Proxies are too often written with SEC compliance rather than investors in mind
Corporate governance can sometimes be a game of inches, where a single poorly worded phrase, confusing line graph or drab font in a proxy statement can lead to a prolonged shareholder action or expensive reorganization.
Proxy statements are often like a recap of the all-important annual meeting, but experts say that too often companies’ statements are written with SEC compliance in mind instead of the end-user: institutional investors. As a result, many proxies are cumbersome, confusing and overwrought.
Part of the problem is due to the ever-expanding size of proxy statements. ‘Right now you have documents that range from 50 to 200 pages, which very few people have the time to read and understand,’ says Rhonda Brauer, senior managing director for corporate governance at Georgeson.
A recent survey by corporate communications firm RR Donnelley finds that of 200 large institutional investors, 68 percent prefer ‘brief and concise’ proxies of 60 pages or fewer. Plain English text is the number one need for proxies (four fifths of respondents say it affects how they vote), but colorful graphs, differentiated fonts and broken columns can also help communicate a company’s story more efficiently.
Another major issue is how proxy statements are worded and designed. ‘Votes are extremely close on many contentious issues, and a well-crafted proxy statement can push the story just enough,’ said Stephen Brown, director of corporate governance at TIAA-CREF, during a recent webinar hosted by RR Donnelley on the survey’s results.
‘It was impressed upon me years ago that some companies were penalized at the ballot box because investors didn’t understand certain disclosures,’ says Ron Schneider, director of corporate governance services at RR Donnelley. ‘I think most companies would like the proxy statement to be the primary source of information, instead of the proxy advisers. A good proxy should tell your story as effectively as possible so at least investors reading a proxy adviser recommendation will appreciate your countervailing arguments.’
Proxy advisory services like Glass Lewis and ISS have incredible influence in helping to shape say-on-pay and audit committee votes. The SEC held a December roundtable forum on the issue of whether the proxy firms have become too powerful, as some of the agency’s commissioners have said they worry that the firms hold undue influence.
According to the RR Donnelley survey, 67 percent of respondents receive proxy statements via proxy advisory voting platforms, and another 12 percent from Broadridge’s platform. None receive proxy statements electronically or in hard copy directly from issuers.
Experts tell cautionary tales of companies receiving negative recommendations from Glass Lewis or ISS for supposedly not including critical information on executive compensation plans, when the information was actually in the proxy statement but the advisory firm simply didn’t see it in the snow of elaborate graphics and blocky text. As such, simplifying proxy statements is more important than ever.
Both institutional investors and proxy advisory firms are often overloaded with the task of having to read hundreds of proxies and other materials every year, which can lead to errors, according to Iain Poole, international development director at Labrador, a communications company that specializes in SEC disclosure. He emphasizes, however, that issuers should focus on meeting the needs of institutional investors. ‘The institutional investor is the ultimate goal,’ he says, noting that there is room to trim the fat on many proxies. ‘If it is not useful and required by law, then it is not worth having in the proxy.’
Proxy do’s and don’ts
Unfortunately, determining what is considered ‘useful’ by investors is a constantly moving (and expanding) target. Right now the most read and most contentious section of the proxy is the executive compensation discussion and analysis (CD&A). Sixty percent of respondents in the RR Donnelley survey say they skip to a specific section in the proxy rather than reading the whole document front to back, and 84 percent say a CD&A summary is helpful.
The more information on how board members and top executives are paid, the better, it seems. One helpful resource is the ‘do and don’t’ chart, which quickly shows the governance practices a company follows or doesn’t follow. This helps readers easily identify any issues of concern to them, says Brauer. She advises companies to list the positive executive compensation practices they have in place, as well as the ones some key readers may view negatively which they do not have. ‘You could easily lose a vote on say on pay if you don’t tell your story well,’ she notes.
H&R Block’s 2013 proxy statement has a ‘do and don’t’ chart that explains that the company prohibits hedging of stock options and requires minimum vesting for equity awards. Prudential discusses its prohibition of hedging and pledging in its 2013 proxy and has a section devoted to stock ownership guidelines.
In addition, several companies have projects that may take years to bring online, and it is worth explaining that to the reader. ‘All too often when I read the executive summary of the CD&A, it feels detached from management performance,’ says Poole, who advises companies to link management actions to business successes over a period of time. For example, ExxonMobil explains in its proxy that it is focusing on longer-term projects rather than emphasizing only what it is doing in the short term, and it includes projected shareholder returns over a 30-year period.
More information on pay is good, but too much can result in a blur of white noise. Some institutional investors are distrusting of seemingly over-engineered or complex graphics in proxy statements. More than half of the investors in the RR Donnelley survey say they have seen graphs in recent proxies that seem over-engineered and hard to follow. Many report that it seems deliberate. ‘Felt like I was purposely being misled,’ one investor writes.
Experts say such mistakes are merely the result of poor design, and are not malicious. ‘If companies wanted to keep something hidden they would do it the old way of burying it in dense text, not by highlighting it [with a graph],’ Schneider says. He believes the problem is that some designers are trying to do too many things at once with overly creative graphics.
Consistency is a good idea when trying to prevent graph-related confusion. Poole advises that companies shouldn’t chop and change graphs every year, but should rather keep graphs in proxies for several years to show continuity.
Tell directors’ stories well
It’s not enough to explain the company’s story – it’s also becoming necessary to delve into the stories of the board of directors. Many proxy fights in recent years have taken place because investors have considered directors not qualified enough in one or more crucial business areas.
Brauer recommends using a matrix to highlight the directors’ various skills and qualifications, as well as other pertinent information (how old they are, how many years they’ve been on the board, on which board committees they serve, which current or prior work experience they have that could help the company at this point in its development). Photos can help to quickly illustrate board diversity, she adds.
It also helps to explain the methodology of how directors were selected, especially if it’s not obvious. Illustrating peer groups – not just at similar companies in terms of market cap or industry, but also so-called ‘human resources peers’ – can help avoid nasty director election battles later on, Schneider says. A well-described HR peer group (firms that may be in completely different industries but will often rely on the same type of executives) can help sway investors and proxy advisory firms in their view of how directors fit the company.
Given the contentiousness of certain proxy fights, admitting defeat to activist investors may be a bitter pill to swallow – but highlighting past proxy battles can actually help companies tell their stories better. ‘If you’re making changes that are considered shareholder-friendly, you want people to know you are evolving in that direction and you want to take credit for it,’ Schneider says.
Replacement of policies
In particular, companies should highlight compensation practices that have fallen out of favor and have been nixed from company policies. For example, many companies no longer offer tax gross-ups for their executives and should probably highlight that in their CD&A, says Wendy Fried, a strategist in stakeholder communications at Addison.
Chesapeake Energy, for example, has had intense shareholder battles over its executive compensation over the last few years. In its annual meeting in 2012, it received an overwhelming 80 percent vote against its pay plan. The company then appointed five new independent directors and reworked most of its corporate governance approach. In its 2013 proxy, Chesapeake called attention to this realignment and published a list of its changes. ‘The company has had a governance revolution,’ Poole says. ‘One institutional investor told me the proxy statement was the best he’d read.’
Sometimes, however, it’s the simple things that make all the difference. Most experts agree that breakout boxes to underline important text, color differentiation between sections, and even page and section tabs can make it far easier for proxy advisory firms and institutional investors to read and compare proxies. ‘Wayfinding improves readability and makes it more convenient, especially for institutions,’ Fried says.
