Analysis of additional say on pay plans means companies may not be able to secure meetings or phone calls with shareholders
From new ways to gauge the independence of compensation committees and their advisors to changing company bylaws, the 2014 proxy season promises to be chock full of issues that are making public companies more attentive to the quality of their proxy statements.
Latham & Watkins and Georgeson teamed up for the fifth consecutive year to host a free webcast on January 15 that provided tips for drafting proxy statements and preparing for annual meetings. Drawing more than 1,100 registrants, the webcast also reviewed policy updates by proxy advisors ISS and Glass, Lewis and discussed hot-button issues concerning executive compensation.
Rhonda Brauer, senior managing director for corporate governance at Georgeson, stressed the significance of how companies present their stories about compensation practices and decisions in the Compensation Discussion & Analysis section of their proxy statements.
‘[Include details of] your off-season shareholder engagement work and make sure no part of your story is misunderstood,’ she said.
That’s especially critical this year in view of how stretched institutional investors and proxy advisory firms will be as this is the first year for say on pay votes at companies whose shareholders opted for advisory votes on this every three years, she said.
That means proxy advisory firms will have to analyze and make recommendations on the pay plans of as many as 650 additional companies. ‘There’s no guarantee you will get an audience with your investors during the actual proxy season, so it’s more important than ever to get your compensation story straight and clear,’ said Brauer.
Georgeson’s recommendations also include using feedback from investors and proxy advisors and ‘best practices’ models to make compensation narratives more accessible to select readers.
Companies need to go beyond what’s legally required to address issues that concern proxy advisors and investors such as the 25 percent rule that is a topic of particular interest to Glass, Lewis.
‘Glass, Lewis expects some sort of explanation [of why a certain company practice met with disapproval from one-quarter of shareholders],’ Brauer said. ‘They appreciate your taking time to explain how your board is viewing a disagreement with 25 percent of your shareholders, so adding some lines to your investor section is useful.’
Notwithstanding the need to tell their compensation stories, companies must keep in mind that proxy statements are legal documents, and that anything in them can and will be used against them, said Jim Barrall, a partner in Latham & Watkins’ benefits and compensation practice.
This year, Barrall expects proxies to be scrutinized more than ever. For example, the shareholder plaintiff bar continues to look for arguable misstatements or omissions. He also warned that with the SEC paying closer attention to disclosures, he expects enforcement actions to rise. All of these factors argue for companies being more careful about what they include.
Companies need to pay special attention to disclosures about pay-for-performance alignment. Because the SEC has yet to finalize rules around this, companies aren’t required to address it, Barrall said. But it’s an issue that shareholders are keenly concerned about and ISS weighs it, albeit in a very rudimentary way, by looking at total shareholder return as depicted in companies’ summary compensation tables. If a company has done well in the past by using ISS-approved metrics, there’s no reason to veer from that now, he said. Companies should do their own simulations before drafting their proxies to see whether they have alignment problems.
‘If a company is going to state that CEO pay is aligned with performance, they need to say why and how they determined [that],’ Barrall said. ‘And if it’s based on supplemental definitions like realizable pay or realized pay, it’s important that those disclosures be accurate. You need to say how you’re defining realizable pay or realized pay, because there is no one definition, and you have to say how it’s different from the summary compensation table [calculation] and why you think your method is better than that.’’
He added that the SEC really likes the use of summary compensation tables.
With shareholder activism heating up, Brauer suggested that companies be especially thorough in how they present directors’ biographies, qualifications and skills matrices in their proxy statements.
‘It’s important to show you have the right board at the right point in time,’ she said. ‘That you show what each individual person contributes in terms of experience. These are things that will be tackled if you get yourself into an activist situation.’
