Taking action on prior years' shareholder votes and increased shareholder engagement have helped companies win positive proxy votes this year.
Executive pay for performance and the disconnect between CEO compensation and returns to shareholders over the last one, three and five-year periods were key battleground issues during the first half of the 2013 proxy season, according to a webcast hosted by the law firm Latham & Watkins and Georgeson on June 18.
The webcast, ‘2013 Proxy Season: Lessons Learned and Coming Attractions,’ highlighted key proxy voting issues, successes in getting shareholder proposals withdrawn and developments in lawsuits based on proxy disclosure issues.
Companies received higher votes on say-on-pay proposals last year than this year, mostly due to better total shareholder returns reported in 2012, said Jim Barrall, a partner at Latham & Watkins. ‘It’s amazing what strong TSRs will do for say-on-pay votes,’ he said.
Pay for performance figured in all but one of the 38 companies that failed their say on pay votes this year, said Barrall. Some companies that failed their votes passed the quantitative analysis done by Institutional Shareholder Services and Glass Lewis but came up short in the qualitative analysis in the proxy advisory firms’ reports.
Proxy advisers are raising the bar by demanding that companies be more aggressive in the performance metrics and goals they set for themselves, he added.
The failure by boards to respond to low say-on-pay votes received in prior years was a factor in 22 of the companies that failed their say-on-pay votes this year. ‘It’s imperative for companies that receive less than a 70 percent vote on say on pay to understand why,’ said Barrall, who urged them to read the proxy advisory reports carefully beyond the first page.
Growing recognition that summary compensation tables aren’t the best way to determine companies’ peer groups has led to an array of alternative methods to analyze executive pay, including realizable pay and earned pay, which often have contradictory meanings. To help reach a more standard methodology, a working group has been established by the Conference Board and the Society for Corporate Secretaries to draft a set of principles to better define executive pay. A draft white paper is expected to be published and distributed in late summer or early fall, which will serve as a jumping off point for analyzing 2013 proxies, said Barrall.
Companies that have stepped up shareholder engagement efforts have been reaping benefits this year, including higher votes on certain proxy proposals and getting activist shareholders to withdraw proposals, said Rhonda Brauer, senior managing director for corporate governance at Georgeson.
‘Where companies had a sense they wouldn’t do well with proxy advisory firms, they started talking with investors and proxy advisory firms and trying to tell their story as best they could in their proxy statements,’ she said.
Filing supplementary materials has proved helpful to companies when reaching out to investors to explain the rationale for changing the basis for paying directors from attendance at board meetings to a retention model. ‘It’s very useful in having that piece of paper when you have to make that follow-up call because investors have it in front of them,’ and it helps a company explain why it wants an investor to vote against the recommendation of the proxy advisory firms, says Brauer.
More dedicated efforts to speak with investors paid off in getting shareholders to withdraw proposals regarding board reclassification, majority voting for directors, and separating the positions of CEO and chairman, which the proxy fight at JP Morgan brought much attention to. Adding disclosures on company websites or in outreach to investors helped some companies persuade shareholders to withdraw proposals on political spending, sustainability and environmental reporting and board diversity, Brauer said.
Looking ahead to next season, Brauer noted signs that proxy advisers may be losing some influence with large institutional investors. Vanguard and Blackrock are now directly contacting companies they invest in and that’s expected to continue, while smaller institutions that lack the capacity for such outreach will continue to rely on the advisory firms. Proposals to extend proxy access to retail shareholders will also warrant monitoring, with more of these proposals passing this year than last year even though the number of proposals was down overall, she added.
