Talking
to shareholders: the IR charm offensive
by
Adam Piore
The
increase in votes against compensation plans is encouraging companies to woo
investors with dialogue instead
As
non-binding say-on-pay-votes at annual meetings grow in frequency, companies
are facing a new question: what to do if most of your investors vote against
your compensation plans? It’s an issue boards ignore at their peril.
Increasingly, say-on-pay votes are seen as a way to gauge director
responsiveness to shareholders, and thus their suitability for service.
‘The thinking is – to use a soccer analogy – in year one you look at the
vote on remuneration and if it’s a ‘no’, that’s a yellow card. The company
has been put on notice,’ says Patrick McGurn, special counsel at RiskMetrics
Group’s ISS Governance Services unit. ‘The next year, if the board is not
responsive it risks getting a red card in the form of ‘no’ votes against the
directors.’
This year, there’s been no shortage of yellow cards issued. Three US
companies failed to win majority support for non-binding say-on-pay plans:
the banking company KeyCorp, which was required to offer the vote to
investors as a condition of receiving funds under the Troubled Asset Relief
Program (TARP); Occidental Petroleum, whose CEO’s salary is consistently
among the highest salaries in the US; and Motorola, which had the highest
‘no’ vote of any non-TARP recipient, and is paying salaries to two CEOs in
anticipation of splitting the company into two.
In the
US,
says McGurn, there had never been a majority ‘no’ vote. ‘The question is
whether shareholders will ratchet up the pressure and conduct some sort of
campaign to potentially unseat some of the directors on those boards,’ he
adds.
Some companies are already facing such pressure. The American Federation of
State County and Municipal Employees (AFSCME) union launched an aggressive
campaign against the compensation committees at oil drilling company Nabors
and clothing retailer Abercrombie & Fitch, attacking both on compensation.
Although AFSCME is not a major holder in either company, the campaigns
yielded results.
At Nabors, 48 percent of shareholders withheld votes for two members of the
compensation committee, even though company insiders control 14 percent of
the voting shares. At Abercrombie & Fitch, investors defeated a long-term
incentive plan that was binding, as it called for the company to issue more
shares to its executives. They also came close to deposing two members of
the compensation committee: Edward Limato (48.6 percent against) and Craig
Stapleton (43.2 percent against).
Listen and learn?
John Keenan, a corporate governance analyst at AFSCME, says Abercrombie
benchmarks pay to the 75th percentile of peer companies, and paid the CEO to
end his free usage of the corporate jet. He complains that Abercrombie’s CEO
and chairman refused to take questions or listen to comments about the
long-term incentive plan after its failure, or to answer questions about
compensation at the annual meeting.
‘Abercrombie received a 49 percent vote against a director on the
compensation committee last year, so it’s not as if it’s unaware,’ notes
Keenan. ‘Not wanting to listen to shareholders is a major problem.
’Rocky Robins, deputy general counsel at Abercrombie, dismisses Keenan’s
complaints as unfair. He says those criticizing executive pay were given
several opportunities to air their grievances during the meeting, and people
were made available to answer compensation questions after the meeting. ‘We
would have taken questions; we just didn’t think it was appropriate to have
a public debate.That’s what it would have been,’ Robins says.
Even so, Abercrombie, like many other companies facing shareholder
complaints, is taking action to assuage some of the concerns. In response to
the withhold campaigns last year, it has become ‘significantly more
proactive with our major shareholders,’ according to Robins. Indeed,
executives and board members, including the chairman of the compensation
committee, have held several face-to-face and phone meetings with the
company’s largest investors and some of the more active smaller ones.
‘What we have committed to do is listen hard,’ Robins says. ‘We may disagree
with investors on many issues. But we have agreed to review those the large
institutions and activists care about, and we will continue to do that.’
He adds that the board has also agreed to make a number of concessions
related to governance, even if it hasn’t yet agreed to change its approach
to compensation. The company has agreed, for instance, to move to a majority
voting system on its directors, which will ‘raise the stakes’ at AGMs in the
years to come, Robins says. It has also agreed to declassify the board, even
though ‘we believe philosophically in the value of a staggered board,’ he
adds.‘
It is a dialogue,’ Robins says. ‘With respect to large shareholders, we’ve
made the point that change doesn’t occur overnight and we believe we have
made substantial progress.’
Creative approach
Occidental Petroleum is another company that was in the midst of a charm
offensive when it was dealt its latest investor repudiation at the annual
meeting. Three years ago, the company started sending out its chairman and
the head of the compensation committee, former US Secretary of Energy
Spencer Abraham, to meet with groups of investors and answer questions,
explains Richard Kline, an Occidental spokesperson. ‘Over the last several
years, we have met with investors representing 20 percent of outstanding
shares,’ he says. ‘It’s an ongoing dialogue where investors can raise the
issues they feel are appropriate.’
Tim Smith, senior vice president at Boston-based Walden Asset Management,
calls Occidental’s willingness to make Abraham available a ‘creative
approach’, which he has urged other companies to do. Smith attended one
meeting with Abraham in Boston last year, and participated by phone in
another.‘
It was a candid discussion about how the company thinks on pay and the
changes it has made,’ Smith reports, labeling it an ‘A+ dialogue’. In the
end, however, it wasn’t what was needed. ‘The vote was not because of a lack
of communication,’ Smith says. ‘It was because people were unhappy with the
company’s compensation.’
McGurn suggests Occidental’s aggressive outreach might even have backfired.
When a company engages with shareholders, it creates expectation that there
will be changes. In this case, he notes, ‘there was a feeling it had maybe
not made enough concessions.’
In the wake of the ‘no’ vote on say on pay this year, Occidental’s board has
now decided to ‘expand its dialogue’ with institutional investors, according
to Kline. The plan is ‘to assess their views and use the input to reevaluate
the company’s compensation policies and objectives in a way that would
address shareholder concerns.’ Indeed, within six weeks of the AGM, Abraham
and others had already held several meetings. ‘We are engaging in further
direct conversations with investors to get their advice and recommendations
on policy,’ Smith says. ‘We clearly believe in engagement with
stockholders.’
Pay freeze fails to appease
In the UK, HSBC launched perhaps the most widely noted charm offensive in
the wake of investor agitation. The bank initially proposed raising the
salaries of some senior executives by nearly 40 percent. But in January the
chairman of the remuneration committee and non-executive chairman met with
institutional shareholders. After that, ‘our group CEO decided it would be
inappropriate to accept a salary increase until further discussions took
place,’ says John Russell, an HSBC spokesperson.
Even with its slimmed-down proposals, almost a quarter of HSBC’s
shareholders failed to back the compensation proposal it put forward at its
AGM, so the company announced the launch of a formal review of executive
pay. John Thornton, incoming chairman of the remuneration committee, has
said publicly he will consult with shareholders over the summer.
John Wilcox, partner at IR firm Sodali and a highly respected governance
veteran who has held positions at Georgeson and TIAA-Cref, has mixed views
on developments of this kind. Such efforts may be motivated by the right
ideas but he feels more companies need to apply basic IR principles to
governance; they need to get out in front of the problems.‘
Companies, especially in the US, are far too defensive about say on pay,’
explains Wilcox. ‘They don’t do enough to take control of the issues and
manage them. That’s in contrast to the way they deal with IR, where they do
outreach and research with their shareholders, and communicate with them
regularly.
’Certainly companies that have acted proactively have had positive results:
the Royal Bank of Canada, Canada’s largest bank, held its first-ever
voluntary say-on-pay vote at its 2010 meeting and received 91 percent
approval. Carol McNamara, vice president, associate general counsel and
corporate secretary at the firm, says RBC adopted the proposal in response
to shareholder requests as soon as it was feasible. To pave the way, the
bank put extra effort into writing a narrative description of executive
compensation that spelled out the rationale in ‘very plain language’.
The bank provided a summary in ‘even plainer language’ and it drew more
attention than at any other time to the mechanism in place to contact the
board directly, highlighting ways to get in touch via the website. The
emphasis was firmly on reaching out to investors and gauging their concerns.
‘Through direct engagement we can get feedback from a single organization
that represents the voice of the most important investors,’ McNamara says.
‘One of the things many boards fear with an advisory vote or say on pay is
that investors may exercise their vote without understanding the
compensation idea.’
A Prudential approach
Prudential Financial has consistently received high marks from investors for
its outreach, and it voluntarily adopted say on pay. Peggy Foran,
Prudential’s chief governance officer and secretary, says it also stresses
communicating in plain, understandable language, and spelling out the
rationale for executive compensation so that it’s ‘easily digestible’.
‘More and more companies are seeing that you have to engage with
shareholders on different platforms,’ Foran says. ‘You may be communicating
with institutional shareholders; how can you communicate with all
shareholders? It’s better to do it before you have a problem than
after. Right now, particularly at companies that got negative votes on say
on pay, you hear them say, We’re going to go back to our shareholders and
try to figure out what happened. We try to do that in advance and know
what is on shareholders’ minds.’
Prudential’s efforts go far beyond just meeting with institutional
shareholders. Before its annual meeting, the company invited investors to
write comments on the back of its proxy statements and received 2,600,
ranging from, You’re doing a great job to No CEO should make more
money than the president of the
US.
‘Sometimes, people vote against compensation and you don’t know why,’ Foran
observes.
Prudential also sought to raise the number of shareholders voting by
offering to plant a tree in honor of every voter, and by offering
recyclable, reusable, union-made tote bags. ‘We got 68,000 more shareholders
to vote this year,’ Foran says. ‘That’s 23 percent more registered shares.’
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