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The Harvard Law School Forum on Corporate Governance and Financial Regulation, January 6, 2012 posting


Say on Pay 2011: Proxy Advisors On Course for Hegemony

Posted by Charles M. Nathan, Latham & Watkins LLP, on Friday January 6, 2012 at 9:23 am

Editor’s Note: Charles Nathan is Of Counsel at Latham & Watkins LLP and is co-chair of the firm’s Corporate Governance Task Force. This post discusses an article by Mr. Nathan, James D.C. Barrall, and Alice Chung that appeared in the New York Law Journal, available here.

My colleagues, Jim Barrall and Alice Chung, and I have co-authored an article titled Say on Pay 2011: Proxy Advisors on Course for Hegemony. The article analyzes the results of the first year of mandatory Say on Pay advisory votes and discusses the implications of these results for Say on Pay advisory voting during the 2012 proxy season. We begin by noting that based on the Say on Pay votes of a universe composed of the Russell 3000 companies that were subject to mandatory Say on Pay voting, recommendations by the two principal proxy advisory firms (ISS and Glass Lewis) appeared to have a significant effect, with a recommendation by ISS accounting, on average, for an approximately 25% vote swing, and one by Glass Lewis accounting, on average, for about a 5% vote swing. The data also indicates that companies receiving a negative SOP recommendation from ISS averaged less that a 70% favorable vote.

This data is particularly relevant because ISS recently announced voting policies for 2012 make clear that ISS views a favorable vote of less than 70% as an indication of sufficient investor concern with a company’s executive pay policies to require that either the company take what ISS considers appropriate corrective action or face a potential withhold vote recommendation for some or the company’s directors. In the ISS Say On Pay universe, the new 50% passing grade for Say on Pay is now 70%. (Moreover, Glass Lewis announced this week, after our article was published, that its new 50% is 75%!)

The overriding lesson of the initial 2011 Say on Pay voting season is that companies have two practical choices in dealing with Say on Pay voting in the future.

  • Try harder to explain to investors why its executive pay policies are appropriate in the company’s particular circumstances, particularly with regard to linking pay to performance, so as to obtain a better than 70% positive Say on Pay vote from the company’s investors, notwithstanding a negative ISS recommendation, or
  • Tailor the executive compensation program to meet ISS’ metrics, thereby “gaming” the system (so to speak) so as to obtain a favorable ISS Say on Pay voting recommendation.

We conclude on a pessimistic note by suggesting that, whatever course of action a company chooses, it is increasingly clear that the one-size-fits all metrics utilized by the proxy advisory firms will increasingly dominate executive pay policies for all of corporate America.

The full article is available here.



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