WHAT AN INVESTOR RELATIONS PROFESSIONAL NEEDS TO KNOW:PREPARING FOR THE 2011 PROXY SEASON
PRESENTATION TO: NIRI Cincinnati Tri-State Chapter
PRESENTED BY:John Siemann
Phoenix Advisory Partners
October 13, 2010
Presentation Overview
• The Changing Role of the IRO
• Setting the Stage – Looking at the Proxy Landscape in 2010
• Shareholder Activism Is Not Dead
• The Focus of Activism – The Board of Directors
• Activists New weapon of Choice – Director Withholds
• Key Aspects of Dodd-Frank
• Mandatory Say on Pay
• Say on Pay and Vote Disclosure
• Preparing for Proxy Access (whenever that may be)
• How We Are Helping our Clients Prepare
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The Changing Role of The IRO
• As we approach the 2011 proxy season, a variety of institutions and activist shareholders are continuing to push for a more active role in the stewardship of the companies they “own”.
• Complicating this situation, issuers are confronted with a greater degree of regulatory change than in any year in recent memory.
• In this new environment, how well and how early companies prepare for their annual meeting will, to a large extent, determine their degree of success.
• Toward that end, the IRO is increasingly being drawn into the corporate governance/annual meeting process. Increasingly, investor relations, public relations, the corporate secretary’s office, the general counsel’s office and Human Resources are all partnering to provide the various components necessary to be successful in this new environment.
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Setting the Stage – Looking at the Proxy Landscape in 2010
• Early actions by regulators in 2010 included expanded proxy disclosure requirements (including director nominee qualifications), loss of broker discretionary voting in director elections and more permissive inclusion of shareholder proposals relating to environmental and other risk factors.
• TARP companies were, for a second year, required to present management-sponsored Say on Pay proposals. More than 50 other companies received shareholder-sponsored proposals to provide shareholders with a future Say on Pay.
• Perennial governance issues remained prevalent, such as providing for majority elections of directors, separation of Chair and CEO, board declassification and shareholder right to call special meetings or act by written consent.
• Previously lightly-regarded “social proposals” relating to climate change and environmental sustainability, political contributions and sexual orientation policies increased in frequency as well as in average levels of shareholder support.
• If there was a “plus” side for companies, it was that many hedge funds, which over the past several years had dominated the activism headlines, were struggling with their own performance issues and related redemptions, contributing to fewer traditional proxy contests at large cap companies.
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Shareholder Activism Is Not Dead
• For some, the evidence would seem to suggest that shareholder activism began to wane in 2010. Most frequently cited statistic is the fact that the number of shareholder proposals declined from the previous year (384 in first six months o f 2010 vs. 421 in similar period in 2009) and the percentage of those proposals that garnered majority support also declined (31% in 2010 vs. 36.6% in 2009). (Please note however, that 2010’s majority-approval percentage was still considerably better than the 26.7 percent rate in 2008 and 23.6 percent in 2007).
• Does this drop-off signal the demise of shareholder proposals and their impact? Definitely not. Reasons for fewer successful proposals in 2010 included:
a) the fact that many of the prior year’s targets adopted those changes demanded in previous shareholder proposals; b) the fact that proponents began to introduce proposals which focused on new issues;c) proponents began to expand their focus to mid-cap companies, and many of these targets were less heavily institutionally
owned and thus had less natural support for the particular proposal issue; d) the fact that there was an increase in engagement and dialogue between issuers and proponents which in many cases led to
concessions by the issuers such that proposals were kept off the ballot in 2010 (although proponents typically made clear the implicit threat to re- file proposals in the future if disappointed with the results of engagement).
• Although shareholder proposals covered a broad range of topics, the underlying theme for most was increasing Board accountability. Some of the more popular topics for shareholder proposals included:– de-classifying a staggered board – implementing majority voting– giving shareholders the right to call a special meeting or act through written consent– eliminating or reducing supermajority voting requirements – say on pay
Statistics Source: ISS data•5
The Focus Remains The Board of Directors
• 2010 marked the first year in which brokers could not apply discretionary voting to the election of directors in uncontested director elections under Rule 452.
• While meeting quorums were typically not affected (due to the ratification of auditors remaining discretionary and this item being allowed to provide the quorum number), the loss of discretionary voting definitely impacts the voting on elections. At most companies, discretionary voting accounts for 15-20% of votes cast on the directors, and the loss of this “automatic” vote highlights the low level of retail participation, particularly if Notice & Access is being used (at most companies, retail participation is in the 25-35% range when traditional proxy packages are mailed to shareholders and in the 7-15% range when Notice & Access is used).
• In addition, a significant number of companies transitioned to majority voting in 2010 (from plurality voting), either under investor pressure or in an effort to be perceived as having enlightened governance.
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The Activists’ New Weapon of Choice - Director Withholds
• The combination of these two factors (the loss of discretionary voting + majority voting) give “withhold” votes real teeth. In 2010 many investors began to consider oversight of compensation a litmus test of a board’s independence and accountability to shareholders, and where investors had concerns about compensation practices, they increasingly began to express their displeasure by withholding support from the members of the compensation committee.
• Over the first eight months of 2010, ISS issues withhold recommendations on almost 1,500 directors. Although less than 100 fail to receive majority support, almost 1,000 generate opposition of 20+%. While majority opposition makes headlines, the 20% threshold is significant, in that directors with 20% or greater withholds can expect increased scrutiny in future elections.
• With the focus remaining on the Board as investors’ representatives and their need to be “accountable” to those institutions, we anticipate greater numbers of withhold campaigns, with greater effect, in 2011. Given this, there is a definite need to identify and address underlying causes of withholds before they escalate.
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Key Proxy and Compensation-Related Aspects of Dodd-Frank
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• Requires a “say-on-pay” vote every one, two or three years and a “golden parachute” vote in connection with mergers, acquisitions or similar transactions
• Eliminates broker discretionary voting on all compensation-related proposals (i.e., the newly-mandated management Say on Pay proposals)
• Confirms the SEC’s authority to adopt shareholder access rules (which it promptly did on August 25 before delaying implementation on October 4)
• Strengthens independence standards for compensation committees and advisers to such committees
• Requires policies regarding the clawback of incentive-based compensation that was based on erroneous financial results
• Mandates that companies disclose information that demonstrates the relationship between paid executive compensation and financial performance of the company as well as disclosure of the median annual total compensation of all of a company’s employees and how such compensation compares to the CEO’s annual total compensation
• Expands the authority of federal regulators to regulate incentive-based compensation at a wide variety of financial firms
Mandatory Say-on-Pay
There are three “say on pay” related votes under Dodd-Frank:
1. “Say on Pay”2. “Say When on Pay” (i.e. future frequency of Say on Pay)3. “Say on Golden Parachutes” in the event of a merger
Say on Pay is required of all US public companies starting with shareholder meetings occurring after January 21, 2011 (six-month anniversary of the Act’s enactment)
The vote will be based on the compensation paid to the company’s “named executive officers” as disclosed under Item 402 of Regulation S-K, including:
– compensation committee report– compensation discussion and analysis (CD&A)– compensation tables and related disclosures
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Mandatory Say-on-Pay
• Say When on Pay: Also in 2011, companies must ask their shareholders to vote on this future frequency (i.e. every one, two or three years). How companies will do this is unclear and may receive clarification from the SEC. Will they present investors with all three choices (which could result in problems such as investors voting for more than one; none of the choices receiving a majority of votes cast)? More likely, companies will indicate their frequency preference and ask shareholders to concur.
• Going forward, Say When on Pay votes must be held at least once every six years.
• Shareholders can submit resolutions to try to change the frequency of Say When votes.
• At this point, although TARP related companies have been excused from filing preliminary proxies, Dodd-Frank has not provided the same relief to non-TARP companies, so companies should review their timetable as they may need to file preliminary proxies at least 10 days prior to the filing of a definitive proxy.
• Say on Golden Parachutes: Rather than wait for a merger special meeting, you can get this out of the way at annual meeting when holding Say on Pay vote.
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Say on Pay and Vote Disclosure
• Presently, only mutual funds are required to disclose their votes publicly each year, via SEC form NP-X.
• Dodd-Frank requires that all institutional investment managers who file reports on Schedule 13-f must annually disclose how they voted on say-on-pay and golden parachute matters.
• This means that all 13-f filing banks, insurance companies, broker/dealers, as well as corporations and pension funds that manage their own investment portfolios, will now also disclose their votes.
• It is reasonable to expect that activists will incorporate these additional disclosures into their traditional activities in pressuring mutual funds to vote critically on compensation and other governance issues.
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Preparing for Proxy Access (Whenever that may be)
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Review Advance Notice Provisions in Bylaws. Companies should ensure that their advance notice bylaw provisions differentiate between nominations from the floor, nominations under Rule 14a-11, Rule 14a-8 proposals, and other business to be brought from the floor of the meeting.
Determine Whether any Shareholders Can Make Nominations. Companies should consider whether they have large long-term shareholders who might be able, individually or with other shareholders, to meet the 3% voting power minimum ownership requirement.
Review Corporate Governance Policies. Companies should review and consider updating their corporate governance policies and governance/nominating committee charters to address how they will process Rule 14a-11 nominations, including the circumstances in which they will challenge a Rule 14a-11 nomination.
Consider the Impact of Rule 14a-11 on Majority Voting Policies. Companies should confirm that their majority voting policies treat the inclusion of a Rule 14a-11 nominee in their proxy materials as a proxy contest and default back to a plurality election standard.
How We are Helping our Clients to Prepare
• Providing a road-map for engagement with the proxy voters at your top institutional investors
• Indicating which of these proxy voters or governance heads also confer with the portfolio managers (and thus opportunity to leverage IR)
• Quantifying the likely impact and influence of Proxy Advisors (e.g. ISS, Glass-Lewis) over your unique ownership base
• Identifying potential vulnerabilities in your governance profile and board composition
• Reviewing draft compensation disclosures with an eye for clarity, explanations of pay for performance and alignment of pay with corporate strategy, and particular features which key investors or proxy advisors find objectionable
• Projecting the vote on a range of potential management and shareholder-sponsored proposals
• Developing and implementing strategies to improve retail voting participation
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Today’s Speaker
John SiemannPartnerPhoenix Advisory Partners, LLC
110 Wall Street, 27th floorNew York, NY 10005
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