Working with investor
Corporate secretaries and investor relations officers must collaborate
during proxy season.
Dodd-Frank Wall Street Reform and Consumer Protection Act became law last
year, investor relations officers (IROs) and corporate secretaries kissed
their free time goodbye. Mandatory say-on-pay and say-on-pay vote-frequency
balloting, as well as majority elections for directors, meant extra work
with proxy votes and investor outreach. Corporate secretaries and IROs had
This is the continuation of a
trend. Over the last decade, governance has become a public sport.
Shareholders vote on – and increasingly sue over – such topics as director
elections and executive compensation. Proxy advisory firms Institutional
Shareholder Services (ISS) and Glass Lewis are ‘de facto rule-makers’,
according to Claudia Allen, chair of Neal Gerber & Eisenberg’s corporate
governance practice group. Power is shifting from the board of directors to
Governance is fast becoming a
product of board deliberation and the wishes of investors. Companies can no
longer use a specialist approach toward governance, where directors make
decisions, the corporate secretary or compliance officer provides input, the
general counsel reviews the decisions for legal implications, and the
investor relations (IR) department delivers the results to investors.
Instead, governance now requires an integrated and collaborative team
approach that combines best practices, strategic considerations,
communications savvy and salesmanship.
‘We’re seeing much more
collaborative work between departments,’ says Robin Ferracone, executive
chair of compensation consultancy Farient Advisors. ‘Corporate secretaries
have a very central role to play in this whole game of governance and
executive pay design. They are the ones responsible for board processes, and
the board processes have to do a very good job of bringing the right people
in the room and getting them to have the right conversation.’
A shift of power
Norman Wolfe, CEO of Irvine,
CA-based management consulting firm Quantum Leaders, says the passage of
Sarbanes-Oxley in 2002 ‘marked a shift from the dominance of the CEO to a
dominance of the board.’
Then, power began slowly shifting
away from the board. According to Allen, less than 20 percent of the S&P 500
had majority voting for directors in 2006. By 2007, the figure had risen to
more than two thirds. That same year, the SEC pushed for plain-English
compensation discussion and analysis in proxy statements. Then Dodd-Frank
made corporations even more beholden to the wishes of investors.
‘Dodd-Frank gave a lot of support
to what we’ve been living with for a long time – shareholder activism,’ says
Wolfe, who is also the chair of the governance committee for product design
consultancy National Technical Systems of Calabasas, CA.
Some experts believe Dodd-Frank has
also allowed power to shift more easily from the board to investors, who are
‘Given executive compensation and
some of the massive failures that have occurred, some shareholders think
that directors are not fully in charge,’ says Sanjay Shirodkar, of counsel
to DLA Piper’s public company and corporate governance group and a former
special counsel with the SEC.
Governance has now become a
mechanism for institutional investors to vent their displeasure over
practices they think are lowering the value of their holdings.
‘Institutional investors over the last three to five years have decided that
one way they can make a difference is by choosing a corporate governance
topic they think is important and pursuing it,’ says Laura Hewett, counsel
at King & Spalding.
The increase in investor actions
means governance is now an issue for IR as much as for corporate
secretaries. Instead of being messengers, IROs have become brokers. They
must explain the board’s rationales to investors and bring institutional
investors’ views into the boardroom. Companies can’t afford to look bad in
proxy votes like say on pay. A negative investor ballot on compensation is
bad publicity and can lead to shareholder lawsuits.
According to Steve Cross, managing
partner of compensation consultancy Cogent Compensation Partners, ‘20
percent of the companies that failed say on pay were also sued over their
executive compensation programs.’ Furthermore, ISS and Glass Lewis have made
governance a central aspect of how they judge and rate companies. Look bad
in their models and you can expect even more grief from investors.
Last year, at least 70 companies
filed additional proxy soliciting materials to plead their cases directly to
investors in the face of proxy advisory firm disapproval, according to
Shirodkar. ‘I was involved in two additional filings for companies,’ he
says. ‘It’s stressful and causes a divergence of management’s attention. It
takes up a lot of time.’
Making committees work
Creating an internal environment
where the corporate secretary, IRO and outside consultants can work together
isn’t easy. Corporate cultures, job responsibilities and organization
structures vary enough that every company’s solution will be different.
There are some principles that will
always apply, however. Coordination is a must – without it, ‘you end up with
a potentially disjointed program and storyline,’ Ferracone warns.
For collaboration to work, everyone
must start from the meaning and purpose of the organization, says Wolfe.
‘Out of that comes the message you want to communicate to the world.’
IR should bring in the voice of the
investor, but often the department only talks to the people that buy stock,
not to other institutional investors or departments that make proxy
decisions. Discussion has to start long before proxy season. Some companies
have a fifth analyst call of the year or separate roadshow to talk with the
institutional investor proxy heads about executive compensation and other
Setting up meetings requires
patience, as investor proxy representatives must handle similar requests
from many companies. The legal team must review previous assumptions about
governance policies. ‘There’s probably an expansion of things the disclosure
policy should cover that likely weren’t contemplated when the policies were
drafted,’ says Sullivan & Worcester partner Howard Berkenblit.
The company should also take a more
collaborative approach with external parties. When proxy advisory firms
suggest voting against directors or compensation, try negotiating to find
compromise language for a better score or sending out additional persuasive
The days of
absolute decisions in governance are over, but with the corporate secretary,
IR and other parts of the organization working together, the collaborative
approach can be more successful and rewarding than ever before.
Cross Border Ltd. 1995–2011.