Dispatches from the Proxy Front: A Preview of the 2013 Annual Meeting Season. Steven M. Pantina Managing Director January 18, 2013

Transcription

1 Dispatches from the Proxy Front: A Preview of the 2013 Annual Meeting Season Steven M. Pantina Managing Director January 18, 2013

2 A Look Back at Say-on-Pay Votes in the 2012 Proxy Season Nearly 2,000 ballots with Say-on-Pay resolutions Average vote ~90% voting FOR of votes cast - ~94% FOR when supported by ISS - ~64% FOR when ISS was in opposition (ISS against ~13.3% of SOP resolutions) 66 companies had failed say-on-pay (46 in S&P 1,500) 2

3 A Look Back at Say-on-Pay in 2012 Of the 124 Companies that had less than 70% of votes cast in 2012 Percent of Votes Cast in 2011 Less than50% 4.1% 50.0% % 9.8% Greater than 90% 31.1% 60.0% % 16.4% 70.0% % 16.4% 80% % 22.1% 3

4 A Look Back at Say-on-Pay in 2012 However, for those companies that failed in 2011 Percent of Votes Cast in 2012 Less than 50% 8.3% 60.0% % 12.5% 70.0% % 8.3% 80% % 8.3% Greater than 90% 62.5% 4

5 Responding to a negative recommendation from P.A.F. DEFA14s and 8-Ks - Real-time adjustments to current compensation (very hard); - Commitments to structural compensation changes to take effect in future years - More companies filed supplemental proxy materials or 8Ks, usually in response to negative recommendations from ISS or Glass Lewis - Direct challenges ISS and Glass Lewis - Challenges to P-4-P Methodology (Options performance-based by nature?) - Challenges to Proxy Advisory Firm peer groups - Challenge to weighting of 1 and 3 year TSR - Others simply sought to strengthen their overall case to win over institutional voters 4

6 Primary Reasons for Negative Recommendation on Say-on-Pay Pay-for-Performance Disconnect Lagging TSR (Absolute and/or Relative to Peers) % of Awards that are Performance based (as opposed to time-based) Lack of Rigor in Performance Metrics Significant Amount of Board Discretion in Awards Absolute Levels of Awards Mega-Grants Large, One-Time Bonus Payments not tied to performance Metrics Poor Pay Practices Single-Trigger Change in Control Agreements Tax Gross-Ups Significant pension packages for outgoing CEO 6

7 Say on Pay Advance Preparation: ISS 2013 Voting Policies ISS Major Policy Changes: - Peer Group Selection greater inclusion of company s peer group - Additional qualitative considerations: o Consideration of realizable pay - More stringent Board responsiveness policy - More attention on parachutes, including old practices - No Hedging or Significant Pledging of Company Shares 7

8 Say-on-Pay Advance Preparation: Enhancements to Glass Lewis Policies Currently Glass Lewis is generating an against recommendation 16% of the time Basic methodology remains the same Builds on new Equilar alliance Will use both Equilar market-based peers and company s self-disclosed peers, with grades still based on Equilar s peers Consideration of realizable pay as subjective factor in say-on-pay analysis Companies will be able to purchase simulations of Glass Lewis pay-for-performance analytics from Equilar 8

9 What We have Learned in Past Two Years Stop, Listen & Respond - Past results are no guarantee of future success! - Engagement is KEY! Conference calls with proxy voters and/or portfolio managers - Report back to largest shareholders on decisions of the board Disclosure matters! - Institutions are swamped with SOP resolutions to vote on and need companies to be clear, concise and graphical in explaining compensation - Proxy statement is not just disclosure, its marketing too - For many, simply passing is not good enough - Results more closely scrutinized when: ISS <70%, Glass Lewis <75% - Downside risk: lower SOP, director withholds, shareholder proposals 9

10 S&P 1500 Withhold/Against Votes - 15% or Greater 1100 Director Withhold/Against Votes # of Directors with 15% or greater withholds # of Companies 10

11 S&P 1500 Director Withhold/Against Votes 400 Director Withhold/Against as % of Votes Cast %+ 30%+ 40%+ 50%+ Director Withholds 2011 Director Withholds

12 Primary Causes of Large Director Withholds - Attendance issues (new ISS policy on attendance) - Director Overboarding - Non-Independent Directors on Key Board Committees - Not just looking at NYSE Standards for Independence - Failure to respond to a Majority-Supported Shareholder Proposal (New ISS Policy) - Failure to address shareholder concerns in a Say-on-Pay vote - Other Perceived Governance Failures - Adopting poison pill without shareholder vote - Board oversight of key issues (risk management) 4

13 Corporate Governance Proposals Submitted Voted on Number of Proposals Number of Proposals

14 Voting Results for Selected Proposals 2012 Annual Meeting Season PROPOSAL TYPE RESULTS AVAILABLE VOTES AS % OF CAST VOTES AS % OF SHARES OUTSTANDING FOR AGAINST ABSTAIN FOR AGAINST ABSTAIN NO-VOTE BOARD RELATED 88 of 88 41% 58% 1% 31% 44% 1% 11% - MAJORITY VOTE TO ELECT DIRECTORS 28 of 28 61% 39% 0% 47% 29% 0% 11% - Have Implemented a Form of Majority Voting 12 of 12 48% 51% 1% 36% 38% 1% 11% - Have Not Implemented a Form of Majority Voting 16 of 16 70% 30% 0% 55% 23% 0% 11% - INDEPENDENT BOARD CHAIRMAN / SEPARATE CHAIR-CEO 46 of 46 36% 63% 1% 27% 48% 1% 11% - NOMINATE DIRECTOR WITH ENVIRONMENTAL EXPERTISE 3 of 3 19% 77% 4% 13% 56% 3% 12% EXECUTIVE COMPENSATION 59 of 59 27% 72% 1% 20% 54% 1% 11% - REQUIRE EQUITY TO BE RETAINED 27 of 27 24% 75% 1% 19% 58% 0% 10% - AWARD PERFORMANCE-BASED EQUITY AWARDS 2 of 2 28% 71% 1% 18% 46% 1% 21% - ADVISORY VOTE ON DIRECTOR COMPENSATION 2 of 2 4% 90% 6% 3% 60% 4% 16% - APPROVE/DISCLOSE SUPPLEMENTAL RETIREMENT PLANS 2 of 2 31% 69% 0% 23% 52% 1% 12% - APPROVE/LIMIT EXECUTIVE DEATH BENEFITS 2 of 2 40% 59% 1% 32% 48% 1% 8% - ELIMINATE ACCELERATED VESTING IN TERMINATION/CHANGE- OF-CONTROL 11 of 11 37% 62% 1% 29% 47% 1% 10% REPEAL CLASSIFIED BOARD 44 of 44 81% 18% 1% 64% 14% 1% 9% SHAREHOLDER RIGHT TO ACT BY WRITTEN CONSENT 20 of 20 45% 54% 1% 34% 40% 1% 11% SHAREHOLDER RIGHT TO CALL SPECIAL MEETING 14 of 14 41% 58% 1% 29% 43% 1% 13% CUMULATIVE VOTING 11 of 11 25% 74% 1% 18% 55% 1% 11% ELIMINATE OR REDUCE SUPERMAJORITY PROVISION 14 of 14 69% 31% 0% 54% 25% 0% 7% ADOPT PROXY ACCESS 6 of 6 42% 57% 1% 32% 44% 1% 10% 14

15 New ISS Policy on Shareholder Proposal Policy: Withhold on directors if shareholder proposal receives: - (i) Majority of shares outstanding in One year OR (ii) Majority of votes cast in two consecutive years Policy: - (i) Majority of shares outstanding in One year OR (ii) Majority of votes cast in the last year and two out of the last three years Policy: - Majority of votes cast in one year - Key Points - Not retroactive to proposals that received a majority of votes cast.., but - Raises the stakes of shareholder proposals 14

16 Hot Topics Among Shareholder Proposals - Classic Anti-Takeover Provisions - Pills, Classified Boards, Supermajority Provisions - All average over a majority of votes cast - Majority Voting to Elect Directors - Shareholder activists looking closer and mid and small cap companies - Shareholder Right to Call Special Meeting/Act by Written Consent - Both averaging over 40% of cast - Excludable by SEC with company sponsored proposal on topic - Companies have been creative in how the craft management proposal - Proxy Access 15

17 Wrapping Up: How Can You Prepare? Know your Shareholder Base % Institutional, % Retail, % Inside Know How To Engage Your Shareholders Proxy Advisory firm vs. In-house guidelines Each institutional has their own engagement process. Who to include in discussion: PM/Proxy voting team? Make the Proxy Clear and Concise Remember, the proxy is not just a disclosure document Avoid the Fire Drill! Don t wait to engage until you actually have a problem 17