Getting Your Message Across “Effective Engagement Is Critical…”
Some practical advice from Ken Bertsch, President of the Society of Corporate Secretaries and Governance Professionals – and a prominent institutional investor analyst and spokesperson in his former career.
“U.S. issuers large and small have experienced fear and frustration on the latest ratcheting up of investor involvement in corporate governance, mainly through “say-on-pay.” The fear is that while investors have an enhanced role to play, they do not have sufficient insight or expertise to “second-guess” board and compensation committee decisions, and that compensation programs will be damaged as a result. Frustration has tended to focus on proxy advisory firms, as well as on some significant investors who are not amenable to dialog.
“I would suggest that while aspects of this fear and frustration are well-founded, issuers are finding effective ways to respond to the new environment, and some claims are exaggerated. Effective engagement is critical. First, this requires awareness of predominant institutional investor views, and familiarity in particular with views of a company’s leading investors. Company officials should know where elements of executive pay structure or outcomes are likely to raise red flags, and be proactive in changing elements that cannot be defended effectively, and in effectively explaining those that can.
“Second, issuers need to communicate effectively in the proxy statement, which too often has been viewed primarily as a compliance document. It behooves compensation committees to try to communicate their executive pay strategy, structure and outcomes as clearly as possible, and a number of leading issuers paved the way in 2011 with succinct Compensation Disclosure & Analysis summaries.
“Third, it is clearer than ever that issuers need to know who the proxy voting decision-makers are at their leading investors, and to have a strategy to reach out to those individuals, particularly should ISS and/or Glass Lewis significantly misconstrue elements of executive pay. The ISS recommendation, in particular, appears dispositive for some investors, but for many others this is not the case, as evidenced by the fact that ISS opposed some 11% of say-on-pay proposals in 2011, but only 1.5% actually were defeated. I believe that large asset managers in many ways are the fulcrum for this new age of shareholder engagement. Many of them, over a number of years, have actually stepped up their game, and are very open to listening to sensible arguments and appeals from issuers.
“The Society of Corporate Secretaries and Governance Professionals has been stepping up its own engagement with investors at the national, regional and chapter levels, and we have seen a series of excellent interactions in 2011 between governance officers and investors. These will continue in 2012, including at our National Conference July 11-14 in Washington, D.C. I encourage folks to take advantage of Society programs and from networking with colleagues through the Society on rapidly evolving best practices in shareholders communications and engagement.”