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Priorities for Voting on Comp Plans
Article published on
December 14, 2009
Under mandatory say on pay,
institutional investors will be paying the most attention to pay for
performance and the process the board goes through to reach its pay
decisions, rather than the amount of total compensation and other details,
such as perks.
That’s according to a new survey conducted over the past couple of months by
the Shareholder Forum.
the survey were released Dec. 14.
Investors also said they will rely mostly on management responses to their
questions and SEC filings rather than the opinions of a third party, such as
governance research and proxy advisory firms.
The information could be useful to board members, many of whom are planning
for a congressional mandate for say on pay as early as spring of 2010.
The Shareholder Forum does not disclose details on the number of responses;
however, “the overall response rate was above average for this type of
survey, and we received more than enough responses for meaningful
statistical analysis,” says Gary Lutin,
chairman of the forum.
Well over half of the responses came from individuals at professionally
managed funds, including pension funds, mutual funds and hedge funds.
Invitations for the survey were sent to investment professionals, including
members of the New York Society of Security
Analysts and the Council of Institutional
Eighty-nine percent of respondents said the relationship of pay to corporate
performance was critical or important under say on pay. That was followed by
79% who said the process followed by the board was critical or important;
73% identified provisions of pay such as perks as critical or important; 71%
responded the amount of compensation; 26% said conformance with guidelines
defined by proxy advisory firms; and 25% said the use of compensation
Directors may be surprised to see the level of investor interest in the
board’s process for making compensation decisions. A company is already
under development, called Soundboard Review
Services, that would essentially audit boards’ process for
determining executive pay, Agenda has
Boards can also convey their process to shareholders through the
Compensation, Discussion and Analysis (CD&A) section of the proxy statement,
says Douglas Chia, senior counsel and
assistant corporate secretary at Johnson & Johnson.
“If more surveys like this come out showing people really do care about the
board’s process, you’ll see more of that disclosure coming out,” he says.
Hye-Won Choi, senior vice president and head
of corporate governance at TIAA-Cref, says
there is room for many companies to improve their CD&A and narrative
disclosure. “Companies have seemed to be focused on technical requirements
of rules, but there could be better analysis,” she says.
For the second part of the survey, investors said the most important source
of information in making advisory votes on compensation will be the proxy
statement and other SEC filings, as well as
management responses to their questions, and an independent third-party
verification of the board’s process. Less valuable to investors’
decision-making were governance ratings and research, responses from boards’
compensation consultants and proxy advisory firm recommendations.
Chia says he’s most surprised by the “low level of influence with respect to
proxy advisory service recommendations.”
“It’s not talked about publicly, but in private many smaller investors rely
on them,” he says.
Indeed, one of the survey respondents, who is responsible for proxy voting
at a pension fund with a portfolio of between $10 billion and $100 billion,
wrote: “There is a big difference between the ‘ideal’ considerations and
reality. For instance, proxy advisor guidelines should not matter much, but
in reality, they will be the first indication of whether or not to look
further — even if you end up disagreeing with them.”
The Shareholder Forum is planning a second phase of the survey process that
will include corporate participation. The forum will include samplings of a
participating company’s shareholder base so companies can “privately analyze
the responses of their own constituency rankings of criteria compared with
the broad market responses,” says Lutin. The results of that survey are
expected to be released by the end of January.