Keith Larson is senior attorney and assistant secretary at Southern California Edison, a regulated electric utility subsidiary of Edison International.
Larson is responsible for advising the corporate secretary on corporate governance and securities law implications for the company. Here he chats with deputy editor Aarti Maharaj about compensation and political contribution disclosures.
1.How do you effectively support the corporate secretary?
My role involves a mix of both legal and non-legal work. In order to be effective I need to be prepared and flexible enough to provide the necessary support under exigent circumstances. On the legal side, I’m primarily responsible for preparing board and nominating/corporate governance committee materials, resolutions and minutes, drafting the proxy statement and handling shareholder proposals, and ensuring that directors and executive officers make accurate and timely Section 16 filings. Also, my duties include advising management on corporate governance trends and practices in our peer group, corporate leaders and the investor community. The non-legal support provided typically includes assisting the corporate secretary with shareholder outreach, planning for the annual meeting, collecting and analyzing governance data, filtering and streamlining information presented to management and the board, and responding to urgent director inquiries. Effective support requires that I understand the corporate secretary’s role within the company, anticipate questions and issues that may arise, and promptly communicate information to management and the board.
2. One of your areas of specialization is securities law compliance. What are some challenges governance professionals are facing in this field?
The challenges involve staying on top of all the legal and practical developments in the field, implementing changes within the company and making sure the company continues to comply with other securities laws when responding to new developments. A prime example of this is the Dodd-Frank Act that imposes a variety of new governance-related obligations on the company, some of which can’t be implemented without SEC rulemaking that has yet to take place.
Securities compliance for certain provisions like say on pay is fairly straightforward – companies are required to hold an advisory vote at least once every three years and disclose the results of the vote in an 8-K. On the other hand, with say on pay, the challenge lies in the company’s practical response to the vote and making sure changes in proxy disclosure to enhance compensation disclosure don’t result in non-compliance with other SEC rules. In contrast, compliance with the requirement for companies to adopt a clawback policy is not possible because the SEC has not issued rules that prescribe the legal requirements, yet companies are facing increased pressure from investors to adopt and implement a clawback policy that could have significant practical implications for executives.
3.How has say on pay affected your proxy preparation and disclosures?
The heightened focus on executive compensation has fundamentally changed the nature of the proxy statement from a compliance-oriented document to a communication vehicle for investors. Prior to say on pay, many companies structured their compensation disclosure to comply with SEC regulations, disclosing only the specific compensation information required to adequately respond to the rules. The tone of the proxy statement used to be legal in nature – written by lawyers for lawyers – with companies reluctant to add explanatory information not required by the rules. Now that shareholders have an advisory vote, the proxy should speak directly to investors in order to communicate the features of the company’s executive compensation program that are most important to them, such as the link between executive pay and performance, even if the disclosure is not required by the SEC. This new way of communication requires more in-depth understanding of the company’s executive compensation program, knowledge of investor concerns and interests, and more creative thinking and writing when drafting the proxy – something they don’t teach in law school.
4.What are you doing to enhance engagement with investors, and what have you learned from your engagement efforts?
We reach out to our top institutional shareholders at least twice a year to discuss our compensation program, understand which compensation features are most important to them, and find out if they have any concerns about our existing programs. In the proxy off-season, we try to arrange calls or meetings with each of our top 50 shareholders, focusing on our largest holders and those we believe voted against our compensation in the prior year. We use this opportunity to discuss specific features of our compensation program, the investors’ votes in the prior year, and changes in our executive compensation program that were made or are being contemplated since the previous year’s vote.
Investors that are willing to engage will typically share how their policies and voting approach apply to our compensation program, ask questions about our program and try to identify potential areas of concern. During proxy season, our engagement with investors is more targeted and focused on changes in our program or the investors’ voting policies, or compensation issues or concerns previously identified by investors or noted in the proxy adviser reports. We also engage with investors via correspondence, often in response to a letter received from the investor, and in person at various industry conferences and events.
These engagement efforts allow us to share information about investor concerns with senior management and the compensation committee.
5.What should corporate secretaries know about their companies’ political spending activities? Why is this an area of concern for some investors?
Corporate secretaries should know that their company’s political spending activity might be closely scrutinized by certain activist shareholders and special interest groups. These groups are calling for increased disclosure of political spending, particularly following the 2010 Citizens United decision that permits corporate funds to be used to endorse political action committees in federal elections. Some investors are concerned that Citizens United gives corporations too much influence on elections and may result in the misuse of corporate funds if there is insufficient oversight and transparency. As a result, public companies are facing pressure to adopt policies that require board oversight over political spending and periodic disclosure of political contributions and lobbying activity, including dues paid to trade associations to which the company belongs. Much of the information requested is publicly available on various state and federal websites, so many large-cap companies have agreed to consolidate this information and post regular political spending reports on their websites. Companies that have no disclosures are at risk of receiving a shareholder proposal – over 100 shareholder proposals have been filed on this topic in each of the past two years, with only modest support from investors.
