by Jeremy L. Goldstein for The Harvard Law School Forum, May 24th, 2011.
The most important development this proxy season has been the new requirement under Dodd-Frank that all public companies hold an advisory “say on pay” vote. The following are our observations on “say on pay” thus far this proxy season.
Results of General Vote. As of May 6, 2011, all but 15 of the 807 companies that have reported results with respect to their say on pay votes have received favorable votes, with over 2/3 of companies receiving more than 90 percent favorable votes.
Influence of Proxy Advisory Firms. The recommendations of Institutional Shareholder Services (ISS) have had a measurable impact on voting results. ISS has recommended against say on pay proposals at approximately 12 percent of companies holding such votes. Of companies receiving unfavorable vote recommendations from ISS, 11 out of 60 that reported results as of April 29, 2011 failed to receive majority support. Companies receiving negative ISS recommendations that have nonetheless passed have generally done so with considerably lower margins than those receiving favorable vote recommendations. No company receiving a positive recommendation from ISS has failed to receive a majority support.
The influence of Glass Lewis, the other major proxy advisory firm, appears thus far to have been minimal. Glass Lewis has recommended against a strikingly high percentage of companies, and perhaps for this reason, has influenced voting results by approximately three percent or less. In our experience, many companies have determined not to address directly criticisms raised by Glass Lewis.
Reasons for Negative Vote Recommendations. In approximately 85 percent of the situations in which ISS has recommended a vote against say on pay, it is because ISS believes there is a “pay for performance disconnect.” A “pay for performance disconnect” generally exists if both one-year and three-year total shareholder return are in the bottom half of the company’s GICS industry group and the total compensation of the CEO as reported in the summary compensation table is in ISS’s view not aligned with total shareholder return over time. Most frequently, the disconnect is found to exist if there is an increase in year-over-year compensation of the CEO. (continue reading… )