When Addressing Say on Pay, Context Is King

2011 was a challenging year for proxy issues. Among other things, this was the first year for companies to adopt the Dodd-Frank regulations regarding Say-on-Pay. For the most part, voters’ say about pay was in line with management proposals, with about 92% of compensation plans winning approval in the 2011 proxy season. It was that ominous 8% that had heads of IR paying attention, trying to understand what went wrong, and trying to figure out what they can do about it.

The Power of Poor Disclosure

We recently ran a teleconference for our membership reviewing the 2011 proxy season, looking at trends, and predicting what might be in the pipeline for 2012. And in our research, we came across one particularly compelling piece of data.

We found a study profiling why shareholders voted against proposed compensation packages, and it had some pretty compelling findings. The study was commissioned by The Council of Institutional Investors and conducted by Farient Advisors. At companies with a failed compensation vote, Farient asked the voters what factors drove their “against” votes. Unsurprisingly, the largest issue was “disconnect between pay and performance.” The interesting part was this – “poor disclosure” in and of itself was a driving factor for over a third of those (35%) who voted against management’s proposals for executive compensation.

That is a flashing signal. While investor relations cannot change pay practices or company performance, we have an obligation to communicate effectively to the marketplace about areas of investor concern and contextualize the decisions senior management makes.

Should IR be more Assertive?

This may mean also that IR has a mandate to lobby for approval to disclose more about how executives are compensated. While many CEOs and other business leaders can be resistant to opening the corporate kimono, there is mounting evidence that better disclosure will have an impact on proxy voters – even when it is not in line with the ISS recommendation.

A number of companies facing unfriendly judgments from ISS managed through clear, credible, and persistent communication to convince voters to pass their proxy. ExxonMobil was one of them. Despite a negative return on their shares for the past three years and an ISS recommendation of “Vote Against”, Exxon Mobil managed to win a majority vote of 67%. Exxon was commended for its persuasive communication about the contribution and achievements of key executives, particularly in the context of the economic downturn.

Context is King

At the Investor Relations Roundtable we have extensive research showing that “context is king.” The most recent proxy season confirms this conclusion: providing investors with proper context for business operations, metrics, and strategic plans is critical to success. Companies that do it well consistently succeed with their investors; compelling investor education has been found to yield on average a 17% valuation premium.

As uncertainty continues to roil the markets, IROs will help their companies best by providing high-quality – which is to say, high-context – disclosure of their pay practices. Given the universal importance of providing good context, IROs will do well to apply that approach in all of their communications.

What CEB is Doing for its Members

• Members of the Investor Relations Roundtable (IRR) can access “Getting Ahead of the 2012 Proxy Season”, a teleconference in which we review the 2011 season and assess what it means for 2012. Intelligent Growth Suite members (IGS) can access this teleconference replay here.
• IRR members can plan for 2012 using our archive of best-in-class approaches to investor education, IGS members can view these resources here.
• IRR members can benchmark their guidance disclosure policies and practices against their respective industries, while IGS members can access these resources here.