While companies are making preparations for the year-end close, governance experts and proxy advisers are already looking ahead to the 2012 proxy season.
Now is the time, they say, to address issues and concerns that shareholders are likely to contest with proposals and resolutions in the coming year.
At the top of that list is compensation. This year shareholders voted against pay plans at more than 40 companies, and governance experts say a higher number of companies will likely join the lists next year. “Investors will pay close attention to companies who lost say-on-pay votes last year and also those who received a high number of opposition votes but still got their resolutions to pass,” says Amy Borrus, deputy director at the Council of Institutional Investors.
About two-thirds of companies are up for an annual say-on-pay vote in the next season, says Robin Ferracone, chairman of executive compensation consulting firm Farient Advisors. “Say-on-pay votes and voting for directors, particularly those on the compensation committee, will receive more attention,” she says. About one-third of companies don't have to worry about say-on-pay votes this year since they successfully garnered support for a triennial vote last year.
At companies that are holding votes, shareholders are expected to dig even deeper on compensation. According to Ferracone, companies that could demonstrate good performance got a pass this year even if they gave outsized pay packages to executives. She does not expect that to be the case next year. “More shareholders recognize that good performance doesn't necessarily mean good pay for performance,” she says. “Investors are going to try to take a harder look at pay levels. Last year, they used a rather crude view of whether pay just looked ‘over the top.' But this year, they're going to look at whether pay is generally in line.”
Instead of only comparing executives' pay to company performance, Ferracone says shareholders will expand their evaluation criteria to include comparable metrics between companies and peers. Red flags on compensation that shareholders and proxy advisory firms will be looking for include tax gross ups and special awards given to executives, such as retention and sign-up bonuses.
Another topic that is likely to get a lot of attention next proxy season is board and compensation committee independence.
Companies will see a resurgence of proposals for compensation committees' independence, says Patrick McGurn, executive director at proxy advisory firm ISS, and he says they will get a higher percentage of votes next year. “The big question in 2012 is the red card on compensation committee responsiveness to shareholder demands,” he says. Based on an ISS survey, investors are expecting companies to communicate with them more directly on compensation issues in 2012. He adds that investors do not necessary expect concrete changes to take place in most cases. However, shareholders do expect better disclosure on corporate pay practices in the next proxy season.
Beyond Compensation
Another issue that remains high on the wish list of institutional investors is majority voting. Borrus says the Council's view is that directors should be elected by a majority of votes cast. Majority voting ensures that shareholder votes count and directors will be more accountable. Based on an ISS survey, shareholder proposals seeking boards to adopt majority voting in director elections received an average of 58 percent support last year.
“Investors are going to try to take a harder look at pay levels. Last year, they used a rather crude view of whether pay just looked ‘over the top.' But this year, they're going to look at whether pay is generally in line.”
—Robin Ferracone,
Chairman,
Farient Advisors
Investors also plan to file more proposals that call for an independent chairman. “We expect more calls for an independent chair in 2012, and some of these proposals may be binding,” says Borrus. The CII's stance on the issue is that the board should be chaired by an independent director instead of assigning the responsibility to the chief executive officer. If companies decide against this view, they should discuss their reasoning on why they want the role to be combined, she says.
Disclosure on corporate political spending is also likely to get some attention from shareholders, given the upcoming presidential election year. “In a presidential election year, shareholder proposals regarding political contributions and lobbying expenses will most likely see an aggregate uptick in support,” says David Eaton, vice president of proxy research at proxy advisory firm Glass Lewis. He says last year these proposals received more support, averaging 33 percent. A shareholder proposal on political spending at Sprint Nextel passed last year.
“Given the Citizens United case, investors will want better disclosure on political spending,” says Borrus. Proposals seeking disclosure on lobbying spending made by companies will also emerge in the next season, she says.
Timothy Smith,senior vice president of Walden Asset Management and director of ESG shareowner engagement, agrees, saying that shareholders will want to see higher level of political spending disclosure from companies. “It is not enough to just say we spend money on lobbying activity; shareholders want a breakdown of the numbers,” he adds.
ISS: PAY TRENDS
The first figure below from the ISS 2011 U.S. Post-Season Report shows what pay practices were deemed ‘problematic' in 2011; the second chart details shareholder vote frequency by management recommendation:
Source: ISS 2011 U.S. Post-Season Report.
What about shareholder access proposals? Since the proxy access rule was vacated by a court ruling in September, the CII has been actively asking the Securities and Exchange Commission to revive the rule, although no actions had been taken by the Commission. However, another rule which allows shareholders to procure proxy access at individual companies by first getting a resolution on the proxy statement and then winning a majority vote on it quietly went into effect on Sept. 13.
Charles Elson, director of the Center for Corporate Governance at the University of Delaware, says companies can expect a lot of shareholder resolution proposals filed next year by shareholder activist groups. He says their requests will go beyond seeking bylaw changes on nominating directors. There will be proposals requesting reimbursement of reasonable expenses incurred by shareholder groups to prepare these proposals. “I think you will see a lot of these proposals asking for proxy reimbursement,” he says.
Borrus does not expect an avalanche of proxy access proposals. “From what I understand, the amount of such proposals will probably be less than twenty,” she says.
Still, it is likely an issue companies will want to discuss with large shareholder groups. Governance experts expect the trend of more shareholder outreach to continue as well in 2012. Smith says most companies did heed the call to up their game in engaging shareholders in conversation ahead of last proxy season and will do even more in the coming year, especially on pay issues. “If [companies] fear a no-vote on compensation packages, they have to learn to talk to major investors, make the changes, and explain to shareholders clearly to get votes,” he says.
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