Panelists Advise on S'holder Engagement, Pay Ratio Rule

By Michael Greene

Sept. 18 —Speakers at a Sept. 12 conference on executive compensation discussed issues that directors and board members should consider involving shareholder engagement, CEO succession planning, SEC enforcement of regulatory filings and Dodd-Frank.

Increasing Engagement

Shareholder engagement has become increasingly more important since the implementation of say-on-pay, and directors are opening themselves up more to shareholders, said Linda Rappaport, a partner at Shearman & Sterling LLP.

Since the Dodd-Frank Wall Street Reform and Consumer Protection Act required nonbinding say-on-pay votes to approve executive pay at least once every three years, and the Securities and Exchange Commission adopted its corresponding rule thereon (26 CCW 25, 1/26/11), investors have used the say-on-pay vote to communicate more with management (29 CCW 129, 4/23/14).

Shareholder engagement has become a more “proactive” process, she said.

As part of this process, companies must think about who should lead the outreach effort; sometimes the CEO may not be the best person. This person needs to be a “good communicator” and always should be careful about the information the company shares, she said.

Additionally, proper shareholder engagement requires identifying the right investors, said Rappaport.

Larger shareholders can account for up to “30 to 40 percent” of the vote so it is “important to get their reaction,” which sometimes requires listening rather than communicating, according to Charles M. Elson, finance professor at the University of Delaware's Alfred Lerner College of Business & Economics.

Dodd-Frank Pay Ratio Issues

The panelists also discussed the controversial pay ratio rule.

Under Dodd-Frank—and a SEC rulemaking promulgated in 2013, but not yet finalized (29 CCW 287, 9/17/14)—public companies are required to disclose the median annual compensation of all employees and the annual income of their CEO.

Companies may use a “reasonable estimate” to calculate annual compensation, and the SEC will be “flexible on the calculation methodology” used, Rappaport explained.

She added, however, that companies need to start thinking about issues related to the choice of methodology, including cataloging their work forces, currencies and exchange rates, and the integration of different payroll systems. Moreover, they should figure out what measurements they are going to use in making their methodology seem “sensible.”

Potential Plaintiffs

In other practical advice, Rappaport warned that firms are reading through proxies and looking “for problems in the way equity plans are administered.”

This trend is coming up more now because many companies have stock prices that are depressed. When advising a company in this area, attorneys should consider what protocols are used in counting shares and whether there are different interpretations on how to count shares when they are rewarded, she said.

According to Rappaport, establishing a protocol for counting shares may be the best way to defend against this type of lawsuit.

The Practising Law Institute sponsored the “Hot Issues in Executive Compensation 2014” conference.

To contact the reporter on this story: Michael Greene in Washington at

To contact the editor responsible for this story: Ryan Tuck at