The Shareholder ForumTM

Electronic Participation in Shareholder Meetings

Forum Home Page [see Broadridge note below]

"E-Meetings" Home Page

"E-Meetings" Program Reference


Note: Margaret M. ("Peggy") Foran, the Vice President, Secretary and Corporate Governance Officer of Prudential Financial who is quoted below on the subject of investor communication, is a member of the Shareholder Forum's Policy Review Board and also of the Forum's Program Panel for "E-Meetings" communications standards.


Corporate Secretary, December 22, 2011 article


Corporate Secretary


Proxy outlook 2012: say on pay year two

by Adam Piore  |   22 Dec 2011

Companies should expect more scrutiny as say on pay enters its second year.

Inaugural say-on-pay votes were the biggest wild card for many companies during last year’s proxy season – and firms shouldn’t expect 2012 to be any different. With a flagging economy driving down earnings, investors are likely to scrutinize rising pay more closely. Insiders say they are also likely to be less tentative in casting ‘no’ votes because say on pay is now in its second year.

Proxy access and campaign finance disclosure will also be hot topics in the coming months, thanks to the furious fundraising of the 2012 presidential election and two recent court decisions that are grabbing shareholder attention. In July, a federal appeals court in Washington, DC struck down an SEC rule that would have required companies to list shareholder-nominated board candidates in their proxy materials. But the legal decision did not prevent an SEC revision to another related regulation – Rule 14a-8 – from taking effect this September.

Rule 14a-8 will for the first time allow shareholders to use company proxy materials to propose their own board election and nomination procedures, which could result in a number of activist initiatives aimed at filling the void left by the DC court decision.

However, there’s no guarantee that those proposals will aim for the consensus ownership threshold established in the SEC proposal, which would have required those nominating directors to own 3 percent of the company for three years. Some suggest the proposals could go as low as 2 percent or even 1 percent.

‘If people are frustrated, you could see some situations where proposals would be management unfriendly, which would be unfortunate,’ says Brad Robinson, a managing director specializing in corporate governance at proxy firm Eagle Rock. ‘If companies believe they will be targeted and that there might be enough support to pass a bylaw, they would be better off opening a dialogue and coming up with one they can live with.’

Meanwhile, the upcoming presidential race will be the first since the Supreme Court struck down campaign contribution limits in the 2010 Citizens United case, and a number of observers expect activist investors to push for greater disclosure. ‘Right now senior executives have enormous discretion to dip into corporate treasuries and fund all manner of charitable and political activities, often with little oversight from boards,’ says Amy Borrus, deputy director of the Council of Institutional Investors.

‘Shareowners have no idea whether their money is being spent in ways that contribute to shareholder value or are contrary to their companies’ own policies.’

Melissa Aguilar, a research associate at The Conference Board, notes that more than a quarter of social and environmental proposals filed in 2011 were related to political contributions. One proposal filed at Sprint Nextel in 2011 garnered 53 percent of the vote. Many of the proposals were coordinated by the Center for Political Accountability, which has already telegraphed its priority for the year by sending letters to more than 400 companies urging them to adopt some form of disclosure or oversight of political contributions.

Say on pay will dominate

Still, the first issue on everyone’s lips as they look toward the 2012 proxy season remains say on pay. ‘There are routine votes, like the annual ratification of an auditor,’ notes Patrick Quick, a partner at Foley & Lardner who specializes in corporate governance and proxy statements. ‘But while say on pay will be annual, I don’t think it will be routine in any way. Issuers will have to address it actively every year, and think early and often about how to do that.’

There are many reasons for companies to pay extra attention in 2012. During the fall conference of the Council of Institutional Investors in Boston, organizers took a straw poll asking participants whether they believed more companies were likely to fail say on pay this year. The verdict was clear: 70 percent of those polled said ‘yes’.

Borrus notes that last year, ‘institutional investors were extremely cautious and judicious and didn’t want to slam companies the first time out.’ That won’t be the case in 2012, however – ‘Now many investors are more comfortable casting say-on-pay votes,’ Borrus explains. Ron Schneider, senior vice president at Phoenix Advisory Partners, says this ‘enhanced scrutiny’ will especially apply to companies that got ‘less than sterling votes’. He notes that while only 40 companies failed say on pay in 2011, at least 200 more got less than 70 percent approval, while 600 companies got less than 80 percent approval.

‘Many of those companies are likely to come under closer scrutiny next year,’ Schneider says. ‘Certainly the same investors who voted against them this year will be looking to see what changes are made, if any, and there are potentially others who may be taking a harder look at these companies than they did last year, when they may have given them an easy pass.’

Schneider’s view appears to be supported by the results of a recent Institutional Shareholder Services (ISS) survey that polled a number of shareholders to determine what level of ‘no’ on say on pay is worthy of a response. The number one answer was a 20 percent ‘no’ vote or greater, says ISS executive director Patrick McGurn. The second most popular answer was a 30 percent ‘no’ vote.

‘If you include those voting that greater than 10 percent requires a response, almost three-quarters of respondents identified their threshold as below 30 percent,’ says McGurn. ‘So when companies are looking at where that red zone will be set for institutional investors, they should keep in mind the figure of 20 percent or 30 percent and know who their investors are.’

For next year, ISS has indicated that it intends to operate on a ‘yellow card, red card’ system, emulating the penalty system used in soccer. Failing a say-on-pay vote is a warning, or yellow card. Failing to address a failed say-on-pay vote is a red card, or penalty, which may well result in a recommendation by ISS of a ‘no’ vote against members of the corporate compensation committee.

Pay for performance drives change

Pay for performance looks to be a clear priority that will drive the recommendations of proxy advisory firms like ISS and Glass Lewis next year. Jim Barrall, a partner in the Los Angeles office of Latham & Watkins who specializes in executive compensation, says it’s essential to address the issue head-on.

Under Dodd-Frank, the SEC is expected to propose rules that will require companies to disclose in narrative and likely tabular formats exactly how their pay to named executive officers aligns with performance.

The rule, Barrall says, is likely to be proposed by the end of the year or soon thereafter. Therefore, companies need to be proactive in determining if their pay and performance are aligned. ‘They need to anticipate whether ISS will determine that there is a pay for performance disconnect, analyze their reasoning and discuss it in their proxies,’ Barrall says. ‘The proxy should also set forth the company’s story as to what performance it values and why it thinks that its pay is aligned with performance.’

Current SEC rules also require that after a say-on-pay vote, every company must say in its proxy whether it has taken the vote into account in designing its pay plans, and if so, how.

So, if companies that received failed votes don’t make significant changes, ‘they risk having ISS make recommendations against the reelection of members of the compensation committee, and possibly the entire board, for failing to be responsive to shareholders,’ Barrall says.

There’s another reason companies should address pay and performance disparities: investors are likely to be far more irate due to the sagging stock market. ‘Unless the market really recovers, we’re likely to have a lot of companies where performance is down, and pay will either be up or even in many cases,’ says McGurn. ‘It will be a disclosure challenge for a lot of companies, and they are going to have to address that disconnect in a fairly straightforward fashion in order to convince investors that there is a long-term linkage between pay and performance.’

Engagement and disclosure are key

How companies will prepare for next year is difficult to say. Many did not return calls seeking comment, or said it was too early to discuss the matter. Some grew agitated at the mere mention of proxy season.

At Exxon, which faced a campaign against its compensation package by union pension funds, received a ‘no’ recommendation from ISS and garnered 67 percent approval for its pay packages, a spokeswoman said the company wouldn’t ‘speculate’ or discuss the way it planned to prepare, or how it planned to respond to the 33 percent who voted against it.

Peggy Foran, chief governance officer, vice president and corporate secretary of Prudential Financial, says shareholder engagement will be a key part of her company’s approach. ‘This proxy season presents a number of important issues, and as ever, the key to managing those issues is the full engagement of shareholders. At Prudential, we prominently feature our commitment to shareholder communication in our proxy statement and are continually exploring new avenues through which shareholders can offer feedback to the board.’

‘One of the benefits of say on pay is supposed to be engagement,’ Barrall states. ‘Even if there was a paltry negative vote, I think a lot of issuers are reaching out to shareholders just to make sure there are no lingering or underlying problems.’

Quick suggests that companies try to learn as many lessons as possible from the first year of say on pay, whether they look at their own experience or the experiences of others. He says delivering a positive vote ‘will depend in part on good disclosure’, both on the actual compensation policies and on the thinking of the compensation committee behind the policies.

‘Companies should also talk to shareholders get a dialogue going and work to understand shareholder concerns,’ says Quick. ‘Even if it’s too late to change compensation for fiscal 2011, you can at least tell people looking ahead to 2012 that you did address relevant issues in response to shareholder concerns.’

Quick adds that companies should be ready to make phone calls to people, ‘to be more active and have active dialogue with shareholders during the 30-day window while your proxy statement is out there. Last year most companies were just reactive.’

© Copyright Cross Border Ltd. 1995–2011.




This Forum program is open, free of charge, to anyone concerned with investor interests in the development of standards for conducting shareholder meetings with electronic participation. As stated in the posted Conditions of Participation, the Forum's purpose is to provide decision-makers with access to information and a free exchange of views on the issues presented in the program's Forum Summary. Each participant is expected to make independent use of information obtained through the Forum, subject to the privacy rights of other participants.  It is a Forum rule that participants will not be identified or quoted without their explicit permission.

The organization of this Forum program was encouraged by Walden Asset Management, and is proceeding with the invited leadership support of Broadridge Financial Solutions, Inc. and Intel Corporation to address issues relevant to broad public interests in marketplace practices, rather than investor decisions relating to only a single company. The Forum may therefore invite program support of several companies that can provide both expertise and examples of leadership relating to the issues being addressed.

Inquiries about this Forum program and requests to be included in its distribution list may be addressed to

The information provided to Forum participants is intended for their private reference, and permission has not been granted for the republishing of any copyrighted material. The material presented on this web site is the responsibility of Gary Lutin, as chairman of the Shareholder Forum.

Shareholder Forum™ is a trademark owned by The Shareholder Forum, Inc., for the programs conducted since 1999 to support investor access to decision-making information. It should be noted that we have no responsibility for the services that Broadridge Financial Solutions, Inc., introduced for review in the Forum's 2010 "E-Meetings" program and has since been offering with the “Shareholder Forum” name, and we have asked Broadridge to use a different name that does not suggest our support or endorsement.