In First Year of Say on Pay, Is Shareholder Dialogue Progressing?

by Gary Larkin for The Conference Board – The Governance Center Blog, June 2nd, 2011.

The fact that as of June 1, 31 companies out of more than 1,600 have reported shareholders have voted down executive compensation plans (of those a majority are small- and mid-cap companies) doesn’t begin to tell the story of the first year of SEC-mandated Say on Pay advisory votes.

That’s because the real story is what are boards, management and shareholder learning from the whole experience. That is to say, is there any real dialogue taking place between the companies and shareholders other than the required SEC filings? Based on some early anecdotal evidence and one study done by Semler Brossy Consulting Group, there is some dialogue.

I could sit here and overwhelm you with all the figures for the 2011 proxy season so far (don’t worry, I will), but I would be remiss if I didn’t point out the shift that is taking place in the boardroom and at the annual general meetings. Directors, officers, and shareholders are actually discussing and dealing with the issue of excessive executive compensation following the 2008-2009 financial crisis. In the past, that discussion was mostly one-sided with shareholders making all the noise.

Acknowledging the influence of the proxy advisory firm Institutional Shareholder Services (ISS), directors are receiving advice from such powerful law firms as Wachtell, Lipton, Rosen & Katz on how to win the Say on Pay vote. (For the record, ISS has recommended a negative Say on Pay vote at about 12 percent of the companies it assessed while only 1.8 percent of the Russell 3000 companies failed to have a majority of shareholders vote for executive compensation plans.)

So what does Marty Lipton and his fellow partners at WLRK advise boards and management to do if they receive a negative Say on Pay vote recommendation from ISS? Here are some of the action steps the law firm advises to do:

  • Understand how compensation programs stack up against ISS standards:Figure out where your executive pay practices deviate from ISS and be ready to explain why they do.
  • Assemble a task force: Anticipate when ISS is going to issue its recommendation and have a task force available to respond to the report.
  • Know your limits: Instead of criticizing the ISS methodology, focus on factual errors in the report and don’t make inflammatory remarks.
  • Reach out to shareholders: The difference between companies that have passed and those that have failed the vote is often willingness to engage directly with shareholders.
  • Consider supplemental materials: Filing supplemental materials that might reiterate what is already in the Compensation Discussion and Analysis may help companies reach investors who they might not otherwise be able to meet in person.
  • Changing compensation practices: ISS has been willing to change its vote recommendation when companies change compensation practices retroactively, as was the case with Disney (removing golden parachute excise tax gross-ups for several executives) and General Electric (adding performance goals to CEO Jeffrey Immelt’s stock option grant).

As for advice for shareholders, the United States Proxy Exchange released last month draft guidelines for shareholders to use when making decisions on Say on Pay votes. “We recommend shareowners need not attempt a qualitative assessment of the various features of a compensation package,” according to a joint statement from the USPX drafting committee (Brett Davidson, Glyn Holton, Jim McRitchie and Steven Towns). “They can simply base their analysis on the total value of compensation paid in the previous year. This solution is in the spirit of Alexander The Great’s original solution of cutting the Gordian Knot. Transforming Say on Pay votes from ex-ante to ex-post is straightforward and effective.” (continue reading… )


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