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The article below was published in Agenda, a Financial Times private subscription service for corporate directors, and is presented with permission.

For the survey report addressed in the article, see


Agenda, December 14, 2009 article


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Article published on December 14, 2009
By Kristin Gribben


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. Results of 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 Investors.

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 consultants.

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 previously reported.

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.




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This Forum program is open, free of charge, to anyone concerned with investor interests relating to shareholder advisory voting on executive compensation, referred to by activists as "Say on Pay." 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.

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