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Boards Are Preparing for Say on Pay
Article published on October 25, 2010
Despite months of knowing
mandatory say on pay is coming in 2011 as a result of the Dodd-Frank Act,
many boards are still formulating an action plan to prepare.
Nearly one third of the 137 write-in responses to Agenda’s
Directors’ and Officers’ Outlook survey for the fourth quarter said they
were still evaluating the say-on-pay legislation, waiting for a specific
rulemaking from the SEC or planning to take a vote on
say-on-pay frequency at the next board meeting. The survey was conducted
Oct. 5 and Oct. 18.
Another 24% of the respondents said they either think say on pay is not a
big issue or it isn’t applicable (in some cases because they serve on boards
that have already adopted the measure). “Not concerned,” wrote one
independent director. “Ignoring it right now,” wrote one public company CEO.
The Agenda survey was conducted before the SEC released its
proposed rules for say on pay last week (for more please see
Boards shouldn’t, however, take say on pay lightly, says Russ Miller,
managing director of ClearBridge Compensation Group. “I
don’t know any companies that are viewing this as a non-issue… For many
companies this doesn’t change what they’re doing, but they’re still
reviewing their programs in light of say on pay,” he says.
Shareholders are looking for pay programs that support pay for performance
and shareholder alignment, he says. “The vote will be driven off of policies
and programs that support those objectives.”
Miller suggests that the first thing companies do is conduct an annual
review of their compensation programs, keeping in mind those objectives
shareholders are looking for. Secondly, boards should make sure they know
who their shareholders are and what their priorities are. Then the board
needs to decide whether changes to compensation are needed, partly based on
feedback from investors. Lastly, boards should determine whether changes to
pay disclosure should be made.
Many respondents to the survey said they are preparing for say on pay by
looking at what other companies are doing. “Follow the leader,” a CEO of a
public company wrote. Miller says that’s not a bad idea, particularly when
it comes to making a recommendation to shareholders on how often to hold a
compensation vote. Seeing what other companies are doing is gauging “the
trend in the marketplace,” he says.
Shareholder engagement is viewed by many to be an imperative under say on
pay. However, only 5.8% of respondents said they were preparing for the
measure by reaching out to shareholders. An additional 1.5% said they were
looking at proxy advisory firms’ policy standards.
SEC chairman Mary Schapiro
spoke about her views on the importance of shareholder
engagement in the context of say on pay and other new initiatives in a
speech to the National Association of Corporate Directors
last week. “For boards and their companies, engagement means more than just
disclosure. It means clear conversations with investors about how the
company is governed — and why and how decisions are made,” she said.
Reaching out to shareholders was a large component of
the preparation Prudential Financial’s board did before
and after the company announced it would be the first to adopt biennial say
on pay last fall.
Peggy Foran, Prudential’s chief governance officer, vice
president and corporate secretary, says her board spent most of its time
preparing for say on pay by gathering feedback from investors, first on
their desired frequency for a pay vote and then about the company’s pay
The board decided that it wanted to find ways to encourage more retail
voting with the say-on-pay initiative on the ballot, so they offered to
plant a tree or give a reusable tote bag to every registered shareholder
that voted. The effort appeared to bear fruit: An additional 68,000
shareholders voted in 2010 compared to 2009, the company says.
The board also sent a letter to shareholders on the new measures it had
adopted over the past year, which was part of this year’s proxy statement.
Foran says the company also made more of an effort to write the Compensation
Discussion and Analysis section in plain English and include executive
It’s important to look at the CD&A as a marketing tool under say on pay,
Miller says. If a board has adopted a pay policy that runs counter to
prevailing attitudes, then the CD&A should make the case for having the
“By listening to your shareholders you learn a lot,” Foran says. “It made us
realize maybe there are things we should do differently.”
Of course, the board isn’t directly involved in each meeting with
shareholders, Foran notes. “You have to figure out effective and efficient
ways of gathering shareholder feedback,” she says. Prudential directors have
spoken at conferences and attended meetings where shareholders are present.
Some directors have served on other boards where they have met with
shareholders that are also Prudential shareholders.
Companies that have already adopted say on pay ahead of the legislation will
undoubtedly be re-evaluating their policies to make sure they reconcile with
the SEC’s rule proposal. The SEC issued its proposal Oct. 18; public
comments are due Nov. 18. The Dodd-Frank Act requires the votes to be in
place for annual meetings on or after Jan. 21, 2011.
For non-TARP companies that already have say on pay, shareholders still get
a vote on the frequency of say on pay. Foran says even though Prudential
heard from shareholders last year that most preferred the biennial model,
the company will be surveying its investors again in light of the SEC’s
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