Shareholders give companies something to talk about

Proxy seasonAs SEC registrants and their shareholders plunge into the 2016 proxy season, recent SEC developments make you wonder what’s ahead. The SEC’s final rules on say-on-pay have generated more communication between companies and their shareholders, a trend expected to grow this year. Companies are using their proxy statements to tell a story about their compensation and make sure shareholders are comfortable with executives’ pay. These trends were discussed in a recent webcast presented by Grant Thornton LLP’s Compensation and Benefits Consulting practice.

The shape of things to come Here are some highlights of what Grant Thornton expects this year.
Peers — Companies are doing more than listing their peers within the proxy statement; they’re describing the peer selection process in detail including the context and criteria. The motivation is usually to explain why their peer groups differ from those used by proxy advisory firms such as Institutional Shareholder Services (ISS) or Glass Lewis and Co., or why companies that aren’t obvious peers were included. For example, not-so-obvious peers might be competing for talent in their local area or be in a similar life cycle.

Shareholder outreach programs — More companies are proactively reaching out to key shareholders. They’re summarizing in their proxy statements their discussions with key shareholders and the resulting outcomes. Effective shareholder outreach practices include Q&A dialogues with shareholders instead of investor relations pitches or presentations.

Descriptions, charts and graphs — Proxy statements are becoming vehicles to sell not only the compensation program but also the company. That requires describing company performance, the financial metrics the company believes will drive its performance and the reason they’re being used in short- and long-term incentive plans.

The use of charts and graphs is also becoming commonplace throughout the proxy statement. They shouldn’t be just any charts and graphs, though; they need to be easy to understand and accurate. Institutional shareholders have said they’re put off by misleading or ambiguous graphs or charts that require excessive interpretation. So if a shareholder has to take 20 minutes to figure out what your chart says, you’re probably better off using a narrative instead or simplifying the chart.

Transparency — Companies may not have a great financial year every year. Outside factors may have affected the company’s financial performance, keeping goals from being met. It’s important to fully describe the company’s financial performance and the reasons for any incentive payouts, especially if any discretionary adjustments were made.    

Proxy advisory firm updates Key large institutional shareholders vote according to their own philosophies and policies, so they may not follow guidance from the ISS and Glass Lewis. Other shareholders will look to ISS or Glass Lewis for voting guidance.

Both ISS and Glass Lewis are dealing with directors’ expanded responsibility for the performance and oversight of companies, and the additional risk. They advise against directors’ sitting on too many public company boards, called “overboarding,” and have reduced the number of public company boards an individual may sit on from six to five. The ISS policy is being put in place for 2016 and will be enforced in 2017.

The ISS is also focusing on compensation of externally managed issuers (EMIs), which typically pay fees to outside firms in exchange for management services. In most cases, some or all of an EMI’s executives are directly employed and compensated by the external management firm. Companies need to adequately disclose EMI compensation to shareholders so that the shareholders can reasonably assess the compensation for their named executive officers. The failure to disclose this is considered a problematic pay practice and generally warrants a recommendation to vote against a say-on-pay proposal.

Unilateral governance changes can impair shareholder rights. So, for established SEC registrants, the ISS will recommend a withhold vote from directors who have unilaterally adopted a classified board structure or implemented a majority of vote requirements in order to amend the bylaws or charter. For new SEC registrants, judgment is on a case-by-case basis. The ISS will view a new company positively if it allows shareholders to change the governance structure in the future through a simple majority vote and hold directors accountable through annual shareholder elections.

Glass Lewis updates address executive sign-on arrangements such as sign-on bonuses and inducement grants. These should be disclosed clearly, including an explanation of payments and the process used to determine the amounts. To decide whether payments are appropriate, Glass Lewis will also consider compensation of other executives, including a predecessor. Companies don’t necessarily have to disclose a predecessor payment or sign-on bonus but should know that Glass Lewis will consider this, so it may be worthwhile to address it in the proxy statement.

Glass Lewis supports holding directors and nominating committees responsible for certain omissions. If a company fails to identify and manage material environmental or social risk that reduces shareholder value, Glass Lewis recommends that shareholders vote against the responsible directors. If the board failed to ensure that directors had relevant experience and that contributed to a company’s poor performance, Glass Lewis may recommend shareholders vote against the chair of the nominating committee.

This year will amplify previous trends: Proxy statements will tell a more detailed story about such areas as peers, shareholder outreach and the company. That story will use more visual elements, such as graphs and charts, and less narrative text. In addition, proxy advisory firms will increasingly hold directors accountable for company performance and risk by limiting the number of public company boards an individual may sit on and making or withholding recommendations.  

For more information, please contact Eric Myszka.

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