Tag: Proxy advisors


Do Proxy Advisors Say On Pay Voting Policies Improve TSR?

The following post comes to us from Pay Governance LLC and is based on a Pay Governance memorandum by Ira Kay, Brian Johnson, Brian Lane, and Blaine Martin.

The following post comes to us from Pay Governance LLC and is based on a Pay Governance memorandum by Ira Kay, Brian Johnson, Brian Lane, and Blaine Martin.

The vast majority—98%—of companies have passed their annual say on pay votes (SOP) over the past four years. Proxy advisor voting recommendations remain highly influential on these votes, and many companies, perhaps hundreds, have changed the structure of their executive pay programs to try to comply with proxy advisor policies and to obtain a “FOR” SOP vote recommendation from proxy advisors. Proxy advisors base voting recommendations on quantitative and qualitative tests that are highly tailored to their own perspective of and guidance on what comprises a successful executive pay model. [1] Are these voting recommendations correlated with long-term shareholder value creation as measured by total shareholder returns (TSR)? While correlation does not prove causation, what possible explanations may explain the correlation observed in our research?

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A Say on “Say-on-Pay”: Assessing Impact After Four Years

Joseph Bachelder is special counsel in the Tax, Employee Benefits & Private Clients practice group at McCarter & English, LLP. The following post is based on an article by Mr. Bachelder, with assistance from Andy Tsang, which first appeared in the New York Law Journal.

Joseph Bachelder is special counsel in the Tax, Employee Benefits & Private Clients practice group at McCarter & English, LLP. The following post is based on an article by Mr. Bachelder, with assistance from Andy Tsang, which first appeared in the New York Law Journal.

The 2015 proxy season is the fifth one in which shareholders of thousands of publicly traded corporations have cast non-binding votes on the executive pay programs of the companies in which they are invested. The holding of such a vote, commonly known as Say-on-Pay, is required under Section 951 of the Dodd-Frank law. [1] That requirement applies to most publicly traded companies. Following are some observations on Say-on-Pay.

Results of Votes

In each of the four years of Say-on-Pay—2011-2014 proxy seasons—at the Russell 3000 companies holding Say-on-Pay votes (i) the executive pay program received favorable votes from over 90 percent of the shareholders voting at 75 percent of those companies and (ii) 60 or fewer companies had a majority of votes cast disapproving the executive pay program. [2]

Evaluating the Impact

Following are two propositions on how well Say-on-Pay is working.

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Proxy Advisors Clarify Proxy Access and Bylaw Amendments Voting Policies

The following post comes to us from Ariel J. Deckelbaum, partner and deputy chair of the Corporate Department at Paul, Weiss, Rifkind, Wharton & Garrison LLP, and is based on a Paul Weiss client memorandum.

The following post comes to us from Ariel J. Deckelbaum, partner and deputy chair of the Corporate Department at Paul, Weiss, Rifkind, Wharton & Garrison LLP, and is based on a Paul Weiss client memorandum.

On the heels of SEC Chair White’s direction to the Division of Corporation Finance to review its position on proxy proposal conflicts under Exchange Act Rule 14a-8(i)(9), both Institutional Shareholder Services (“ISS”) and Glass Lewis have issued clarifying policies on proxy access, entering the fray of what is becoming the hottest debate this proxy season. The publication of ISS’s updated policy in particular means that market forces may have outpaced the SEC’s review process. In order to avoid risking a withhold or no-vote recommendation from ISS against their directors, many companies will be faced with the choice of (i) including any shareholder-submitted proxy access proposal in their proxy materials (either alone or alongside a management proposal) (ii) excluding the shareholder submitted proposal on the basis of a court ruling or no-action relief from the Division of Corporation Finance on a basis other than Rule 14a-8(i)(9) (conflict with management proposal) or (iii) obtaining withdrawal of the proposal by the shareholder proponent.

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2015 US Compensation Policies FAQ

Carol Bowie is Head of Americas Research at Institutional Shareholder Services Inc. (ISS). This post relates to ISS compensation policy guidelines for 2015. The complete publication is available here.

Carol Bowie is Head of Americas Research at Institutional Shareholder Services Inc. (ISS). This post relates to ISS compensation policy guidelines for 2015. The complete publication is available here.

US Executive Pay Overview

1. Which named executive officers’ total compensation data are shown in the Executive Pay Overview section?

The executive compensation section will generally reflect the same number of named executive officer’s total compensation as disclosed in a company’s proxy statement. However, if more than five named executive officers’ total compensation has been disclosed, only five will be represented in the section. The order will be CEO, then the second, third, fourth and fifth highest paid executive by total compensation. Current executives will be selected first, followed by terminated executives (except that a terminated CEO whose total pay is within the top five will be included, since he/she was an within the past complete fiscal year).

2. A company’s CEO has resigned and there is a new CEO in place. Which CEO is shown in the report?

Our report generally displays the CEO in office on the last day of the fiscal year; however, the longer tenured CEO may be displayed in some cases where the transition occurs very late in the year.

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2015 Benchmark US Proxy Voting Policies FAQ

Carol Bowie is Head of Americas Research at Institutional Shareholder Services Inc. (ISS). The following post relates to ISS’ 2015 Benchmark Proxy Voting Policies.

Carol Bowie is Head of Americas Research at Institutional Shareholder Services Inc. (ISS). The following post relates to ISS’ 2015 Benchmark Proxy Voting Policies.

ISS is providing answers to frequently asked questions with regard to select policies and topics of interest for 2015:

Proxy Access Proposals

1. How will ISS recommend on proxy access proposals?

Drawing on the U.S. Securities and Exchange Commission’s (SEC) decades-long effort to draft a market-wide rule allowing investors to place director nominees on corporate ballots, and reflecting feedback from a broad range of institutional investors and their portfolio companies, ISS is updating its policy on proxy access to generally align with the SEC’s formulation.

Old Recommendation: ISS supports proxy access as an important shareholder right, one that is complementary to other best-practice corporate governance features. However, in the absence of a uniform standard, proposals to enact proxy access may vary widely; as such, ISS is not setting forth specific parameters at this time and will take a case-by-case approach when evaluating these proposals.

Vote case-by-case on proposals to enact proxy access, taking into account, among other factors:

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Proxy Access, SEC Uncertainty and Related Issues in 2015

The following post comes to us from Bill Libit, Chief Operating Partner concentrating in corporate and securities and municipal finance at Chapman and Cutler LLP, and is based on a Chapman publication by Mr. Libit and Todd Freier; the complete publication, including footnotes, is available here.

The following post comes to us from Bill Libit, Chief Operating Partner concentrating in corporate and securities and municipal finance at Chapman and Cutler LLP, and is based on a Chapman publication by Mr. Libit and Todd Freier; the complete publication, including footnotes, is available here.

The rise of shareholder activism in the realm of corporate governance has increasingly focused on board performance and the right of shareholders to replace those directors who are perceived to underperform. One proposed approach to facilitate the replacement of underperforming directors is to give shareholders direct access to the company’s proxy materials, including permitting the inclusion of a shareholder-proposed director nominee (or slate of nominees) and a statement in support thereof in the company’s proxy statement (which such approach is more commonly referred to as “proxy access”). Although current U.S. securities regulations do not grant shareholders access to company proxy materials, proxy access may be available to shareholders by way of a company’s organizational documents (e.g., articles of incorporation, bylaws or corporate governance guidelines), as permitted by state corporate law.

While proxy access did not garner significant attention over the past two proxy seasons, it is one of the most notable early developments of the 2015 proxy season. It has been reported that shareholders have submitted an estimated 100 proxy access proposals to U.S. companies, a considerable number of which will be voted upon by shareholders over the next several months. Proxy access will very likely be one of the most contentious corporate governance issues this proxy season.

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ISS 2015 Equity Plan Scorecard FAQs

Carol Bowie is Head of Americas Research at Institutional Shareholder Services Inc. (ISS). This post relates to ISS’ Equity Plan Scorecard for 2015.

Carol Bowie is Head of Americas Research at Institutional Shareholder Services Inc. (ISS). This post relates to ISS’ Equity Plan Scorecard for 2015.

General Questions

1. What is the basis for ISS’ new scorecard approach for evaluating equity compensation proposals?

The new policy will allow more nuanced consideration of equity incentive programs, which are critical for motivating and aligning the interests of key employees with shareholders, but which also fuel the lion’s share of executive pay and may be costly without providing superior benefits to shareholders. While most plan proposals pass, they tend to get broader and deeper opposition than, for example, say-on-pay proposals (e.g., only 60% of Russell 3000 equity plan proposals garnered support of 90% or more of votes cast in 2014 proxy season, versus almost 80% of say-on-pay proposals that received that support level). The voting patterns indicate that most investors aren’t fully satisfied with many plans.

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The State of Corporate Governance for 2015

Holly J. Gregory is a partner and co-global coordinator of the Corporate Governance and Executive Compensation group at Sidley Austin LLP. The following post is based on a Sidley update.

Holly J. Gregory is a partner and co-global coordinator of the Corporate Governance and Executive Compensation group at Sidley Austin LLP. The following post is based on a Sidley update.

The balance of power between shareholders and boards of directors is central to the U.S. public corporation’s success as an engine of economic growth, job creation and innovation. Yet that balance is under significant and increasing strain. In 2015, we expect to see continued growth in shareholder activism and engagement, as well as in the influence of shareholder initiatives, including advisory proposals and votes. Time will tell whether, over the long term, tipping the balance to greater shareholder influence will prove beneficial for corporations, their shareholders and our economy at large. In the near term, there is reason to question whether increased shareholder influence on matters that the law has traditionally apportioned to the board is at the expense of other values that are key to the sustainability of healthy corporations. These concerns underlie the issues that will define the state of governance in 2015 and likely beyond:

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Understanding Director Elections

The following post comes to us from Yonca Ertimur of the Accounting Division at the University of Colorado at Boulder; Fabrizio Ferri of the Accounting Division at Columbia University; and David Oesch of the Department of Financial Accounting at the University of Zurich.

The following post comes to us from Yonca Ertimur of the Accounting Division at the University of Colorado at Boulder; Fabrizio Ferri of the Accounting Division at Columbia University; and David Oesch of the Department of Financial Accounting at the University of Zurich.

In the paper Understanding Director Elections: Determinants and Consequences, which was recently made publicly available on SSRN, we provide an in-depth examination of uncontested director elections. Using a hand-collected and comprehensive sample for director elections held at S&P 500 firms over the 2003–2010 period, we examine the factors driving shareholder votes in uncontested director elections, the effect of these votes on firms’ actions and the impact of these actions on firm value. We make three contributions.

First, it is well known that recommendations by the proxy advisory firm Institutional Shareholder Services (ISS) play a key role in determining the voting outcome. Yet, the question of what factors drive ISS recommendations and, thus, shareholder votes in uncontested director elections remains largely unanswered. To fill this gap, we use the reports ISS releases to its clients ahead of the annual meeting and identify the specific reasons underlying negative ISS recommendations. We find that 38.1% of the negative recommendations target individual directors (reflecting concerns with independence, meeting attendance and number of directorships), 28.6% target an entire committee (usually the compensation committee), and the remaining 33.3% target the entire board (mostly for lack of responsiveness to shareholder proposals receiving a majority vote in the past). A withhold recommendation by ISS is associated with about 20% more votes withheld, in line with prior research. More relevant to our study, there is substantial variation in votes withheld from directors conditional on the underlying reason. A board-level ISS withhold recommendation is associated with 25.48% more votes withheld, versus 19.73% and 16.44%, respectively, for committee- and individual-level withhold recommendations. The sensitivity of shareholder votes to ISS withhold recommendations is higher when there are multiple reasons underlying the withhold recommendation for the director (a proxy for more severe concerns) and at firms with poorer governance structures. These results suggest that shareholders do not blindly follow ISS recommendations but seem to take into account their rationale, their severity and other contextual factors (e.g. governance of the firm). However, cases of high votes withheld without a negative proxy advisor recommendation are rare, suggesting that voting shareholders only focus on the issues singled out by proxy advisors, potentially at the expense of other value-relevant factors (e.g. directors’ skill set, expertise and experience) for which proxy advisors have not (yet) developed voting guidelines (perhaps due to lack of sophistication or the inherent complexity of the issue).

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ISS 2015 Independent Chair Policy FAQs

Carol Bowie is Head of Americas Research at Institutional Shareholder Services Inc. (ISS). This post relates to ISS independent chair voting policy guidelines for 2015.

Carol Bowie is Head of Americas Research at Institutional Shareholder Services Inc. (ISS). This post relates to ISS independent chair voting policy guidelines for 2015.

1. How does the new approach differ from the previous approach?

Under the previous approach, ISS generally recommended for independent chair shareholder proposals unless the company satisfied all the criteria listed in the policy. Under the new approach, any single factor that may have previously resulted in a “For” or “Against” recommendation may be mitigated by other positive or negative aspects, respectively. Thus, a holistic review of all of the factors related to company’s board leadership structure, governance practices, and performance will be conducted under the new approach.

For example, under ISS’ previous approach, if the lead director of the company did not meet each one of the duties listed under the policy, ISS would have recommended For, regardless of the company’s board independence, performance, or otherwise good governance practices.

Under the new approach, in the example listed above, the company’s performance and other governance factors could mitigate concerns about the less-than-robust lead director role. Conversely, a robust lead director role may not mitigate concerns raised by other factors.

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