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NOTE:  The column copied below is made available to Forum participants with the permission of its publisher, Compliance Week.

For other reports on the subject of "Say on Pay" presented by Stephen M. Davis, one of the authors of the column below, see

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Compliance Week, April 14, 2009 article


Compliance Week

A Weekly Newsletter On Corporate Governance, Risk And Compliance


Create Meaningful, Effective Say-on-Pay Plans

ttention corporate executives and board members: Please help us restore some rationality into the executive compensation debate.



Stephen M. Davis is widely considered a pioneer in the field of international corporate governance. A founder of the Global Shareholder Service at the Investor Responsibility Research Center, Davis also co-founded the International Corporate Governance Network, which represents the interests of institutional shareowners with $10 trillion in assets around the world.

A Pulitzer-nominated author who has published seminal books and studies on shareholder rights, Davis also writes a regular column for The Financial Times, and sits on the editorial boards of several governance newsletters in the United Kingdom and Eastern Europe.

He is currently the president of Davis Global Advisors—which consults to institutional investors, government bodies and others—and is a member of numerous governance institutes, panels, and working groups in the United Kingdom, Japan, Australia, Russia, and elsewhere in the EU. His firm publishes a weekly newsletter called “Global Proxy Watch,” as well as prominent studies like the annual Leading Corporate Governance Indicators report.

Stephen Davis can be reached via e-mail.


Jon Lukomnik was previously the deputy comptroller for the City of New York, where he was investment advisor for the city’s treasury, and for defined benefit plans totaling $80 billion in assets. In that role, Lukomnik gained a reputation for forward thinking on governance issues, overhauling the city’s corporate governance program, and earning election to position of chairman of the Council of Institutional Investors’ Executive Committee.

A former governor of the International Corporate Governance Network and member of the World Bank/International Finance Corporation’s Investor Task Force, Lukomnik not only serves on numerous international advisory boards, but has had a role in changing the national regulatory and legislative framework. He was one of two investor representatives who successfully negotiated changes in the proxy voting processes, and his testimony before Congress on the predecessor bill to the Securities Litigation Reform Act helped identify the issues that were ultimately included in that law.

A former hedge fund managing director, Lukomnik is currently managing partner of Sinclair Capital, which provides consultative services for institutional investors, the investment management industry, and numerous multinational corporations including Coca-Cola, Pfizer, WorldCom, Korea Telecom, and others.

He can be reached via e-mail.

The recent feeding frenzy about the AIG bonuses was much more about melodrama than installing a capital market fix. The only items missing were pitchforks and tar on the side of the rampaging masses, and some CEO dropping a Marie Antoinette-like saying such as “let them eat stock options” on the other. Rational discussion was drowned by the din.

Into this emotional maelstrom is born the United States version of “say on pay” (SOP). Nearly 400 public companies must have advisory votes on executive compensation this year, with a condition of receiving taxpayer money through the various government emergency relief programs. A handful of others have voluntarily adopted say on pay. Scores of other companies have SOP proposals on their proxies, and the probability of legislated say on pay for all public companies—perhaps as soon as the 2010 proxy season—is high.

After studying SOP outside the United States, and even after understanding the strong differences between other capital markets and ours, we believed say on pay would increase communication among owners, managements, and boards, leading to more nuanced conversations. We thought say on pay would prevent exactly the type of shouting past each other that has been a staple of the evening news for the past few months. We still believe that.

We didn’t, however, anticipate the advisory vote being forced into the current proxy season, leaving neither owners nor companies adequate time to prepare, and starting amidst a white-hot national emotional background. As a result, the core objective of the advisory vote—improved communications between boards and owners—is at risk, at least in the short term.

As Colin Diamond, a partner in the capital markets practice of law firm White & Case, has noted, installing an advisory vote into the system should be a process that enhances dialogue, not a way for one side or the other to scream “gotcha!” Unfortunately, the imposition of an advisory vote for nearly 400 companies participating in the government bailout has caught both the companies and their owners by surprise. We and Diamond both, however, remain optimistic that the United States can emerge from the short term with a workable advisory vote system for the long term.

To make ‘say on pay’ constructive at your company, here is a roadmap you can adopt. We suggest you follow the “Five Ps” rule: preparation, philosophy, personnel, process, and planning.

1.    Be prepared. Assume you will have to place an advisory vote on compensation on your proxy in 2010, whether you are a bailout recipient or not. Don’t think you can parachute in with the right answers next year; the preparation will take six or nine months to do well. Consider carefully the philosophical, personnel, process, and performance link recommendations below. If you are a bailout recipient, your job is harder; you have to deal with all the following while under the gun. Do the best you can with these recommendations as guides, then evaluate and plan for next year.

2.    Adopt the right philosophy for dealing with SOP. Above all, we strongly suggest viewing say on pay as a process, not as an isolated vote. Companies taking that approach in other markets have made it work well. Second, remember that say on pay is designed to increase communication—which is a two-way street. Decide what you want to communicate, to whom, and through what mechanisms. Start with your existing Compensation Discussion & Analysis. Are the incentive performance targets clear and explicit? Can an average investor read the CD&A, and just the CD&A, and understand what are the key drivers of corporate performance? Are those drivers aligned with the performance targets? Are there any ways in which executive compensation creates unintended risk motivations? But then be prepared (be eager, in fact) to listen to how your principal shareowners see those plans. Your default approach should be discussion, not defensiveness.

3.    Create a simple, replicable communication process that includes the nature of communications you will be making, the target audience, and a timeline. Start by carefully considering the one document that all shareowners will read: the proxy statement. What type of resolution will you put on the proxy? While there might be a temptation to write the narrowest possible resolution—for example, asking for approval only of the summary compensation table—less is definitely not more. The trend, and the likely legislation, is for approval of both the amounts and the compensation philosophy as evidenced in the CD&A. Some companies are considering placing two resolutions on the ballot, one to approve the amounts paid in compensation and one to approve the CD&A. (RiskMetrics Group, the parent of proxy adviser ISS, actually includes a third, asking for approval of the upcoming year’s plan.) Then decide on how much outreach you will make to investors and their representatives. Will you hold a meeting with the largest owners? How will you select them? Will you meet telephonically with the proxy advisory firms? Will you answer one-off questions from investors? (Assuming they don’t create Regulation FD issues.) Or will you simply release the proxy and consider it self-explanatory? Should management or the board compensation committee run the talks? While the level of communications program will depend on individual circumstance such as your investor base, market capitalization and perceptions of your compensation program, the point is that you should decide on that level in advance.

4.    Involve the right personnel. To whom should you talk? And who should represent the company? These would seem to be simple decisions. But from our experience, they are the most misunderstood practical aspects of virtually all corporate governance communications between companies and investors. First, when selecting investors with whom to talk, don’t make the mistake of automatically assuming that your investor relations unit is best placed to make those choices. IR is often best acclimated to dealing with analysts who want to know, for trading purposes, what will happen in the next quarter. The result is that a company can be surprised come the annual general meeting, when a corporate governance issue surfaces that never cropped up in the quarterly analyst calls. That helps nobody. Many companies understand this; it’s one reason they assign the corporate secretary responsibility for the proxy. You could make the corporate secretary responsible for staffing the communications plan as well. Or you could restructure your IR department to communicate with the governance professionals, not just the analysts, at investment houses. As a generality, the larger the institutional investor and the more quantitative, the more likely it is to have specific corporate governance experts assigned to decide on how to vote a proxy who are not portfolio managers or analysts. That is particularly true of index funds such as Barclays Global or State Street. It is also true of the largest public pension funds (think CalPERS or New York State Common Retirement Fund). That situation often does not hold for smaller investors where the portfolio managers and analysts usually make voting decisions. Exceptions abound, however, and the proxy voting advisory firms add another layer of complexity. There is no substitute for simply knowing how your top shareowners manage their ownership responsibilities; someone needs to be accountable for gathering that information and keeping it current. Second, in picking who represents the company, don’t assume that management should take the lead. Outside the United States, it is the independent chair of the board compensation committee who has that job. That’s what investors may often prefer, since they view directors as their agents—especially when it comes to setting compensation frameworks. So make use of that channel.

5.    Review your vote count, and start planning for the next year. If you receive a high proportion of no votes, don’t rely on the fact that the vote is “advisory.” It is, but should a material number of votes be cast against the report, take action immediately. As Richard Ferlauto of the American Federation of State, Municipal, and County Employees and one of the most active proponents of SOP testified before Congress, a negative advisory vote should be regarded as a warning. Absent changes in policies, the next stage will almost certainly be a vote against director(s). So, if you receive any material no vote, seek out your largest holders and find out what aspect of your compensation plan was problematic. That engagement cycle has served Britain well. When shareowners of GlaxoSmithKline voted against its compensation report in 2003, the company immediately responded with a series of changes, and instituted biannual shareowner roundtables. The other British companies learned the lesson as well; most now build routine outreach to investors into their annual calendar of preparations for the annual meeting. And since 2003, only eight companies have suffered negative advisory votes, or less than two a year. Finally, make sure you stay current on the state of the art; the National Association of Corporate Directors, the National Investor Relations Institute, and the Society of Corporate Secretaries and Governance Professionals all have resources on the current state of SOP, and are likely to continue to update them.

Simply put, your investors want a voice. If you treat the advisory vote as a true, two-way communications process, you likely won’t ever have a majority negative vote, you’ll know more about how your investor base regards your compensation policies, and your investors will know more about your company. Everyone wins all around. Done right, SOP will help get the mob to put down its pitchforks, rather than fanning the flames.

So relax. The market reality is that with more than 10,000 public companies in the United States, the chances of your being made into one of the poster children for executive compensation abuse is low, particularly if your company is not in financial services, is performing well, and your compensation policies are mainstream. The trick, of course, is to make sure you don’t become a headline in the future. That’s what the Five-P structure is designed to prevent.

© 2009 Haymarket Media, Inc. All Rights Reserved. "Compliance Week" is a registered mark of Haymarket Media, Inc.
Compliance Week provides general information only and does not constitute legal or financial guidance or advice.




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