‘Bright Line' for Companies on Say-on-Pay Is 80 Percent Vote and Proxy Firm Support

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By Yin Wilczek

Feb. 10 — In the fourth season of say-on-pay, the “bright line” for a company to determine whether it is entering the danger zone is a shareholder vote of 80 percent or less and the support of the major proxy advisory firms, a compensation consultant said Feb. 10.

If a company has an 80 percent vote for its compensation program and it has the support of both Institutional Shareholder Services Inc. and Glass Lewis & Co. LLC, then it has a “potential problem,” said Daniel Ryterband, president of Frederic W. Cook & Co.

In that situation, if the company loses the support of the proxy advisers, then the likelihood is that it will fail say-on-pay the following year, Ryterband said.

Conversely, if the two firms are against the company and it still receives 80 percent shareholder support, then “that's a great outcome” and the company is in a “pretty good place,” he said. That means that independent shareholders looked at the ISS and Glass Lewis analyses and disagreed with the proxy firms, he said.

However, Ann Yerger, executive director of the Council of Institutional Investors, urged companies not to focus too much on the proxy firms.

Ryterband and Yerger were part of a compensation panel at the Practising Law Institute's corporate governance conference in New York.

Best Interests of Company 

Yerger told the panel that there is an overemphasis on the proxy firms and their recommendations. Instead, in the compensation context, directors should be doing what they think is in the best interests of the company and its executives, and communicating that information to investors, she said.

Yerger added that during the past decade, there has been a huge change in how institutional investors exercise their voting rights. Large shareholders now cleave to their own proxy voting guidelines and undertake their own research, she said. Accordingly, “it's a lot more important for companies to understand how their largest shareholders look at these issues and a lot less important to focus” on the proxy advisory firms.

The panelists also suggested that if companies want to switch course in their compensation programs, they must explain clearly why they are doing it.

“Different is not automatically bad, but it requires explanation,” Ryterband said. The “clarity of the proxy disclosure and the rationale for why you decided to take a different path is going to be of critical importance if you're doing something atypical or that is not aligned” with prevailing best practices.

Ryterband added that in his experience, institutional investors will listen if companies can make a good business case about why they are taking a different course.

Yerger said that timing also is important. If companies are trying something new that may not be in line with what investors or the proxy firms expect, they must “communicate it early,” she said. She noted, for example, that now would be the “wrong time” for companies to announce a new move. Instead, companies should reach out to their investors during the offseason to put themselves in a good position, she said.

Investor Outreach 

In other discussions, the panelists offered some suggestions for companies trying to undertake investor outreach.

Ryterband noted that when companies are in a good position with no say-on-pay problems, they should be conducting proactive outreach. That process is almost always handled by members of the management team, such as the general counsel or the head of investor relations, he said.

However, when a company has failed say-on-pay or hovers at the 65 to 70 percent vote level, then it's “reactive” outreach, Ryterband continued. That company needs to explain its pay program in greater detail and solicit feedback on the concerns that its institutional investors have, he said. He added that for companies that fail say-on-pay, there is “no question” that the institutional community is not interested in hearing from management, but wants to engage directly with the board, in particular the chair of the compensation committee.

Yerger also warned that directors must be “robustly prepped.” Institutional investors are evaluating the boards during times of crisis, and directors who are inadequately prepared reflect poorly on the organization, she said. “You don't want a director that just turns to the general counsel or the IR person” to get all the answers.

Yerger offered other practice points related to shareholder engagement. She said companies should:

• “really think” about their public communications and ensure that their required disclosures and proxy statements are effective; and

• ensure that their two-way communications work. If companies publicize particular methods of communication, they should make sure those channels function well.


Panel moderator Linda Rappaport, a New York-based Shearman & Sterling LLP partner, also recommended that companies recognize that not every board member will be a good communicator. If some other director can do a better job, it may not always be the compensation committee chair who responds, Rappaport said.

SEC Hedging Proposal 

Meanwhile, the panel also discussed a proposal the SEC issued Feb. 9 on hedging policies. The proposal implements a Dodd-Frank Wall Street Reform and Consumer Protection Act provision and would require public companies to disclose whether they allow their officers, directors and employees to hedge against declines in the company stock.

Keith Higgins, director of the Securities and Exchange Commission Division of Corporation Finance, told the panel that one question the proposal poses to commenters is whether all employees should be included. “Will investors be that interested in the rank and file?” he asked.

Yerger responded that it will depend on the type of company, its pay program and the number of employees it has. “Clearly, plenty of companies have significant equity plans that are awarded deeply through the organization, and I think there will be a lot of interest in understanding what the principles are behind the expectations” when shares are granted or earned, she said. “I think there’s going to be a lot of interest in the disclosure.”

Ryterband noted that according to recent surveys, 91 percent of publicly listed companies and 70 percent of smaller companies already have anti-hedging policies. He also suggested that it wouldn't be difficult for companies to apply such policies throughout their organizations.

The challenge will be how they monitor and determine whether their employees in fact are in compliance with the policies, Ryterband said. He added that for the most part, it is “pretty unlikely” that companies will expend significant resources to monitor their policies.

Panel member Meredith Cross, a former Corp. Fin. director who now is a Washington-based partner at Wilmer Cutler Pickering Hale & Dorr LLP, said that those who want differences in the proposal should ensure that they weigh in during the comment period. “A good solid comment is going to be important, particularly reading the concurring statements of the other commissioners,” she said.

To contact the reporter on this story: Yin Wilczek in Washington at ywilczek@bna.com

To contact the editor responsible for this story: Ryan Tuck at rtuck@bna.com