and can lead to shareholder lawsuits.
According to Steve Cross, managing partner of compensation consultancy Cogent Compensation Partners, ‘20 percent of the companies that failed say on pay were also sued over their executive compensation programs.’ Furthermore, ISS and Glass Lewis have made governance a central aspect of how they judge and rate companies. Look bad in their models and you can expect even more grief from investors.
Last year, at least 70 companies filed additional proxy soliciting materials to plead their cases directly to investors in the face of proxy advisory firm disapproval, according to Shirodkar. ‘I was involved in two additional filings for companies,’ he says. ‘It’s stressful and causes a divergence of management’s attention. It takes up a lot of time.’
Making committees work
Creating an internal environment where the corporate secretary, IRO and outside consultants can work together isn’t easy. Corporate cultures, job responsibilities and organization structures vary enough that every company’s solution will be different.
There are some principles that will always apply, however. Coordination is a must – without it, ‘you end up with a potentially disjointed program and storyline,’ Ferracone warns.
For collaboration to work, everyone must start from the meaning and purpose of the organization, says Wolfe. ‘Out of that comes the message you want to communicate to the world.’
IR should bring in the voice of the investor, but often the department only talks to the people that buy stock, not to other institutional investors or departments that make proxy decisions. Discussion has to start long before proxy season. Some companies have a fifth analyst call of the year or separate roadshow to talk with the institutional investor proxy heads about executive compensation and other governance issues.
Setting up meetings requires patience, as investor proxy representatives must handle similar requests from many companies.The legal team must review previous assumptions about governance policies. ‘There’s probably an expansion of things the disclosure policy should cover that likely weren’t contemplated when the policies were drafted,’ says Sullivan & Worcester partner Howard Berkenblit.
The company should also take a more collaborative approach with external parties. When proxy advisory firms suggest voting against directors or compensation, try negotiating to find compromise language for a better score or sending out additional persuasive proxy materials.
The days of absolute decisions in governance are over, but with the corporate secretary, IR and other parts of the organization working together, the collaborative approach can be more successful and rewarding than ever before.
