ISS, the leading provider of corporate governance solutions, recently released results on “say on pay” votes from the first year of shareholder advisory votes on executive compen-sation under the Dodd-Frank Act. In the release, ISS notes that investors have endorsed companies’ pay programs with 91.2% support on average.
So far this proxy season, companies in the S&P 500 have received 88.6% support, slightly less than the 91.8% support received by issuers in the Russell 3000 index. In the individual sectors within the S&P 500, consumer retail firms received the highest support at 90.7%, while large-cap industrial companies received the lowest support at 87.1%. In addition, large financial firms, which are typically heavily scrutinized over executive compensation, received the second-highest approval rating in the S&P 500 with 89.7%. Within the Russell 3000, consumer retail firms again received the highest support at 92.8%, while the energy sector received the lowest support at 88.8%.
Shareholders have voted down management “say on pay” proposals at 37 companies in the Russell 3000 index. Some of the latest issuers to report failed votes are Freeport McMoRan Copper & Gold, Monolithic Power Systems and Premiere Global Services.
The primary force driving the failed votes appears to be pay-for-performance concerns. Shareholders seem to be voting with their return on investment in mind, as almost half of the firms that have not gathered the necessary support have reported double-digit negative three-year total returns for their shares. The greatest numbers of failed advisory votes have occurred in the energy sector, which accounts for about 25% of the total failed votes.
Additionally, 34 companies received between a 50 and 60% approval for their pay-package proposals, and are likely to face greater scrutiny from their shareholders next year. Among these firms were Chesapeake Energy, Safeway, Lazard, Amgen and Devon Energy.
This season, the Dodd-Frank Act also mandated voting on the frequency with which a “say on pay” section will appear on ballots. Thus far, shareholders have overwhelmingly supported annual frequency. As of late June, annual votes received majority support at 1,753 companies, while triennial votes received support at 397 and biennial votes only won support at 15.
Interestingly, the recommendations of management on “say on pay” vote frequency have shifted throughout the proxy season. Following the lead of investor preference, management recommendations shifted away from the triennial frequency to the annual frequency. As of late June, 41.4% of companies still endorsed triennial votes, with 53.4% supporting annual and around 2.5% recommending biennial. However, investors have shown tremendous support for the annual frequency, defying management recommendations for triennial votes at 553 of 902 companies, according to ISS data.
Due to the advent of “say on pay” and the mandatory frequency vote this year, companies have given significantly more attention to compensation issues this year. Many companies have made amended their compensation programs and some have filed additional proxy materials to garner shareholder support, including Walt Disney Co. and General Electric.