Proxy Statements Transitioning From Compliance To Communications-Focused Documents

By Ron Schneider, Director, Corporate Governance Services, RR Donnelley

RR Donnelley works with approximately 1,900 US companies each year on various aspects of their proxy statements, including providing strategic advice, design services, printing, filing, distribution and web-hosting. Commencing with a few “governance leader” companies a decade ago, each year an increasing number of our clients take significant steps transitioning their proxies from their traditional SEC 14A compliance document into more shareholder-friendly, visually inviting and compelling communications pieces.

DRIVERS OF CHANGE

The main reasons companies are making this transition include:

• Say-on-Pay proposals and a desire to communicate their compensation programs more effectively
• Increasing levels of investor activism and a desire to tell their best “board and corporate governance” stories
• Changes made by their peer companies — and the recognition that if they “stand still”, by comparison they may appear to be communication laggards
• Concerns about the impact and influence of proxy advisors, and a desire to make the company’s disclosures the primary reference point for investors

The above reasons do not impact every company in the same way or at the same pace, and as a result, all companies are not compelled to move in the same direction or at the same time. But eventually, we think that most widely-held public companies will make efforts to communicate their compensation and board/governance stories more effectively to their investors and other critical audiences.

MANY RR DONNELLEY CLIENTS INCREASING THEIR PRINT RUNS

Another trend we’ve observed is that a majority of our clients upgrading their proxies in these fashions have also increased their print runs. We considered why this is, and have come to the conclusion that, driven by a desire to communicate more effectively with a range of their investors (institutional, retail, employee, and others), once they upgraded their proxies, most of these companies then wanted more of their investors to receive them directly. While we know that many larger institutional investors view proxies online, often on the ISS institutional voting platform or Broadridge’s ProxyEdge platform, it is also amply documented that retail investors are much more likely to vote if they directly receive traditional, “full set” hard copy documents in the mail, than if all they receive is a one page “notice of internet availability” which explains what they need to do if they want to obtain the documents, and to vote.

THE PROCESS AND PLAYERS ARE SHIFTING

For an increasing number of companies, the proxy process is shifting from an “episodic” event starting a couple of months before the filing/mailing and ending with the meeting date handled primarily by one member of the legal team. The new model is for the proxy process to be more of a year-round undertaking involving a broader, cross-functional drafting team. Issues typically considered as part of this year-round process include:

• Consideration of the recent annual meeting vote results
• Conduct of post-meeting engagement with investors
• Review of feedback from this engagement, emerging trends and best practices in proxy disclosure, and review of evolution of peer company disclosures
• Consideration of current year financial performance and other key events impacting investors
• Drafting of the next annual meeting proxy featuring enhancements to governance and compensation “story- telling”
• Distribution, solicitation and once again
• Consideration of the recent annual meeting voting results (what’s sometimes referred to as “rinse, repeat”)

WHICH COMPANIES SHOULD RE-DESIGN THEIR PROXIES?

Not every company needs to radically re-design their proxy statement in any given year. This is not to say that it’s “set it and forget it”. Many companies, having undertaken their initial re-design, find themselves in what we call “incremental tweaking mode”.

Based on our experience working with hundreds of clients each year, we offer the following process to aid you as you consider a proxy re-design:

PROXY RE-DESIGN DECISION TREE AND CHECK LIST:

Phase One threshold question as part of post-meeting review:

Did our proxy serve us and key constituents well this past year and is it, with minor updating, likely to do the same next year?

Considerations in answering this question include:

• Were our voting results satisfactory, whether on directors, say on pay or other key resolutions? If not, do we know the reasons for poor votes, such as negative proxy advisor vote recommendations or triggering of internal investor voting policies?
• Is significant post-meeting engagement with investors appropriate to better understand who voted against what and why, and what it will take to turn these votes around next year?
• Is our company’s performance holding up? Or is there the potential for increased concern about future alignment between pay and performance?
• Is our board coming under heightened scrutiny over diversity, tenure or related issues?
• Do we anticipate being a target for proxy access or other high profile resolutions on next year’s ballot (whether company or shareholder-sponsored)? Are we otherwise concerned about potential activist initiatives?
• Have our peer companies significantly enhanced their disclosures? As a result, without upgrades, will we appear to be a relative laggard in this area?

Phase Two: Develop your Objectives, Strategy and Priorities:

• Convene cross-functional team
• Review latest engagement results, along with RR Donnelley institutional survey research
• Review evolving best practices in proxy disclosure, including the current RR Donnelley Proxy Guide (catalog of best in class proxy statement sections, topics and features)
• Bring objective, outside advisors, including RR Donnelley Proxy Solutions strategy and design team, into the conversation
• Most important, before making any changes, identify specific goals and objectives for next year’s proxy

Phase Three: Review Potential Changes:

• Select specific pages or sections of the prior year’s proxy for content upgrade and design enhancements. Possibilities? Director skills and qualifications, the CD&A and pay for performance alignment, increased clarity around the appropriateness of performance metrics and peer group benchmarking
• Based on the Proxy Guide or other sources, have RR Donnelley re-set selected pages/sections of the current year’s proxy into the new design so you can get comfortable in advance with a new style template
• Have internal drafting team work on enhancing telling of your story
• Identify graphs and other visual elements that can support the new or refined story
• Consider whether the addition of a Proxy Summary and/or CD&A Executive Summary would improve the likelihood that key messages get noticed. Note: While Proxy Summaries will be read, not every company needs one. Have a “strategy” for what you hope to accomplish through a Proxy Summary
• Consider whether enhanced navigation via an expanded table of contents (TOC, or multiple mini TOCs), page headers/footers and other devices will improve the ability of investors to quickly locate key information
• Approve new design template

Phase Four : Tactical Implementation:

• Once year-end performance and related pay decisions reveal themselves, finalize drafting
• Print, SEC file, mail and web-host the new proxy
• Consider upgrading the web-hosted version via additional color and improved navigation, as this is the version many larger institutional investors view
• Review whether you are using an optimal mix of hard copy versus Notice & Access distribution to maximize voting participation from friendly audiences (Note: your critics and activists will always vote no matter what)
• Engage in coordinated solicitation outreach, pointing out any changes made in response to earlier post-meeting engagement
• Hold annual meeting, analyze voting results

RESOURCES & CONTACT INFORMATION

To view the RR Donnelley Proxy Guide, Investor Survey and other relevant thought leadership pieces, you are invited to go to: rrd.com/proxythoughtleadership

To contact the author Ron Schneider directly, email ronald.m.schneider@rrd.com