Say on Pay — Questions for Institutional Investors

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton firm memorandum.

With the advent of mandatory “say on pay” votes this year for all public companies as required by the Dodd-Frank Act, institutional shareholders must consider not only whether to support a company’s executive compensation arrangements, but also, more broadly, how to ensure that their decision-making process will take into account the particular circumstances of the company, the impact that a negative vote could have on the company, the institutional shareholder’s fiduciary and other duties to its own investors, and the extent to which voting decisions should be dictated or influenced by recommendations of proxy advisory firms. In this regard, institutional shareholders may find it useful to bear in mind the following questions:

  • Should the shareholder accept a negative voting recommendation of a proxy advisory service without independent consideration of the company’s compensation program?
  • To what extent is independent review and consideration by an institution of a say on pay vote, including consideration of the reasons put forward by a company as to why a negative voting recommendation by a proxy advisory service should not be followed, necessary to satisfy fiduciary duties under ERISA, the Investment Company Act and state corporate law?
  • Are the compensation policies of the Council of Institutional Investors and proxy advisory services unduly influenced by certain union and public pension funds, activist hedge funds and academics that may have objectives that conflict with or are inconsistent with supporting management’s strategy for long-term shareholder value creation?
  • Could a letter or phone call expressing the institution’s views to the CEO, the board of directors and/or the compensation committee be just as, or even more, effective than a negative say on pay vote?
  • Will a negative vote adversely affect the company’s ability to attract, retain and incentivize outstanding executives? Should exceptions be made for make-whole awards, tax gross-ups or other provisions which may be necessary to attract key executives from another company or which reflect the company’s particular circumstances?
  • Will a negative say on pay vote, and any resulting changes to executive compensation arrangements, encourage key executives to leave for private companies not subject to public say on pay scrutiny?
  • Will a negative vote embarrass the board in a way that could undermine rather than promote a constructive relationship between the board and management on sensitive, complex matters such as executive compensation?
  • Will a negative vote influence compensation consultants to be unduly conservative to the point of impeding the company’s ability to compete for talent with organizations that have more attractive compensation programs? Will the inflexible guidelines and policies of proxy advisory firms stifle candid assessment and advice from compensation consultants?
  • Are compensation features (e.g., excise tax grossups) that may alone result in negative voting recommendations from proxy advisory services sufficiently problematic to shareholder interests to warrant following recommendations of the advisory service, regardless of other features of the compensation program?
  • Is the “peer group” used by proxy advisors to measure a company’s relative performance a valid representation of comparable companies against which the company should be measured?
Both comments and trackbacks are currently closed.

One Comment

  1. Sarah Wilson
    Posted Tuesday, May 31, 2011 at 6:17 pm | Permalink

    Another question for shareholders – shouldn’t they automatically vote against any say-on-pay disclosures not made in plain English?

    Speaking as the CEO of one of the “little” proxy advisors, I am finding the tone of debate on the role of advisors bordering on the juvenile.

    Yes, shareholders should indeed speak with their companies and engage with them. To that end companies should not hide behind Reg FD and support the 5th Analyst Call.

    Yes, shareholders should make informed judgements. To that end companies should think about not bunching their AGMs into such a short time spanin the Spring. The US is not as bad as Japan for that, but not far away.

    When was the last time issuers took a negative stance on broker sell-side research that didn’t tell the “right story”.

    Sure, there is always room for improvement. But how about we have some intelligent and balanced debate for a change?
    [email protected]