Although we are still in the middle of the 2012 proxy season with many public companies holding annual stockholder meetings during May and June of 2012, there are a number of interesting trends and voting results that have emerged so far from the 2012 proxy season. Overall, the majority of Say-On-Pay proposals continue to be approved with substantial stockholder support – 74% passed with over 90% stockholder support, 17% passed with between 70% and 90% stockholder support and 7% passed with between 50% and 70% stockholder support.
There have been some interesting changes in the voting results from 2011 to 2012. Companies that received below 70% stockholder support in 2011 have generally received increased stockholder support in 2012. Companies that failed their Say-On-Pay vote in 2011 or received stockholder support of between 50% and 70% in 2011 improved by 12% or more in 2012. In contrast, companies that received stockholder support above the 90% stockholder support level in 2011 have seen stockholder support drop by about 3%. While it may be too early to tell, the positive variances in stockholder support could be attributable to companies engaging in discussions with their stockholders on their executive compensation programs more frequently, making changes in response to such engagement efforts as well as communicating in their proxy statements their stockholder engagement efforts and any corrective actions they have already implemented in the past year or plan to implement in the future.
ISS has recommended that stockholders vote against their companies’ Say-On-Pay proposal at about 15% of the companies it has reviewed so far, up from 12% during the 2011 proxy season. Illustrating the tremendous influence that ISS has over institutional stockholders, the average stockholder approval of a Say-On-Pay proposal where ISS has issued an “Against” recommendation is 67% as compared to a 94% favorable vote where ISS has issued a “For” recommendation.
While Citigroup has received the bulk of the media attention, the Say-On-Pay proposals at eight companies have failed to receive at least 50% stockholder support. These eight companies are Actuant Corp, Citigroup Inc., Cooper Industries Plc, FirstMerit Corp, International Game Technology, KB Home, NRG Energy Inc. and Ryland Group Inc. All eight companies had received at least 50% stockholder support of their Say-On-Pay proposals in 2011. The likely causes for the failure of these companies to garner sufficient stockholder support of their Say-On-Pay proposals during the 2012 proxy season include negative total shareholder return, increased year over year pay levels where the company’s stock has performed poorly, above-median benchmarking, concerns over existing excise tax gross-ups and internal pay equity, and concern over incentive plans not being sufficiently performance-based or containing performance metrics that are too easy to meet. In addition, some of these companies seemed to have received limited credit from their stockholders for changes made by these companies in response to their 2011 Say-On-Pay votes.
Of the 310 companies so far that have received an “Against” recommendation from ISS and other proxy advisors, 52 have chosen to respond to such recommendation by filing additional definitive materials. The key topics addressed in such company responses have included correcting factual errors in such recommendations, addressing what the company thought was flawed methodology employed by the proxy advisor, addressing the relationship between pay and performance, discussing concerns over the peer group selected by the proxy advisor for company comparison purposes and other governance and related issues. In two of these instances, ISS reversed its recommendation after reviewing each company’s response. Additionally, in two of these instances, companies made modifications to their compensation programs following the receipt of the proxy advisor’s negative recommendation.
The current 2012 proxy season voting results and developments may offer some new lessons to public companies as well as reinforce certain actions that many public companies are already taking. These lessons/actions include:
- stockholder support in 2011 does not guarantee stockholder support in 2012 or beyond;
- understand and manage the reputational impact of your company’s compensation decisions (i.e., companies in the financial services industry have been subject to a higher level of scrutiny in their executive compensation decisions for a number of years);
- know your stockholder base well, identify any stockholder voting patterns and understand the level of influence that proxy advisory firms carry with your stockholders; and
- communicate frequently and consistently with your stockholders regarding your company’s compensation programs and practices.