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07 Jul. 2011 | Comments (0)

What you see isn’t necessarily what you get when it comes to the 2011 proxy season, according to John Wilcox, chair of international corporate governance consulting and advisory firm Sodali Ltd. Specifically, in a recent Webcast Wilcox warned viewers not to be deceived by the perceived decrease in shareholder activism and low rate of negative advisory executive compensation, or Say on Pay, votes this year. “While it is true that shareholder activism is at a lower level in 2011 than last year [according to FactSet’s SharkRepellent, 44 proxy fights have been announced as of April 27 compared to 88 in April 2009],” Wilcox told Alan Rudnick, program chair of The Conference Board Directors’ Institute during the June 29 Webcast [Registration required; free to Conference Board members]. “This can be interpreted as a sign of failure. We should look at it in a different way. Actually, this should mean that communication between shareholders and companies is improving. It might mean they have resolved their differences.” The same has been said of the Say on Pay votes this year, the first held under the Dodd-Frank Act. But Wilcox believes the headline writers got it wrong by calling the advisory votes “a complete bust.”  He said: “It shouldn’t be viewed negatively. It’s not a zero sum game.” Instead, Wilcox, who was once head of TIAA-CREF’s corporate governance unit, views the results of the Say on Pay votes as a “pass/fail on a report card, where a negative [fail] vote is a signal for companies to go back to the drawing board.” You may recall what I wrote in a post last month: “Institutional Shareholder Services has recommended a negative Say on Pay vote at about 12 percent of the companies it assessed while only 1.8 percent of the Russell 3000 companies failed to have a majority of shareholders vote for executive compensation plans.” At the same time, it’s no secret that CEO pay has rebounded significantly from 2009 following the height of the financial crisis (See my post). So while it seems that some shareholders are getting the collective ears of the directors and management of some companies, executive pay continues to rise precipitously. But Wilcox is not sold on the idea that there should be a correlation between Say on Pay votes and the amount executives receive. “Say on Pay is indicative of how executives are paid, now how much they are paid,” he said. “The much tougher question is how much the executives are receiving. The levels of pay are particularly urgent in times of economic [duress]. But in the end that is a policy question. … Executive pay is a directors’ issue, not a management issue.” One point Wilcox and others in the corporate governance area agree on is that the topic of executive compensation points to the bigger issue of shareholder dialogue with the board. “We need to re-think what kind of information about compensation should be made available to shareholders,” he said. “…The directors of companies need an independent voice and should be able to respond to issues of concern.” One idea he has floated is along the lines of the Management Discussion & Analysis (MD&A) included in the proxy statement. It would be a Directors’ Discussion & Analysis that would touch on such issues as governance and the role of the board as it pertains to the business judgment rule. Another issue Wilcox expounded upon during the Webcast was the call for regulating proxy advisory firms, an issue that has international repercussions. “Proxy advisory firms should be subject to the same standards as the companies they rate,” he said. “However, I don’t think there is a way to regulate the quality of the work done, which would be like regulating the work done by analysts.” He believes the users of proxy advisory firms’ services, such as institutional shareholders, should be held more accountable when it comes to voting their shares based on the information they receive. He did point out that it is up to the companies being rated by proxy firms, such as ISS and Glass Lewis, to make sure information being used by those firms is accurate. Wilcox mentioned during the Webcast that he is writing a comment letter on those issues and others covered in the European Commission’s green paper, The EU Corporate Governance Framework. That paper, which has a public comment deadline of July 22, touches upon such issues as Say on Pay, proxy advisor regulation, disclosure of remuneration policy, an independent board chair, board diversity, and the board’s role in risk oversight. The Council of Institutional Investors (CII) just yesterday released its comment letter on the EC corporate governance framework in which it calls for annual Say on Pay votes that can “catalyze discussion between shareowners and directors about executive compensation,” disclosure of all executive compensation plans and policies to shareowners, and the use of an independent chair. [To see the whole letter, click here.]
  • About the Author:Gary Larkin

    Gary Larkin

    Gary Larkin is a research associate in the corporate leadership department at The Conference Board in New York. His research focuses on corporate governance, including succession planning, board compo…

    Full Bio | More from Gary Larkin


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