WHY PROXY REDESIGN IS USEFUL
The approaching proxy season presents an opportunity to update and refresh the proxy statement to meet evolving investor needs and expectations. The trend among companies of every size is to enhance user-friendly features to transform disclosures that are merely responsive to SEC rules into proactive messages for investors. Disclosure updates may be driven by say-on-pay votes, investor activism on a particular topic or revisions by peer companies. In addition, proxy statements have become a tool to enhance shareholder engagement, improve corporate branding, advocate management’s position on past performance and introduce management’s strategic vision for the future.
The key to proxy redesign is relevancy. Proxy redesign should improve the functionality of the document, highlight significant information and generally enhance the reader’s experience. It should not distract the reader or otherwise incorporate design elements which do not advance the underlying message. When used effectively, proxy redesign can reduce the length of a proxy statement, providing cost savings and improving the reader’s experience. For example, TheCorporateCounsel.net notes that Weatherford International saw a 25 percent reduction in proxy statement length (including a 40 percent reduction in CD&A) following proxy redesign efforts.
Recommended areas of focus during the proxy refreshment process are: content and readability, online navigability, design and access to complementary information.
Proxy Statement Content and Readability
Investors must be able to engage with the proxy materials in order to absorb a company’s messaging. As proxy disclosures have expanded to comply with the SEC’s complex disclosure rules and regulations, it has become increasingly important to draw investor attention to important information through the use of summaries and supplemental disclosures that are responsive to investor feedback. Below are seven tips for improving the content and readability of the proxy statement:
- Engage with Shareholders: Understanding what information is relevant to investors is fundamental to improving proxy statement content. Shareholder engagement is a year-round effort, primarily coordinated between a company’s investor relations and legal teams. It is no longer confined to the largest of companies. As noted in the July 2014 ProxyPulse published by Broadridge and PricewaterhouseCoopers (which summarized voting results and governance trends based on over 4,000 annual meetings held between January 1 and June 30, 2014), mid-, small-, and micro-cap companies continue to experience weakening say-on-pay results and could benefit from increased levels of shareholder engagement. Likewise, approximately 50 percent of respondents in a May 2014 E&Y Survey of S&P 500 companies stated that they had not only engaged in conversations with shareholders, but had added disclosure to the proxy statement that was responsive to those conversations. Moreover, half of such disclosures described company changes that had resulted from the shareholder feedback.
- Shareholder feedback, as well as responsive proxy statement disclosure, frequently relates to executive compensation. It may also cover corporate governance topics such as director tenure and diversity, executive succession planning, management of the company’s opportunities and risks, and social responsibility topics such as sustainability. Companies that conduct ongoing discussions with shareholders are better able to avoid unexpected shareholder proposals and voting outcomes as well as improve investors’ trust of the board and management. Careful management of the engagement process and ongoing refocusing of the dialogue can alleviate the potential risks of inconsistent messaging, competitive harm and commitment to impractical deliverables.
- Highlight and Summarize Information of Interest: CD&A summaries, which generally provide a brief overview of prior-year company performance and a high-level snapshot of executive compensation, have been prevalent for several years and were employed by 73 percent of the respondents to the 2014 E&Y survey. In response to greater investor focus on governance and other matters, companies are also starting to include a three- to five- page proxy statement summary to highlight governance practices, shareholder engagement efforts and executive pay changes made over the last year. The summary can also emphasize the company’s strategic accomplishments and orient the reader as to the structure of the document.
- Feature Easy-to-Read FAQs: Including a dedicated FAQ section near the beginning or end of the proxy statement is a small and relatively easy enhancement that can highlight key information and improve document navigation. FAQs can be helpful to readers in presenting both procedural information, such as the mechanics for voting shares, and substantive information, such as the rationale for the board’s recommendations.
- Create an Eye-Catching Cover and Back Page: Investors, particularly institutional investors, are inundated with proxy statements each year. Appealing cover graphics can make a company’s information stand out, facilitate branding and provide a more inviting introduction to the important disclosures. Redesigned cover pages typically include the company’s name, logo and institutional design, and may include artwork or graphics that distinguish the proxy statement from a complementary annual report. The proxy statement’s back cover, which is often underutilized, can provide valuable real estate for promoting a successful corporate social responsibility campaign, highlighting company awards and recognitions, or thanking the shareholders for their investment in the company.
- Include Substantive Letters from the Chairpersons of the Board and Key Committees: In order to acknowledge the board’s accountability to shareholders, proxy statements are increasingly incorporating letters from the chairpersons of the board and key committees. These letters go beyond inviting shareholders to attend the meeting; they also introduce disclosure sections that describe company performance and committee work and anticipate and respond to investor concerns.
- Enhance Disclosure About Directors: Board composition is expected to be a top priority among boards and investors in 2015. In light of an increasing investor focus on director nominees, more companies are providing supplemental information about directors and the board as a whole, including headshots, infographics of age, tenure, gender and diversity, skills matrices and committee grids. Careful attention to this disclosure, along with complementary discussions with key shareholders, can facilitate consistent presentation and comparison from year to year and can reduce the risk that the supplemental information will be used as the basis for unexpected activism or other scrutiny.
- Continue to Refine the CD&A: Although no new SEC disclosure rules are expected to apply to executive compensation in 2015, shareholders and the SEC continue to take great interest in the topic and demand a plethora of information. A detailed or lengthy CD&A may benefit from a dedicated table of contents as well as an executive summary. In addition, maintaining a readable and easy-to-understand CD&A provides an opportunity for a company to frame its compensation message, particularly with respect to how its compensation philosophy and design enforce the correlation between pay and performance.
- Infographics may aid investor review, such as a pie chart that shows the mix of fixed compensation versus compensation tied to achievement of specific performance goals, or bar graphs that compare a company’s compensation programs to those of its peers or demonstrate multi-year alignment between pay and performance. When presenting such information, it is important to carefully define relevant performance measures that can be consistently applied on a year-over-year basis. It may also be necessary to emphasize qualitative factors or alternative definitions of total compensation that the compensation committee considers when determining programs and payouts, particularly if the quantitative data or a generally-applied definition of total compensation does not adequately represent the basis for the committee’s decisions.
The changing format in which proxy materials are accessed and viewed has been a catalyst in the movement towards proxy redesign. In a 2013 RR Donnelly survey, nearly 70 percent of investors reported viewing proxy materials online. Therefore, it has become increasingly important to enhance features of the proxy statement which improve the online viewing experience. Broc Romanek of TheCorporateCounsel.net recommends observing as an employee or family member navigates within your company’s proxy statement to locate a specific disclosure; insights learned from the experience can improve the usability of disclosure for company investors. Generally speaking, however, the most important feature of online accessibility is a navigable table of contents with hyperlinks to relevant sections. It can also be helpful to include additional headings and sub-headings to help the reader identify placement within the document at any given point.
Design elements, when used thoughtfully and consistently, can transform a dry disclosure document into a visually compelling and accessible memorandum of the company’s message. The most beneficial design tools include improved use of white space, adjusted font type, size and color, inclusion of call-out boxes with key information or director quotes and incorporation of tables, charts, timelines or other infographics. As noted above, it is important to be thoughtful about proxy design. Design choices should highlight company success, but should be developed carefully to enable year-over-year consistency, and infographics should be used only when graphic representation enhances clarity for the reader. Inconsistent design and overly-complex infographics can suggest that the company is attempting to cherry-pick highlights, or worse, to hide results and mislead the investor.
Access and Complementary Information
While redesign of the proxy is central to the proxy refresh process, it is also important to consider improving shareholder access to related information. In the digital era, many companies are refreshing their investor relations webpages, and, in particular, dedicating a separate page to annual meeting materials. Dedicated annual meeting webpages make proxy materials and messaging easier to find and can enhance shareholder engagement with company-driven content. These materials may include short videos from the company’s CEO, chairperson and individual directors, which tend to be more captivating than a written document, or may identify endorsements from proxy advisors. An investor relations team who works closely with legal counsel can ensure that all required SEC filings are made in connection with these postings.
HOW TO PLAN FOR SUCCESS
Proxy redesign affords a number of investor relations opportunities. While the evolution of a proxy statement from a disclosure document to an investor-friendly tool may take a number of years, the first year of the refresh process is typically the most intense. Conversations about redesign ideas and processes should begin as early as possible, preferably prior to the first draft of substantive disclosures. It will be important to identify the new proxy team, which in addition to the company’s transfer agent, legal counsel, proxy solicitor and financial printer may include a company’s marketing or investor relations departments or a document design and publishing firm. Planning early helps orient the team to the redesign process, align strategic thinking and insights, create a timetable and best utilize limited management time. A post-mortem review of the process is also recommended in order to discuss lessons learned and incorporate feedback for the following year. Finally, because the proxy process is ever-evolving, companies should continue to analyze their disclosures annually to identify areas for growth and improvement.