Perspectives on Key Issues for Proxy Season
On January 16, 2014, John Houston of the Fredrikson & Byron Public Companies Group moderated a panel presentation titled ”Anticipating Key Shareholder Issues and Handling Activist and Advisory Firms This Proxy Season.” Panelists included:
- Brian Blackwood, Sr. Executive Compensation Consultant, Towers Watson & Co.
- Richard Grubaugh, Sr. Vice President, M&A/Corporate Proxy Solicitation, DF King & Co., Inc.
- Keyna Skeffington, Vice President and Deputy General Counsel, Medtronic, Inc.
- David Strandberg, Office of the General Counsel, NASDAQ OMX Group, Inc.
The following are key take-aways and practical perspectives shared by our panel.
Call for Transparency at Proxy Advisory Firms
Proxy advisory firms like ISS and Glass Lewis play an increasingly significant role in shaping corporate governance and executive compensation. Yet these firms’ policies and methodologies are opaque, forcing public companies to engage in costly analysis and negotiation with them. Panelists also noted the following:
- There is continuing concern over the conflicts inherent in the U.S. proxy advisory firm model. Despite SEC interest, including a December 2013 roundtable discussion of the issue, there is no clear timetable for reform. Read NASDAQ’s petition to the SEC urging prompt action to address the lack of transparency in this area.
- Compensation consultants could assist companies with an analysis of stock plans using ISS’s known tools and models, allowing companies to avoid risky shareholder votes without paying ISS to do so.
Best Practices in Pay-for-Performance Disclosure
Executive pay continues to be a key issue for public companies and their shareholders this proxy season. While companies routinely state their pay-for-performance approach, there is no clear GAAP-like standard for demonstrating the relationship between pay and performance.
The stakes for getting the Compensation Discussion & Analysis (CD&A) disclosures right are higher than ever before. Panelists had these key insights for improving disclosure:
- CD&As should lead with three clear messages: (1) Here’s how we performed; (2) Here’s what we paid; and (3) Vote in favor of our compensation. Performance metrics will vary by company (e.g., total shareholder return, stock price, company-specific metrics), but companies should be clear what standards apply and how pay compares.
- It’s important to highlight and simplify key information. Analysts at institutional investors must review a tremendous number of companies for say-on-pay votes. Companies should “think like their reader” to discern key bullet points. Review last year’s proxy advisory report on your company to identify key areas.
- Companies should incorporate investor feedback and address questions raised in the shareholder engagement process. Executive summaries are best prepared after the CD&A and compensation tables. Panelists recommended taking extra time to step back from the detail and identify the bigger picture.
Trends in Shareholder Activism
During the 2014 proxy season, shareholder activism is expected to continue. Shareholder proposals seeking independent board chairs, board diversity and other governance matters, and political spending policies and disclosure are expected to continue. See D.F. King’s 2013 Proxy Season Review.
Companies are also expected to continue to negotiate with activists to try and settle concerns before they hit the proxy statement. Panelists shared the following insights:
- There is a new ISS policy on board responsiveness that will base its recommendations on director elections following the board’s failure to fully implement a majority-supported shareholder proposal after only one year. Requests for confidential proxy tallying are expected to be a new “hot button” issue, while proxy access proposals seem to be in a decline.
Best Practices in Shareholder Engagement
Engaging and negotiating with shareholders is a continuing trend, especially for larger companies. The rationale is that companies are better off avoiding disruption by anticipating and responding to shareholder concerns before they reach the point of a proxy battle. But what is the best way to do so?
Panelists all noted that engaging with shareholders involves both listening carefully to shareholder concerns and then acting on those concerns. Shareholder engagement can backfire if companies bring back a message from their shareholders and then ignore it. In addition, shareholder engagement needs to occur both during the “off-season” and during proxy season. Panelists also shared these insights:
- Panelists reminded companies that institutional investors are each organized differently. Thus, companies need to be cognizant of what they are hearing from whom. Portfolio managers may have a very different take than the governance professionals at the same institution that will be doing the actual voting. They recommended asking investors about their voting policies and whether they rely on advisory firms.
- Companies need to understand their shareholder base and should ask investors what issues they are worried about. In addition, companies should be sure to ask shareholders the manner of engagement they prefer (phone calls or meetings). Many investors prefer a brief phone call to a more extensive meeting. Attending key investor conferences might be a great way to reach out and engage. Companies must prepare carefully for these discussions and be prepared for any follow-up questions they may receive. This preparation is key to avoiding any disclosure of material nonpublic information in the process.
For more information, please contact a member of our Public Companies Group.