• Compensation committee members can expect withhold campaigns as new disclosure hits
• Early preparation is key to ensuring effective processes and timely disclosure
• More active engagement with shareholders can reduce up to two-thirds of proxy fights
• Don’t view agencies as the enemy; work with them to improve or avoid negative ratings
• Hot button issues could distract companies from perennial shareholder activist causes
America’s corporate leaders may feel as though they have woken up in boot camp. As the 2007 proxy season looms large, CEOs, their boards, in-house legal teams and those tasked with corporate reporting and compliance are mustering their troops, checking their defenses and, in many cases, drawing up battle plans.
For those looking to get through proxy season unscathed by messy shareholder proposals or costly proxy fights, Corporate Secretary asked Institutional Shareholder Services (ISS), Glass Lewis and DF King what companies should be doing to get prepared.
Almost everyone agrees this year will see more shareholder campaigns and proxy contests than the last few. Rick Grubaugh, SVP, M&A and corporate proxy solicitation at DF King explains: ‘Companies disclosing jaw-dropping compensation are going to face withhold campaigns against members of the compensation committee. These can be launched at the eleventh hour and can have a significant impact.’
Robert McCormick, vice president of proxy research and operations at Glass Lewis, agrees: ‘It is highly probably that new disclosures of executive compensation will result in a higher level of withhold votes against members of the compensation committee. The wow factor is going to be significant because investors can now see a total for previous years’ compensation. Much of this data was previously available, but never all in one place and in an easily identified manner. That is going to shock a lot of people and it will lead to some action against the people that were on the committee at the time those payments were made,’ he says.
Pay for performance
Other issues that received high-level support last year will likely raise their heads again, according to McCormick, in particular those related to tying pay to some form of performance standard. Also, proposals seeking that shareholders have some sort of ratification of the compensation committee report will likely increase. These were brought at four companies in 2006 and each received very high-level support – an average of 40 percent, which is very high for a first-year proposal.
Majority voting will continue to be a big issue. At least 150 companies are likely to see proposals on this subject. Some companies have taken significant steps in this area and received very high levels of support. However, most are taking some sort of middle- ground approach like Pfizer, and these are receiving a reasonable amount of support.
Returning to compensation, McCormick feels that while high levels of pay will disturb some investors, it is not a universal problem: ‘Total amounts have not really changed year-on-year. Even if pay levels are high, and many of them are going to be, shareholders are much happier if they see that pay is tied to some sort of performance standard. They want not just a vague statement saying that payments are tied to performance but a little more detail. The CD&A should include some basic performance metrics and a discussion of how they were met. For example, they achieved 80 percent of target levels and therefore they received 80 percent of their bonus.’
‘Obviously, there is a line between discussing some of the performance parameters and divulging potentially competitive information,’ McCormick continues. ‘I think it is okay for a company to say we have parameters based on components of the following metrics: total shareholder return (TSR) and return on investment (ROI). That is basically market information so it isn’t that bad to disclose. It is definitely possible to present a general overview without divulging anything that is going to impact the business.’
While majority voting and executive compensation will be the most high-profile issues, it is important not to forget about some other perennial favorites of the activist community. Anti-takeover provisions will be a problem for some companies this year, according to McCormick. Last year, for example, was the first time that a majority of S&P 500 companies did not have classified boards. ‘This makes it far more difficult for the companies that still have classified boards because it removes the argument that everyone else is doing it, so we are too,’ he says.
More than in the past, communication is going to be the key to avoiding protracted battles. Proxy solicitation firms should be able to assist in identifying investors that are likely to present issues or to vote in a particular way. Grubaugh highlights the need for not waiting until a problem arises to start talking with shareholders: ‘Early engagement is important because approximately two-thirds of proxy contests where a dissident pre-files go away before they even get to a vote.’
Grubaugh further highlights the need to stay up to date with your shareholder base. ‘Ownership will have changed since the last proxy season and it is vital to understand who the shareholders are at the record date.’
Don’t forget the advisers
It is a good idea to understand the influence of the various advisory firms like ISS and Glass Lewis on your shareholders. Some of them will listen to ISS or others’ recommendations and some investors will not, so you must understand this so as not to waste effort in talking about the wrong issues with the wrong groups, explains Grubaugh.
Active communication with proxy advisory firms is very important. There is a tendency to take an adversarial view of advisory firms but this is not generally useful. If it emerges that you are going to get a negative recommendation, then you should talk with the advisory firm to get that issue changed before the recommendation comes out. Once the recommendation is out, it is a lot more difficult to handle.
One significant difference that we are going to see in 2007, says Grubaugh, is the approach of some companies toward the activist community. CEOs and boards have been willing to negotiate and make major concessions, like giving up a board seat to a dissident. ‘There is most likely going to be a lot more pushback this year. There is a growing feeling that some companies have been too quick to give up too much. They will most likely start to pick and choose which dissidents they will negotiate with and which ones they will fight,’ he says.
But it is not just corporations that benefit from increased engagement. In many cases activists are more likely to achieve a desired result through a conciliatory approach. They can often achieve much greater levels of influence and change through in-depth engagement than through proxy votes or fights.
If the only time a company hears about an issue is via a proxy contest, it is hardly surprising there is resistance. The company may not know why investors are voting the way they are or even which investors are voting. ‘This is not a particularly efficient way to effect change,’ says McCormick.
The experts concur that there is more to this proxy season than tactics. Beyond ensuring efficient filing and reporting structures and expanded compensation disclosure, companies striving for a painless proxy season should focus on a strategy of active engagement with investors, proxy advisory and ratings firms and the media.
For those looking to get through proxy season unscathed by messy shareholder proposals or costly proxy fights, Corporate Secretary asked Institutional Shareholder Services (ISS), Glass Lewis and DF King what companies should be doing to get prepared.
Almost everyone agrees this year will see more shareholder campaigns and proxy contests than the last few. Rick Grubaugh, SVP, M&A and corporate proxy solicitation at DF King explains: ‘Companies disclosing jaw-dropping compensation are going to face withhold campaigns against members of the compensation committee. These can be launched at the eleventh hour and can have a significant impact.’
Robert McCormick, vice president of proxy research and operations at Glass Lewis, agrees: ‘It is highly probably that new disclosures of executive compensation will result in a higher level of withhold votes against members of the compensation committee. The wow factor is going to be significant because investors can now see a total for previous years’ compensation. Much of this data was previously available, but never all in one place and in an easily identified manner. That is going to shock a lot of people and it will lead to some action against the people that were on the committee at the time those payments were made,’ he says.
Pay for performance
Other issues that received high-level support last year will likely raise their heads again, according to McCormick, in particular those related to tying pay to some form of performance standard. Also, proposals seeking that shareholders have some sort of ratification of the compensation committee report will likely increase. These were brought at four companies in 2006 and each received very high-level support – an average of 40 percent, which is very high for a first-year proposal.
Majority voting will continue to be a big issue. At least 150 companies are likely to see proposals on this subject. Some companies have taken significant steps in this area and received very high levels of support. However, most are taking some sort of middle- ground approach like Pfizer, and these are receiving a reasonable amount of support.
Returning to compensation, McCormick feels that while high levels of pay will disturb some investors, it is not a universal problem: ‘Total amounts have not really changed year-on-year. Even if pay levels are high, and many of them are going to be, shareholders are much happier if they see that pay is tied to some sort of performance standard. They want not just a vague statement saying that payments are tied to performance but a little more detail. The CD&A should include some basic performance metrics and a discussion of how they were met. For example, they achieved 80 percent of target levels and therefore they received 80 percent of their bonus.’
‘Obviously, there is a line between discussing some of the performance parameters and divulging potentially competitive information,’ McCormick continues. ‘I think it is okay for a company to say we have parameters based on components of the following metrics: total shareholder return (TSR) and return on investment (ROI). That is basically market information so it isn’t that bad to disclose. It is definitely possible to present a general overview without divulging anything that is going to impact the business.’
While majority voting and executive compensation will be the most high-profile issues, it is important not to forget about some other perennial favorites of the activist community. Anti-takeover provisions will be a problem for some companies this year, according to McCormick. Last year, for example, was the first time that a majority of S&P 500 companies did not have classified boards. ‘This makes it far more difficult for the companies that still have classified boards because it removes the argument that everyone else is doing it, so we are too,’ he says.
More than in the past, communication is going to be the key to avoiding protracted battles. Proxy solicitation firms should be able to assist in identifying investors that are likely to present issues or to vote in a particular way. Grubaugh highlights the need for not waiting until a problem arises to start talking with shareholders: ‘Early engagement is important because approximately two-thirds of proxy contests where a dissident pre-files go away before they even get to a vote.’
Grubaugh further highlights the need to stay up to date with your shareholder base. ‘Ownership will have changed since the last proxy season and it is vital to understand who the shareholders are at the record date.’
Don’t forget the advisers
It is a good idea to understand the influence of the various advisory firms like ISS and Glass Lewis on your shareholders. Some of them will listen to ISS or others’ recommendations and some investors will not, so you must understand this so as not to waste effort in talking about the wrong issues with the wrong groups, explains Grubaugh.
Active communication with proxy advisory firms is very important. There is a tendency to take an adversarial view of advisory firms but this is not generally useful. If it emerges that you are going to get a negative recommendation, then you should talk with the advisory firm to get that issue changed before the recommendation comes out. Once the recommendation is out, it is a lot more difficult to handle.
One significant difference that we are going to see in 2007, says Grubaugh, is the approach of some companies toward the activist community. CEOs and boards have been willing to negotiate and make major concessions, like giving up a board seat to a dissident. ‘There is most likely going to be a lot more pushback this year. There is a growing feeling that some companies have been too quick to give up too much. They will most likely start to pick and choose which dissidents they will negotiate with and which ones they will fight,’ he says.
But it is not just corporations that benefit from increased engagement. In many cases activists are more likely to achieve a desired result through a conciliatory approach. They can often achieve much greater levels of influence and change through in-depth engagement than through proxy votes or fights.
If the only time a company hears about an issue is via a proxy contest, it is hardly surprising there is resistance. The company may not know why investors are voting the way they are or even which investors are voting. ‘This is not a particularly efficient way to effect change,’ says McCormick.
The experts concur that there is more to this proxy season than tactics. Beyond ensuring efficient filing and reporting structures and expanded compensation disclosure, companies striving for a painless proxy season should focus on a strategy of active engagement with investors, proxy advisory and ratings firms and the media.
