Early Returns From The Annual Meeting Front

Lots Of Good News, But Some Big, Bad Surprises Are Still In Store For The Unwary

The big news from the Annual Meeting front in the early going is that sayson-pay are mostly sailing by nicely…And bigger news, perhaps; big companies have been ditching the three-year-say-when-on-pay recommendations that many of them planned to recommend…based on early returns that indicate a rapidly snowballing preference for annual “says” by institutional and individual investors alike…exactly as we had predicted.

In just one week in mid March, three Fortune-50 companies told us they were making last minute switches in their proxy statements – from the three-year says they initially intended to recommend to an annual say…And this seems to be fast percolating down to smaller companies too.

The irony here is that three-year says actually provide a much stronger governance structure, and a much deeper and broader framework for evaluating executive pay, we think – which requires a LOT more work on the part of corporate pay-crafters. Thus, we predict that those currently intractable institutional investors will wake up before the next vote on saying-frequency comes up and insist on a three-year say…if they are really smart, that is. “Think about it” we consoled the folks who felt sad that they had ‘retreated’ from the 3-year say; “With a 3-year say, you give all those Monday-morning-quarterbacks a three year look-back to second-guess…plus a 3-year look-ahead to evaluate and second-guess as well. Good for governance, yes…Good for YOU, if you have to craft and draft all this stuff ? Probably not. And let’s note the way those one-year says are mostly sailing through when teed-up as ‘routine matters’ to be rubber-stamped like the ratification of auditors – and how this will soon give activists and other second-guessers some very compelling reasons to re-think, we predict.

But in a not so happy development, four companies have had voters say NO on pay so far – most recently the much picked-on Hewlett Packard – and many companies have had very large votes NO – including quite a few “squeakers” – as executive pay “bounces back” from the financial crisis period. And we sense that momentum to vote NO is beginning to build as the season rolls ahead: A recent WSJ article noted for example that at Monsanto, even though the CEO “didn’t collect a penny for the year ending Aug. 31, because [the Co.] missed key financial goals…34% of the voting shares opposed executive pay packages at the Jan. 25 annual meeting…Monsanto directors are now discussing the large minority vote with investors so they can understand why shareholders ‘voted the way they did’ according to a company spokesperson.” But Duuuh! As the WSJ story also noted, the CEO’s direct compensation climbed 17.4% in fiscal 2010, while shareholder return fell 36%. Duuuh indeed!

We can think of quite a few “household names” that may be in big trouble on the say-on-pay front…like BofA, for so publicly flunking the Fed’s fitness test on their plan to restore a dividend…or Citicorp, for its absurdly low – insultingly low, many will say – penny-a-share dividend declaration…or Johnson & Johnson for merely cutting the bonus its CEO will get, following a disastrous year of product recalls and related blows, both to the bottom line and to J&J’s once golden reputation. How could the board justify a “bonus” after a year like this???

Equally alarming is the press attention that says on pay are currently getting – especially when coupled with the simplicity and the instant ‘feel-good feeling’ one can get simply by voting NO on pay…and maybe on all the directors…or across the board if one feels cross: A recent WSJ “Intelligent Investor” column prominently touted “A Chance to Veto a CEO’s Bonus” – citing a Drexel University study that “Each 1% increase in ‘no’ votes knocks up to $222,000 off the excess compensation of the CEO the next year.” (An awful lot of fuzzy numbers here we have to say…like “up to $222,000” (??) and how one might calculate “excess compensation”…but highly compelling to a skim reader, for sure.) Another study cited, from the University of Maryland, on the “gaming” of peer groups, asserts, very compellingly, that the intentional selection of “peer companies” with higher than average pay scales does take place – and “makes CEOs $1.2 million richer a year on average.”

“Vote against the pay package” the “Intelligent Investor” urges…and “Don’t stop there; vote against every director. That will show them you are paying attention” he asserts. We would say “No; that seems to indicate you are voting no reflexively…and not really ‘paying attention’ at all”…But we must also add, as a daily observer of voting returns, that a growing number of voters seem to be doing just that.

Even more alarming – at least for companies in the S&P 500 – GovernanceMetrics International – formed from a merger of The Corporate Library, Audit Integrity and GovernanceMetrics – has rolled out a new Executive Pay Scorecard that rates pay at the 500 vs. their peers using 10 sets of very specific metrics. The model – and the objectivity and simplicity it appears to offer – plus the very attention-getting “red flags” they post next to each metric the subject company flunks – is a very compelling one, at least at first glance. (Your editor found three companies of their bottom-eight in his own portfolio, one of which he agreed was a bummer, one of which he’d just bought – partly for the yield and partly in the belief it was in a turnaround mode, and one of which has been a best-performer over the long-term, where we found no particular cause for anger or alarm.) Go to Francis Byrd’s wonderful website, we advise at www.laurelhill.com and find The Byrd Watch V22 for a full report, and for links to the Governance Metrics materials. Byrd, by the way, says he’s predicting at least 100 pay packages will not get yeses this season, and we’d second that. We also bet that the new pay-rating product will soon spread to the Russell 5000 – so stay tuned.

On a much more positive note, several companies have, at long last, been paying attention to the need to put the matters to be voted on “up front” – at the very beginning of the proxy statement: A very sensible way to improve their chances of getting average investors to vote…and to vote with the management recommendations. General Electric made a nice try at it this year – and managed to get a bit of nice press attention too. But as we responded to inquiries through the blogosphere, the real gold-standard this year is Prudential. Get thee to their Investor Page asap we advise – especially if you’re still drafting your own proxy statement – to see how much improvement can be made, simply by putting the important voting info up-front…where really it belongs: It begins with a statement of how important it is to vote…and offers that nifty little incentive again – a tree or a tote – if one does vote. Then it cuts straight to the chase, with the matters to be voted upon – with a clear summary of the things an average voter most needs to know – and what the management’s recommendation is – and why. All in nice plain English – very neatly and helpfully laid out - in fact, the best layout we’ve seen. Little dropdowns help the skim readers and info-surfers…Plus, voters can readily surf between the “campaign literature” and the voting site – and even to the tables, footnotes and other “heavy stuff ” that’s discussed further down…if one feels the need to do so.

Apropos…since this is something the Optimizer has been writing about for eighteen years now…we hope you will go to our own website, www.optimizeronline.com and look under “What’s New” for the story we wrote for Directors & Boards Magazine on “What To Do About The Annual Meeting.” We do think it needs fixing…and that it can be fixed…And at a minimum, you’ll be up to speed if any of your Directors ask about this in response to the very robust discussions about the usefulness of AMs - or lack thereof – in Directors & Boards 1st quarter issue, as we bet some will.