June 11, 2012, 5:52 PM ET
Failures on the Rise This Proxy Season
More companies are facing a
backlash in their say-on-pay votes this year.
The number of companies receiving less than 50% of shareholder support for
their executive compensation packages this proxy season now exceeds last
year’s total, according to executive pay consulting firm Semler Brossy.
Through June 8, 44 companies have failed say-on-pay this proxy season,
compared to 29 at the same time last year, according to the firm, which
tracks say-on-pay votes. In the full 2011 season, 41 companies failed.
While the number of failures is only marginally higher, it’s significant
because there are still several weeks left in the current proxy season,
according to Francis Byrd, who heads the corporate governance practice at
Laurel Hill Advisory Group. He said it wouldn’t be surprising to see at
least 50 failures by the end of June.
Companies “need to be closely monitoring their performance and discussing
this with shareholders,” Byrd said. “Just because they received good grades
one year, doesn’t mean they will receive good grades the next year.”
He said the most common reason for a failure was a disconnect between CEO
compensation and company performance.
Of the companies that failed last year that have already held their annual
meetings, 24 have passed. Four companies have failed say-on-pay twice
–Hercules Offshore, Kilroy Realty, Tutor Perini and Nabors Industries.
“Most companies have been able to recover from a failed vote — it has not
been fatal,” said Michael Littenberg, an executive compensation attorney at
Schulte Roth & Zabel.
Littenberg said companies may have failed twice because their pay practices
are difficult to modify or they’re in an industry doing badly. However, he
said, “Companies that have failed the vote twice, they will have to consider
whether there’s more that they should be saying to the market about their
Nabors has been under pressure since shareholders learned in February that
its former chairman, Eugene Isenberg, was eligible for a $100 million exit
package. Even though Isenberg declined to take the package, shareholders
voted in favor of a proxy access rule at the company’s annual meeting last
week, which could eventually let some big shareholders nominate their own
candidates to the board.
Both Tutor Perini and Kilroy faced shareholder concern over poor stock
performance and performance relative to their peers this year, Semler Brossy
said. Tutor Perini wrote two letters to shareholders after receiving
negative recommendations from proxy advisory firms, saying it took its
negative vote in 2011 “very seriously,” made changes to its programs and
undertook a shareholder outreach program. Still, shareholder support fell to
38% in the 2012 vote, down from 49% in the 2011 vote.
Kilroy received just 30% support from shareholders this year, down from 49%
last year. Chief Financial Officer Tyler Rose told Bloomberg last week that
the company made a lot of effort reaching out to shareholders last year and
that the company’s board is continuing to evaluate the situation.
In May, Hercules Offshore became the first company to fail a say-on-pay vote
twice, as proxy advisory firms said changes to the company’s pay practices,
such as removing tax gross-ups from executive pay packages, did not go far
enough. Hercules’ CEO received a 110% increase in reported pay due to a
retention and performance award, Semler Brossy noted. The oil and gas
services provider saw a modest improvement in its say-on-pay vote, receiving
48% shareholder support in 2012, versus 41% in 2011.
Spokesmen for Nabors and Tutor Perini declined to comment, while Hercules
and Kilroy representatives did not immediately respond.
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