New Report Offers Lessons from Say-on-Pay Successes and Failures

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Jul 13, 2011, 02:00 ET

NEW YORK, July 13, 2011 /PRNewswire/ -- With the 2011 proxy season coming to a close, U.S. public companies should take the lessons learned from this season's say-on-pay votes and begin preparing now for the 2012 proxy season, according to the Director Notes report released today by The Conference Board, the global business research and membership organization.

The study -- entitled Say on Pay in the 2011 Proxy Season: Lessons Learned and Coming Attractions for U.S. Public Companies -- reviews the results of the inaugural season of shareholder advisory votes under the Dodd-Frank Act through June 23, 2011. It also examines the impact of proxy advisory firm recommendations on shareholder votes and company responses, and offers recommendations for companies in making their compensation and governance decisions to help position them for future say-on-pay votes.

"While only 2 percent of Russell 3000 companies failed to receive majority approval on their say-on-pay advisory votes, the big stories this proxy season have been the unprecedented number of negative recommendations by proxy advisers, their influence on vote results, and companies' reactions to those negative recommendations. More than 100 companies challenged proxy adviser recommendations and methodologies, especially on purported pay for performance disconnects. Some companies changed outstanding agreements or made commitments to prospectively change their compensation policies to reverse negative adviser recommendations," said James D.C. Barrall, a partner at Latham & Watkins and co-author of the report for The Conference Board. "This turbulence, the questions raised about proxy adviser policies and methods, the advent of derivative shareholder lawsuits against companies that failed to obtain majority shareholder approval, and the expectation that most companies will hold annual votes, all likely mean that the 2012 proxy season will be even more challenging. Companies should start preparing now."

Adds Matteo Tonello, research director of corporate leadership at The Conference Board: "The interest in pay-for-performance is not going to subside for quite some time. For this reason, companies that recently won approval of their executive compensation shouldn't rest on their laurels and should use the lessons from the first few months of implementation to improve their shareholder communication practices."

Although most public companies sailed through their first advisory say-on-pay votes during the 2011 proxy season, the vote results show that not all organizations fared so well. While roughly 71 percent of the Russell 3000 companies that reported vote results through June 23 reported a compensation approval rate of at least 90 percent of voting shares, the report found that every company that failed to receive at least majority approval of its say-on-pay vote had received an "against" recommendation on the vote from proxy advisory firm Institutional Shareholder Services (ISS). Moreover, even where companies passed their votes with majority support in the face of negative ISS recommendations, shareholder support was, on average, 25 percent lower than for companies that received favorable ISS recommendations. The most prevalent basis for negative recommendations has been proxy advisers' "pay-for-performance" voting policies and their conclusions that there were "disconnects" between the company's financial performance and its pay to its executive officers -- most importantly, to its CEO.

Among the report's recommendations:

In light of the large volume of say-on-pay votes and the difficulties companies encountered in 2011 in engaging with shareholders during the brief period between the release of voting recommendations by proxy advisers and shareholder meetings, companies should identify and reach out to their major shareholders much earlier in the year.
Given that 2011 bonus, equity, and other compensation grants were determined by many companies prior to their 2011 say-on-pay votes, it may not be easy for companies to react to failed or close votes or negative voting recommendations in a way that can be meaningfully reflected in 2012 proxies. Some companies may find it too late to avoid negative proxy adviser recommendations for 2012, especially if their 2011 total shareholder returns are below those of their peer groups.
Even companies that won their say-on-pay vote with more than 70 percent shareholder approval cannot rest easy going into future proxy seasons, given the crucial role played by negative proxy advisory firm recommendations based on alleged pay-for-performance disconnects. One or two years of poor TSR performance may jeopardize positive recommendations.
Pay-for-performance issues will be even more important in the next proxy season, especially if the SEC adopts rules to require U.S. public companies to disclose annually in their proxies the relationship between the executive compensation paid and the company's financial performance, as it is scheduled to do later this year under Section 953(a) of the Dodd Frank Act.

For complete details on the 2011 say-on-pay vote results, companies' responses to negative vote recommendations by proxy advisory firms, and the actions companies should take to prepare for future say-on-pay votes:

https://www.conference-board.org/publications/publicationdetail.cfm?publicationid=1977.

To access previous issues of Director Notes, visit the archive page:

https://www.conference-board.org/governance/index.cfm?id=2439

About The Conference Board

The Conference Board is a global, independent business membership and research association working in the public interest. Our mission is unique: To provide the world's leading organizations with the practical knowledge they need to improve their performance and better serve society. The Conference Board is a non-advocacy, not-for-profit entity holding 501 (c) (3) tax-exempt status in the United States.

www.conference-board.org

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