Say-on-Pay Update: How Does 2012 Compare With 2011?

It’s June, and the crush of annual meetings is, for the most part, finished. For most companies, this has been the second year in which a Say-on-Pay vote – an advisory shareholder vote on the company’s executive compensation – has been required under the Dodd-Frank Act. This is a good time to look at the shareholder votes to see if there has been a major change from 2011.

Semler Brossy’s latest Say-on-Pay Results report (PDF) reveals that not much has changed from last year. For the vast majority of companies, Say-on-Pay has passed with a significant margin of victory. Like last year, most companies have received greater than 90% approval.

It does appear that there will be more failed Say-on-Pay votes this year than last year. Mark Borges, in his Proxy Disclosure Blog on (subscription site) reports that 40 companies have failed to achieve a majority of affirmative votes this year, about the same number as all last year. Therefore, there will almost certainly be more negative votes in 2012 – but it’s unlikely that there will be a huge difference.

Of course, for some companies the results will be much different this year. For example, as reported in this previous post, Citigroup failed to get a majority positive vote this year, even though it won by a large margin last year. And Chiquita Brands International slipped on a banana peel this year – Borges reported that Chiquita got less than 20% Say-on-Pay support this year, compared to an 86% positive vote last year.

The 2012 proxy season so far teaches these lessons:

Don’t get cocky. As Citigroup’s experience demonstrates, a company can take nothing for granted, even if it did great on the vote in the previous year.

Supplemental proxies don’t seem to have a major impact. According to Semler Brossy, company responses to an “against” recommendation from ISS, filed in the form of supplemental proxy statements, do not appear to have a material impact on vote results. [On the other hand, they can’t hurt.]

Sue-on-Pay is still alive. As reported in this previous post, Citigroup was sued shortly after the negative Say-on-Pay was defeated, with claims based on the negative vote. 

Engage, engage, engage. Continue to engage with major shareholders and proxy advisory firms about executive compensation issues before, during and after proxy season. The day after the 2012 annual meeting, it’s not to early to start planning for 2013.

ISS 2012 Policy Updates, Continued: Board Response to a High Negative Vote

As discussed in my last post, the proxy advisory firm ISS recently issued its 2012 Updates to its U.S. Corporate Governance Policy (PDF). One important change relates to the board’s response to a high negative vote. For companies that experienced a lot of “thumbs down” votes from shareholders at the last annual meeting, ISS’s evaluation of the board’s responsiveness will affect ISS’s recommendation on the upcoming Say-on-Pay vote. Not only that, but this evaluation will also inform ISS’s voting recommendations for compensation committee members in the election of directors.

The new formulation is much more specific than in the previous Policy. ISS will evaluate responsiveness on a case-by-case basis if the previous Say-on-Pay proposal received less than 70% of the votes cast. Therefore, ISS has for the first time specified the “red zone” range where the negative votes are high enough to create significant concern. For these under-70% companies, ISS’s evaluation will take into account the company’s responsiveness to the negative votes, including:

  • Disclosure of engagement efforts with major investors;
  • Actions to address issues that contributed to the low level of support and other recent compensation actions;
  • The recurring or isolated nature of the issues raised;
  • The company’s ownership structure; and
  • Whether support was less than 50%, which requires the highest degree of responsiveness.

In its “Rationale for Update,” ISS specifies the disclosures it will look for in the proxy statements of these companies that received under 70% the previous year:

. . . At companies that fail to receive a meaningful level of support on their say-on-pay proposals, shareholders will seek substantive and meaningful disclosure in determining whether the company has taken sufficient actions to address the compensation issues that contributed to the low level of support. Companies should discuss their outreach efforts to major institutional investors and provide the specific actions that they have taken to address the compensation issues that resulted in a significant opposition votes. These specific actions should ideally be new rather than a reiteration of existing practices. Companies should refrain from providing boilerplate disclosure, as it does not enable shareholders to gauge the level of effort taken by the company. Placement of such information should be readily identifiable.

For the companies in this situation for their upcoming annual meeting, it is important to be making explicit engagement efforts now rather than waiting until after the proxy statement is mailed. These engagement efforts should be aimed at determining the reasons for the negative votes. These efforts should be completed far enough in advance of the annual meeting to plan specific actions to address shareholder concerns, and to draft appropriate disclosures in the proxy statement. Note that ISS is looking for proxy descriptions of specific new actions taken by the board and expects the information on engagement and responsiveness to be in a readily identifiable place in the proxy.

For more thoughts on the joys of “engagement” with shareholders, see my special Valentine’s Day post on engagement. Love is in the air!

Preparing for the Shareholder Advisory Votes, and the Concept of Engagement

I thought Valentine’s Day would be a great time to talk about engagement.

In this case, I’m talking about “engagement” by public companies with their shareholders. A lot of commentators these days are talking about engagement in the context of the new shareholder advisory votes regarding executive compensation (Say-on-Pay and the frequency vote) required under the Dodd-Frank Act.

In his Byrd Watch report released last week, “The Permanent Engagement Campaign for Say on Pay/Say on When Votes,” Francis Byrd of Laurel Hill Advisory Group gave a nice summary of engagement issues to be considered by public companies. After he discusses concrete steps companies should consider he describes his concept of a “permanent engagement campaign” – i.e., one that doesn’t end on the date of the annual meeting:

Once upon a time, shareholders voted in accordance with management and the logistics of the proxy vote was the greatest difficult companies faced in electing directors and approving corporate actions. Those days are gone forever. There are no routine annual meetings. Whether your SOP vote is approved by a wide or narrow margin (or defeated) you will need to maintain your engagement teams and continue on-going dialogue with your investors.

Another interesting document is the set of Global Corporate Governance & Engagement Principles published by BlackRock, a major asset manager and institutional investor. The document lists BlackRock’s general global policies for evaluating governance of its portfolio companies. I thought the interesting part was the last section, where BlackRock talks about its own internal oversight of its decisionmaking progress as it relates to voting shares. In other words, this describes how a large shareholder responds to engagement by its portfolio companies.

The New, Slimmed-Down Version of the Say-on-Pay Rules

The SEC just released the Federal Register version of its final rules on Say-on-Pay, the frequency vote and Say on Parachutes. This version, thankfully, is only 39 pages (including the cover page), compared to the 152-page beast that was available previously. Always a relief – the same useful information, but much lighter in my briefcase. On Valentine’s Day, I can once again truly say I love the SEC . . . .