Broc Romanek of the comprehensive, insightful, and influential Corporate Counsel was kind enough to talk to me about his thoughts on “say on pay.”
What have shareholders learned from two years of “Say on Pay?”
It obviously will depend on each shareholder but the main lesson is how to manage the enormous logistical nightmare of voting on executive pay for the many portfolio companies they own. This was a sea change in responsibilities at a time when investors were cutting from a department that is not a profit center. Now that the concept of “shareholder engagement” being a year-long process, the proxy season has turned into a year-long event for those investors who take their voting responsibilities seriously. Some still don’t.
What have companies learned?
That say-on-pay isn’t the end of the world. Even in this era of intense anger over skyrocketing pay, only about 50 companies have failed say-on-pay in each of the first two years. Even for those that failed, the consequences have not been that extreme even though a spate of say-on-pay lawsuits threw a scare into a dozen companies. Given that those lawsuits aren’t failing that well, say-on-pay is well on its way to being a routine along with the rest of the proxy season action items. This was always my biggest beef with say-on-pay – it will cause boards to become complacent because they think they are doing a great job with CEO pay because the voter said so.
Companies have also begun to treat annual meetings like real campaigns. For the first time, they are willing to publicly battle a negative recommendation from the proxy advisors through the use of supplemental letters that rebut what the proxy advisor has said about them. This practice has grown like wildfire with nearly one-third of the companies receiving negative recommendations willing to go to the mat this proxy season.
What is more important in getting a majority “no” vote on pay — the make-up of the pay or the make-up of the shareholder base?
Probably the shareholder base.
How influential are the proxy advisors?
The proxy advisors – ISS and Glass Lewis being the primary ones in the US – are quite influential and have primarily been responsible for boards making changes to pay practices as their policies have pushed the envelope at times. However, their influence has often been overstated – as borne out by several recent studies – and they have been targets for criticism by quite a few corporate interests.
Surprisingly, at least one of these studies shows that management often benefits from proxy advisor influence – leading me to say “be careful what you wish for” for those managers who bash proxy advisors more out of a knee-jerk reaction to not wanting to make any changes to a broken executive pay process.
What should a company with a “no” vote do?
Schedule a series of compensation committee meetings to develop, approve and monitor an outreach plan to figure out why the vote was negative. Don’t wait for a lawsuit to be spurred into making real changes. And don’t rely solely on advisors – like proxy solicitors – for intelligence about why the vote came in the way it did. Directors should also participate in some of the research to get a firsthand feel of what shareholders are saying about the company’s pay program.
Do shareholders vote “no” on comp committee members when they don’t like the pay?
Sometimes, but less than they used to before say-on-pay became the law of the land. Note what happened at Cablevision Systems recently; the company did not have say-on-pay on its ballot this year because the frequency is triennial (triennial was the choice of shareholders last year) – but then the members of its compensation committee received less than majority support at this year’s annual meeting presumably due to pay issues. The company has a plurality vote standard so there is no direct impact from this vote – but I consider this to be a more serious failure than a nonbinding SOP vote.
Will binding “say on pay’ votes become law in the UK? In the US?
Yes, seems pretty close to a done deal in the UK. I’ll be shocked if it happens in the US but you never know…