Pushing for triennial
Majority of investors opting for annual
At the great majority of
companies that have already held their 2011 shareholder meetings, investors
have voted in favor of conducting
say-on-pay votes annually, and for the most part, boards are acceding to
But at least one major union and a maverick few management teams – including
those at Pfizer and Prudential – are still backing biennial or triennial
votes, arguing that they allow more time for thoughtful analysis and a more
accurate window for evaluating company performance trends.
‘Annual is always the better position,’ says Tim Smith of Walden Asset
Management. Smith is referring to the frequency of advisory (that is,
non-binding) shareholder votes on executive compensation, which are mandated
at big companies as of 2011 under the
Dodd-Frank Wall Street Reform and Consumer Protection Act. He’s one of
the leaders in the push to get companies to adopt polices providing that the
votes be held every year.
It’s a position that was initially embraced by a clear majority of the
boards of US companies that had filed proxy statements early in the year.
According to a study conducted by the corporate and shareholder consulting
firm Georgeson and the law firm Latham & Watkins, 57 percent of the boards
of the 300 companies that had filed proxy statements as of the first week in
March recommended that investors vote in favor of a triennial vote, while 8
percent recommended biennial votes.
Only 27 percent recommended that investors support annual say-on-pay votes.
Many of those proxy statements were likely set down in ink before the
strength of an investor push for annual votes became clear, however.
What investors want
On January 31 this year, some 39 institutional investors representing more
than $830 bn in assets – including heavyweights like Vanguard, Fidelity and
a number of state pension funds – laid out their positions in a statement
declaring that holding shareholder votes on executive compensation annually
would allow for ‘maximum accountability’. Annual votes are ‘standard in all
other major markets’ and ‘encourage companies to communicate effectively
with shareowners’, they further contended.
These institutional investors backed up their position with actions, voting
down board recommendations for biennial or triennial say-on-pay proxies at
annual meetings held by Woodward, Accenture, Costco Wholesale, Air Products
and Monsanto, among others. At some companies – including the
investor-friendly Monsanto and Emerson Electric – the majority of ‘no’ votes
on the triennial option resulted in directors quickly retreating back into
their boardrooms and deciding to hold annual votes in keeping with
All told, of the 24 S&P 1500 companies that have recommended the triennial
option and taken investor tallies, only five have received majority support
for their position, according to Georgeson. Not everyone believes annual
votes on executive compensation are the best option, however. Edward Durkin,
director of corporate affairs for the United Brotherhood of Carpenters and
Joiners of America, is among the dissenters.
‘Studies have shown that individual investors have fallen away from voting
and it’s the institutional investors who vote,’ says Durkin, whose union has
100 pension funds and $45 bn in assets, with equity holdings in 3,600
different companies. ‘We are a typical pension fund, and I’m telling you,
you can’t do thoughtful analysis of 3,600 plans on an annual basis. It’s
just not possible.’
Durkin has logged up a lot of time lobbying lawmakers on Capitol Hill in the
months leading up to the Dodd-Frank vote for language that would ensure
triennial say-on-pay votes and other reforms his union felt would improve
the process of having investors vote on executive compensation.
His plan would have limited the annual advisory votes to more manageable
rotating pools of 350 companies with $1 bn in revenue and higher in the
Russell 1000, where Durkin argues the vast majority of pay scandals reside.
Durkin also wants to see say-on-pay votes broken down into three
sub-categories: annual incentives, long-term pay and post-employment
His battle has been a lonely one. ‘We did not find other institutional
investors during legislation or even right now that really support anything
but annual shareholder votes on executive compensation,’ he says. Finding
allies in the corporate community is getting harder too, as corporate boards
watch other triennial proposals defeated, Durkin notes.
There are some companies that have continued to announce their intent to
offer triennial or biennial votes, however. Citigroup, Prudential Financial
and Pfizer are among them. Smith predicted Citibank’s proposal would fail,
given the company’s ‘very, very questionable record over the past five years
and the financial crisis.’
Citigroup did not return calls seeking comment. But both Prudential and
Pfizer, says Smith, offer more convincing cases and have won deeply rooted
goodwill among the investor community by adopting say-on-pay voting early
and on their own, and by making aggressive efforts to engage shareholders.
Even so, he says, ‘our simple answer is ‘no’. Annual is always the better
A slow process
Matthew Lepore, Pfizer’s corporate secretary, says that in Pfizer’s case,
annual voting simply doesn’t make sense. The profit cycle of the
pharmaceutical industry operates over the long term, since drugs undergo a
great deal of research and development, and it’s difficult to accurately
assess a company’s performance by looking at one year’s results, he argues.
Lepore notes that Pfizer’s board settled on a biennial say-on-pay review
back in 2009, and says he has ‘no reason to believe that the board believes
it’s in the interest of shareholders to move to an annual review. ‘One of
the key issues with say on pay is tying pay to performance, and doing that
over the longer term is a better approach, in our view,’ he adds.
Lepore notes that many of Pfizer’s investors had also echoed Durkin’s
opinion that conducting exhaustive annual reviews would be difficult. ‘We
talk with our shareholders all the time about what is important to them, and
I have heard feedback that the burden of conducting an annual say-on-pay
review would be too great,’ he says.
Prudential adopted say-on-pay voting prior to Dodd-Frank and also opted for
a biennial review last year after extensive discussions with its
shareholders, says Peggy Foran, Prudential’s corporate secretary and chief
governance officer. The biennial approach was a compromise between investors
pushing for the three-year option and those pushing for the one-year option.
‘In our cycle, given the work that has to be done communicating with
investors and given the amount of time that we hope investors will put into
analyzing the numbers, we decided every two years works best,’ says Foran,
who notes that without sufficient time, many investors would likely delegate
the responsibility for analysis and simply rely on the recommendations of a
proxy adviser such as ISS. ‘Investors really do have rights – they own us,’
Foran says. ‘But they also have obligations to spend some time to get to
know our issues and vote thoughtfully.’
Though Foran has heard from institutional investors that they might actually
make an exception in Prudential’s case and support a biennial vote, the
board recently reconsidered its approach in light of the aggressive push by
institutional investors to standardize one-year votes. The board decided to
switch to an annual vote, and will soon announce that decision in its proxy,
This decision does not surprise Durkin. ‘There’s very little appetite for
pushing back against the shareholder view on the frequency issue,’ he
complains. ‘What you are starting to see and will continue to see is less
recommendations for triennial, because they are reading the tea leaves.
‘But if companies really believe that triennial is the best way to go, they
ought to do it anyway and take the consequences, even if that means ISS gets
mad,’ Durkin continues. ‘Quite frankly, we need companies to make their
voices heard on this issue. Failure to do this is how we get bad policies.’
Foran predicts that many companies will return to the issue in the years
ahead. ‘We need to get through the next couple of years,’ she says. ‘I think
the dust needs to settle; people need to get comfortable and figure out who
they can trust. Once everything’s calmed down, you may see some
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