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E-MailJeremy Goldstein is a partner at Wachtell, Lipton, Rosen & Katz active in the firm’s Executive Compensation and Benefits practice. This post is based on a Wachtell Lipton firm memorandum by Mr. Goldstein.
With the proxy season just getting underway, we thought it might be useful to summarize some initial observations to aid those in the midst of the season’s challenges.
Results. According to Institutional Shareholder Services’ (ISS) 2013 Say on Pay Snapshot released April 8, 2013, ISS has recommended against 10 percent of issuers so far this proxy season. While ISS’s study represents a relatively small sample size (473 companies), a “no” recommendation from ISS against 10 percent of companies represents a decrease in “no” recommendations of over 20 percent from last year (12.2 percent).
Reasons for Failure. The single largest reason that companies have received “no” recommendations from ISS continues to be a so-called pay-for-performance disconnect. In addition, ISS has recommended against an increased number of companies on the basis of a so-called lack of compensation committee communications and effectiveness. A lack of effectiveness often arises where ISS has determined that the company has not provided disclosure about actions it has taken in light of a low say on pay vote for the previous year.
What to Do Generally. In our previous memoranda, we have advised companies who are being challenged by ISS to engage in a proxy-like campaign to persuade shareholders of the merits of its pay programs. To achieve this, we have previously recommended that companies understand how their compensation programs stack up against ISS standards; create a designated working group to address say on pay; engage with ISS and shareholders; consider supplemental proxy materials; and, solely in those cases where a company feels upon reflection that the criticism leveled by ISS or by other investor groups is valid, consider modifying compensation programs.
What to Do If ISS Finds Lack of Responsiveness. In our experience, most companies that have received a “no” recommendation for lack of responsiveness have actually engaged in robust shareholder outreach programs; however, their disclosure is not quite as detailed about this issue as ISS has wanted, perhaps as a result of underestimating ISS’s increased focus on such disclosure this year. In light of ISS’s greater sensitivity to this issue, we would recommend that companies include thorough disclosure regarding actions taken by the company in response to last year’s vote. In addition, we recommend that companies that have filed their proxy statement and have received a “no” recommendation from ISS on the basis of lack of responsiveness consider a supplemental filing indicating specific actions taken in response to last year’s vote. Such disclosure should include a statement as to how many significant shareholders have been engaged, what percentage of the company’s shares such holders represent, the concerns of such shareholders identified in such engagement and any modifications to the company’s compensation programs that have resulted from such discussions.
