An increasing number of US
investors and their advisers are seeking non-binding ‘advisory’ votes on
executive compensation at US companies, also known as say-on-pay, a
practice common in England and Australia for several years.
Intense investor, media and
regulatory scrutiny of executive compensation in the midst of the
declining financial market has created a regulatory fever. Legislators are
on the verge of a regime that establishes shareowner advisory votes on
compensation for all US public companies.
This development and the
likelihood that mutual fund holders are lobbying their portfolio managers
to support this populist issue in their proxy voting create a volatile
mix. Where the issue is on ballots in the 2009 proxy season, it is
reasonable to expect average voting support to exceed the low 40 percent
level of the last two years, and declining stock prices may continue to
exacerbate ‘disconnects’ between executive pay and performance, as
measured by shareowner returns.
There are several ways
investors can seek a ‘say’ on pay: direct dialogue with companies in their
portfolio, voting against equity compensation plans that are sponsored by
management, filing or supporting shareowner proposals on compensation, and
withholding votes from members of the board’s compensation committee.
proposals continue to be filed by individual proponents or the issue
becomes legislatively mandated, it is important companies have a proactive
strategy for addressing concerns about compensation. Here are some
thoughts to consider:
Many companies were
recalibrating their executive compensation program practices and
disclosures to better reflect pay for performance considerations long
before today’s economic turmoil.
Firms should publicize and take credit for any progressive, shareowner-
friendly reform. Position your company to tell a credible story
demonstrating that your board has been doing its job all along to ensure
its CEO’s compensation is reasonable and properly aligned with investor
Remain sensitive toward disappointed constituents.
The SEC, investors, proxy advisers and the media have expressed
displeasure with many companies’ year-one and year-two responses to the
enhanced proxy compensation disclosure requirements, including the
compensation discussion and analysis. In 2009, armed with two years of
aggregate frustration, these critical audiences will likely hold companies
to an even higher standard.
In these audiences’ minds,
firms have had sufficient time to adapt to the new rules. There will
likely be a very public review of these disclosures, including
‘best-in-class’ and ‘worst-in-class’ assessments.
perceived disclosure shortcomings may make it more likely companies will
be targeted for say-on-pay proposals, as well as drive voting support for
While companies may believe disclosure should be kept to the minimum
required (in part out of competitive concerns), be mindful that investor
expectations surrounding best practices in governance, compensation and
transparency are not limited by regulatory requirements. For this reason,
it is important to balance the potential risks associated with making
expanded disclosures with the increased risk of being targeted for
say-on-pay proposals if you do not do so.
Instead of treating such
disclosure as a compliance exercise, consider it a communication and sales
opportunity in which you convince investors that your compensation
philosophy and corporate practices truly support your company’s business
model, and are aligned with your commitment to increasing shareowner
value. This enhanced disclosure may not deter proposal sponsors, but it
might minimize the support they receive from mainstream investors.
that speak to your investors.
Rather than simply responding to the well-publicized criticisms from the
SEC, Riskmetrics Group and others, directly identify the expectations and
desires of your largest investors and proactively engage them. Ask them
what they do and don’t like about your existing pay philosophy, programs,
administration and disclosure. If you are reluctant to open a potential
Pandora’s box by requesting a critique of your company’s current
practices, solicit their feedback in more general terms – ask for their
perspective and concerns about executive compensation generally.
The mere act of asking
their opinion sends a powerful message that you care, and the
relationships you develop should have a pay-off at proxy time, when you
can remind those same investors: ‘you spoke, we listened, and see how we
When communicating with
investors, keep in mind that many of them maintain dedicated proxy voting
groups that you will need to include in this process. Also, talk to your
largest institutional investors first, as far in advance of finalizing
proxy disclosures as possible. The feedback your directors and others
receive may prove invaluable, particularly if it’s early enough in the
process that it can be acted upon.
With this strategy, you may
feel pressure to adopt some of their recommendations, but if you simply
commit to communicate their concerns and suggestions to senior management
and the board, your company should be less vulnerable to accusations it is
ignoring its investors. Further, if your company has a say-on-pay proposal
on tap for 2009, it is probably in your best interest to collect a
preliminary report card from investors, so there is ample time to alert
and prepare the management and board before the AGM when you will receive
your final grade in the form of investor voting support (or lack thereof).
engagement with investors on governance and compensation issues as a
Rather than discussing these issues with investors once a year when you
are asking for their vote, continual discussions may intercept criticism
and lessen the likelihood of surprises at proxy time. With investor
perception and voting policies changing year on year, you will also be ‘in
the loop’, rather than blindsided by high votes for shareholder proposals
or other forms of activism. Many leading investors prefer to conduct these
discussions directly with their portfolio firms, rather than through
surrogates such as proxy solicitors and investor relations agencies. Such
agents can, however, provide road maps for effective engagement.
It really matters
who conducts investor engagement.
Board-level engagement with top investors speaks volumes. Directors are
shareowners’ elected advocates, and a direct interaction can increase
investors’ confidence in the stewardship of their investment. Consider
enlisting your independent directors, including members of the
compensation committee, to lead this effort. If you are hesitant to
directly involve them, and they don’t volunteer, senior management
engagement can also be effective.
Also, consider expanding
your IR and proxy disclosures about the board, its independence and
qualifications. This is a sensitive area, but director quality and
contributions can be vital non-financial assets. Company assertions of
board quality are not as effective as direct board engagement, which
enables investors to make that determination themselves.
Finally, remember that
conventional tactics and messaging yield conventional results. Investors
have likely already seen the standard boilerplate proxy rebuttal arguments
many times, and these arguments are likely fully baked into their voting
policies. If your goal is to move the dial on the vote, think and act
creatively to stand out from the crowd.