AGENDA

A Way Around Powerful Proxy Advisors? 

Article published on October 26, 2009
By Kristin Gribben

A new firm is being developed that would verify that boards have responsibly and faithfully conducted compensation decisions when putting a pay plan to a stockholder vote. The firm, called Soundboard Review Services and led by former Glass, Lewis & Co. CEO Greg Taxin, would be one way to undercut the rising influence of proxy advisory firms on compensation plans.

Companies would pay Soundboard to audit the compensation committee’s process for determining pay plans. The movement toward universal say on pay spawned the idea for Soundboard, but the third-party firm would review the process for all compensation-related stockholder votes, from say on pay to stock option repricing plans. The company is in the process of securing its first client.

Many observers think that in order for comp committees to agree to be audited by a third party, they will want to participate in setting the standards by which they are judged. Soundboard is attempting to do this by working with The Shareholder Forum — a group of companies, governance professionals and investors that have been discussing say on pay for several years — to develop the processes that will be reviewed.

“The thing that many forum participants consider most important is that the standards be defined by the people who are actually responsible and know what’s required. Nobody on either the corporate or investor side wants another set of bureaucratic rules or black box formulas that discourage competitive adaptation,” says Gary Lutin, chairman of the forum.

“Boards ought to be focusing shareholders on their process for coming to compensation decisions,” Taxin says, rather than the total CEO pay figure. Soundboard would certify that companies’ compensation committees did their due diligence, hired outside counsel and thoughtfully executed executive pay decisions.

“From our standpoint the process by which an outcome is achieved is many times [as] important, sometimes more important, than the actual outcome,” says Glenn Booraem, principal and assistant fund controller with The Vanguard Group.

In regard to say on pay, many corporate governance professionals have become increasingly concerned that shareholders will not be able to cast an educated vote on the compensation of every company in their portfolios. Instead, some fear, shareholders will outsource the research required to make an educated judgment to proxy advisory firms that issue voting recommendations based upon screening tools and formulas that don’t take into account nuanced information that only the board can know.

Taxin says he wants to help boards communicate to shareholders “their good intentions, hard work and analysis that goes into compensation decisions.”

Soundboard will provide a report to the board on how it came to its decision on whether to certify the board process. But unless boards share that report with shareholders, investors will simply know whether a company is certified by Soundboard or not. “Much like a fairness opinion in the context of an M&A deal, what matters is that a third party has been satisfied about the price, not so much how they were satisfied,” Taxin says.

The problem with investors’ casting votes on executive compensation is not just time and money but also information that only the board has, Taxin says. Shareholders shouldn’t be focused on using say on pay to judge compensation figures or specific metrics, but rather that the board is spending the right amount of time and effort on executive pay, he says.

John Wilcox, who sits on the advisory committee of Soundboard, thinks proxy advisory firms and Soundboard can complement one another. “Greg’s service comes between what the proxy advisory service does and what a big institutional investor would do on its own,” says Wilcox, who is also chairman of Sodali, a consultancy firm for public companies. For example, if a proxy advisory firm recommends that its clients vote down the compensation of Company A, but Soundboard certifies that the board of Company A had the right compensation processes in place, an institutional investor is left with more information to come to its own decision, he says.

Like Wilcox, Booraem says Soundboard will be another useful tool for institutional investors but should not be a substitute for their own due diligence.

Focusing on Say on Pay

The development of a third-party certifier is just one indication of the momentum say on pay has garnered. Even though some investors have said they don’t want this privilege, politicians such as the influential House financial services chairman, Barney Frank (D-Mass.), have latched on to it as part of a panacea to runaway CEO pay and excessive risk-taking.

“Our biggest proposal is say on pay. That’s the biggest single thing to give shareholders a chance to say,” Frank told Fox Business channel in June prior to the passage of his executive compensation bill.

Whether they agree with say on pay or not, if investors are granted this right, they will take it seriously, Taxin says. “I think the thing that’s been lost on a lot of people is having a vote on this matter won’t be treated frivolously by shareholders,” he says.

While a say-on-pay bill passed the House this summer, it isn’t expected to pass the Senate in time to be implemented for the 2010 proxy season, giving boards and investors another year to decide how to fine-tune the policy. Prudential Financial and Microsoft are the latest to voluntarily adopt say on pay, but also the first to do so in a modified form. Prudential shareholders will vote on the “overall executive compensation policies and procedures employed by the compensation committee” every other year, according to a press statement. Microsoft shareholders will vote on pay every three years (known as the triennial option).

Another alternative to the mandatory, annual say-on-pay policy is one put forward by Columbia University’s Jeffrey Gordon. He has suggested that Congress and the SEC consider having only large accelerated filers adopt the provision, or only companies where a majority of shareholders ratify the policy.

Compensation Guidelines

As part of the say-on-pay debate, several groups are putting forward their own lists of compensation best practices that can be adopted by the board.

The National Association of Corporate Directors comes out with periodic reports on compensation best practices from its Blue Ribbon Commission on Executive Compensation. The Conference Board Task Force on Executive Compensation issued a “practical set of guidelines” for companies to follow in September. And now the Independent Directors Executive Compensation Project (IDEC) is promoting a set of compensation principles for boards to adopt.

IDEC is unique in that it is led primarily by independent directors and is promoting general principles instead of prescriptive metrics for compensation, according to veteran corporate director Pastora San Juan Cafferty, who is leading the effort along with compensation consultant Donald Delves.

It’s important to merge various groups’ guidelines into one set of principles that is governed by a nonprofit, independent clearinghouse or commission of some sort, Cafferty says. While that idea hasn’t been discussed by IDEC yet, it could be a next step. “The compensation industry doesn’t have any principles or certification,” she says.

As with the sentiment behind Soundboard, Cafferty says, the process by which compensation committees make their decisions is more important than pay levels when judging compensation plans. It also makes it easier to have broad-based principles in the interest of widespread adoption.

Among other things, IDEC’s principles say boards should verify that all compensation members are independent, that compensation consultants are independent from management and the board, that comp committees verify the appropriateness of peer group companies, and that data is obtained from multiple sources.

The group is creating a secure website that board members can join to continue to discuss the adoption of principles and is holding its next meeting at Northwestern University’s Kellogg School of Management Nov. 20. The organization is also looking to hold future meetings in New York.

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