Advice for governance teams
Investors continue to articulate their own policies as opposed to relying solely on proxy advisers, leading to greater differentiation and a growing need for consistent shareholder engagement.
In the executive compensation area, firms typically engage shareholders in the context of one or more of the following scenarios: – As part of the company’s regular annual shareholder outreach program – In order to pre-emptively address a potential pay-for-performance disconnect or a compensation decision that could be viewed negatively by proxy advisers and/or investors – To combat a negative say-on-pay vote recommendation by proxy advisers or the dissident view of activist investors – To recover from a failed or challenged say-on-pay vote outcome.
The following provides an overview of the shareholder engagement process with respect to executive compensation and related governance issues.
When? Timing is driven by the reason for engagement and varies depending on each company’s specific circumstances. In general, proxy advisory firms and institutional investors are most receptive to meetings during the proxy-off season – June to late fall – and may decline invitations during a company’s proxy solicitation period.
With whom? To determine which shareholders to engage, evaluate the company’s ownership base – institutional, retail, insider – and say-on-pay voting patterns, such as an investor that typically votes based on an independent analysis or follows the recommendations of a specific proxy advisory firm.
Contact a meaningful number of shareholders – at least the top 20 holders. To the extent proxy advisory firm recommendations are influential with the company’s institutional investor base, consider engaging directly with the proxy advisory firms.
By whom? Who should represent the company in front of shareholders depends on the reason for the engagement, the subject matter to be discussed and the severity of the situation. If multiple participants are involved, messaging should be consistent and parties should speak with one voice.
Participants should be well prepared. They should know the institutional investors’ voting policies and prior feedback, how the company’s compensation philosophy and pay design aligns with those policies, and who makes the say-on-pay voting decision. At some institutions the voting decision is made directly by the investment team, but at other institutions the voting decision is made by a separate governance team.
Directors should be used strategically: investors recognize that directors have limited time and therefore value receiving direct attention from a member of the board.
How? – Clearly state the objective of the meeting and the reason for pursuing that particular audience. – Prepare a shareholder outreach presentation to facilitate conversation. – Prepare to demonstrate knowledge of the compensation program, the behaviors it is designed to promote and elements that could potentially be perceived as controversial. – Be prepared to address any ways in which compensation policies deviate from those policies favored by the shareholder. – Communication with investor representatives is a two-way street. Be prepared to listen to investor issues and ready to discuss broader governance and social responsibility issues outside compensation. – Be concise and sensitive regarding time allocation.
Post-engagement process – Develop a summary of interviews and share with the entire board of directors. – Assess opportunities for addressing key shareholder themes. – Demonstrate responsiveness to shareholders by detailing shareholder outreach efforts in the next proxy statement. Disclosure will typically cover details of how many stockholders were contacted, who the company engaged with, what percentage of shares were represented, topics discussed and resulting changes to pay practices (if any). – When substantive changes were made, present details in a table with ‘what we heard’ and ‘what we did’ columns. – Use the compensation discussion & analysis as an effective medium for shareholder engagement to:
Create a shareholder communication document that tells the company’s unique story
Brings the reader inside the decision process
Employs enhanced graphics and shorter, more concise text.