Both Disney and HP filed materials with the SEC strongly condemning ISS’s no recommendation on say-on-pay and other matters. Disney ultimately changed course and received support on its advisory vote on executive compensation, while HP did not. Why the differences in strategy? We do not know because we were not involved, but perhaps a few clues can be ascertained.

ISS apparently had two issues with Disney’s proxy statement. ISS objected to tax gross-ups in executive employment agreements. ISS also recommended voting for a shareholder proposal regarding performance tests for restricted stock unit awards.

Disney ultimately eliminated the tax gross-ups from the executive employment contracts prior to the meeting. Perhaps after engaging with a few key shareholders, it determined that absent such action its rational set forth in response to ISS’s recommendation was not going to carry the day. The key here however was there was something Disney could do, given the cooperation of its executives. By taking that action, it avoided the embarrassment of a failed vote and having to spend board resources to deal with the issue in the upcoming year. Perhaps Disney also reasoned that by removing that institutional irritant it was more likely institutions would not be persuaded by what appeared to be ISS’s weak recommendation with respect to the shareholder proposal on restricted stock units.

Like Disney, ISS had two issues with HP. One appeared to center on the employment arrangements in connection with its new CEO. The other was a concern regarding its CEO’s participation in indentifying director candidates.

While HP may have found ISS’s recommendation on say-on-pay offensive, it devoted scant attention to supporting its pay-for-performance philosophy in its additional materials. Only a single paragraph at the end of three pages of text addressed that issue. But unlike Disney, there was no immediate action HP could take to correct the situation before the shareholder vote. We assume that asking its new CEO to return his signing bonus and renegotiate his employment package was not an option. So HP stayed the course.

It is also likely that HP’s primary concern was ISS’s recommendation against the reelection of three directors as a result of the nominating process. HP has a majority voting standard. If a director fails to receive a majority of votes for reelection, it triggers a process where the director must submit his or her resignation to the governance committee for consideration. That process would have put HP governance back in the spotlight. As pointed out by Martin Lipton, ISS’s logic was tenuous, if not unsupportable. So it is not a surprise HPs materials centered on this point.

Why did Tyco International succeed with an approach similar to HP while HP failed? We suspect it is because Tyco’s materials were much more precise and informative as to why a pay-for-performance link existed and therefore persuasive to institutional investors. HP’s arguments were general and vague in comparison.

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