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A Proxy Advisor’s Negative Recommendation on Say-on-Pay: How Much Should You Care?

    Client Alerts
  • October 25, 2011

As of mid-summer 2011, Institutional Stockholder Services (ISS) had recommended a negative vote on say-on-pay for about 13% of the companies it evaluated. In turn, those companies received stockholder support for their say-on-pay proposals that was a substantial 25% lower, on average, than their ISS-blessed peers – 94% approval versus 69% approval. While 69% is a long way from a failed vote, an approval vote that low is very likely to attract the attention of stockholder activists and, arguably, justify demands for change in the subject company’s compensation practices. And for those few unfortunate companies that received a negative vote (39 through September 2011), there is the possibility of stockholder litigation alleging breach of fiduciary duty by the board in setting compensation.

Historically, where ISS has identified a “problematic” pay practice, it has not issued a negative vote recommendation when a company has committed to eliminate the practice prospectively. Effective November 19, 2010, ISS changed its policy to generally no longer consider prospective commitments in rendering or reversing a negative vote recommendation. This policy change raises the ante for companies whose pay practices could garner a negative vote recommendation.

These realizations sunk in, both through observation of early filers and discourse with large institutional stockholders, as the proxy season wore on. As a result, companies that received negative recommendations adopted more aggressive responses, rather than merely letting the voting process play out. More than 100 companies responded directly to proxy advisor negative recommendations in supplemental proxy materials filed with the SEC and delivered to their stockholders prior to the vote. About half of those companies contested the advisor’s assessment of their pay for performance. Other disputes included valuation methods for options, director independence assessments and factual errors.

Three Blue Chips, Three Paths

Disney, Hewlett-Packard and General Electric all received negative recommendations. Their responses and the ultimate outcomes provide an interesting snapshot of the season:

Disney: ISS took issue with Disney’s tax gross-ups on golden parachute payments in executive employment agreements and also supported a stockholder proposal regarding performance tests for restricted stock unit awards. Disney eliminated the tax gross-ups before the meeting and notified its stockholders accordingly. Its say-on-pay proposal passed with 77% approval.

Hewlett-Packard: ISS also had two problems with HP – its employment arrangement with its new CEO and the CEO’s participation in indentifying director candidates. Given its majority voting standard, HP chose to focus its response largely on the director nomination issue, which HP believed was not well supported by ISS. HP’s say-on-pay proposal failed with 48% approval. Since the annual meeting, the “new” CEO in question, Leo Apotheker, was fired and replaced with Meg Whitman.

General Electric: GE received a negative recommendation from ISS, at least in part due to the structure and amount of option awards to its CEO. GE filed additional proxy soliciting materials challenging ISS’s valuation methodology as well as other issues. Later, GE restructured the options and reported that the change was with its CEO’s full support and after constructive conversations with its stockholders. ISS reversed its recommendation and GE’s say-on-pay proposal passed with 85% approval.

Trends to Watch?

These three examples highlight several items to watch going forward:

  • Disney actually had a change it could make quickly and with the cooperation of its executives. HP likely did not. Golden parachute tax gross-ups are more easily addressed than renegotiating a new CEO’s employment arrangement, including his signing bonus.
  • In its response, HP did little to advocate for its pay-for-performance, which is a hot issue for activist stockholders and ISS. By focusing on the director nomination issue, it left its say-on-pay vote more vulnerable.
  • GE’s response highlights its discourse with institutional stockholders. It also features a “fix” that warrants close attention going forward. GE changed an individual executive’s compensation package, unlike Disney, which eliminated a compensation feature for all of its top executives.

What Can You Do Now?

Stockholder Communication Plan

Be sure you have a stockholder communication plan and that it is updated to reflect the new say-on-pay environment. If you had to mobilize quickly to enlist support for your executive compensation program, could you?

Prepare a Scenario

Build into your stockholder communication plan a scenario based on a negative say-on-pay recommendation. In some cases, there may be very little time between the release of the proxy advisor’s report and your stockholders’ meeting. Be sure you can meet the challenge of reaching large stockholders to make your case or making necessary compensation changes.

Monitor Proxy Advisors

Even if your stockholder base or previous say-on-pay votes do not make you a likely candidate for a negative recommendation, monitoring changes in your proxy advisor reports is essential. Be wary of factual mistakes in the data cited or the assumptions made in the report. Say-on-pay only increased ISS’s workload and everyone makes mistakes. In some cases, a mistake alone can ultimately cause a negative recommendation.

Know Your Stockholders

Dig deeper into your stockholder list. Do any of your institutional stockholders as a policy vote in line with ISS? If so, should you spend time on them or concentrate on reversing the recommendation? How does each institution prefer to be approached? Knowing your stockholder base helps answer these questions and also allows you to anticipate what they might ask so that you can be as persuasive as possible when time is short.

Additional Articles from the Fall 2011 Public Company Forum


Director Diversity = Dollars

Is it Bigger than a Breadbox? Navigating Materiality

What’s Market? Are Press Releases Passé?

Dodd-Frank Act Progress Report: Fall 2011