Dispatches from the Proxy Front: A Preview of the 2013 Annual Meeting Season Steven M. Pantina Managing Director January 18, 2013
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
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% - 59.9% 9.8% Greater than 90% 31.1% 60.0% - 69.9% 16.4% 70.0% - 79.9% 16.4% 80% - 89.9% 22.1% 3
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% - 69.9% 12.5% 70.0% - 79.9% 8.3% 80% - 89.9% 8.3% Greater than 90% 62.5% 4
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
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
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
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
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
S&P 1500 Withhold/Against Votes - 15% or Greater 1100 Director Withhold/Against Votes 2008-2012 1000 1027 900 800 700 748 600 500 612 549 526 400 300 200 253 378 314 254 263 100 2008 2009 2010 2011 2012 # of Directors with 15% or greater withholds # of Companies 10
S&P 1500 Director Withhold/Against Votes 400 Director Withhold/Against as % of Votes Cast 2011-2012 300 355 339 200 191 100 145 83 62 20 28 0 20%+ 30%+ 40%+ 50%+ Director Withholds 2011 Director Withholds 2012 11
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
Corporate Governance Proposals Submitted 2008-2012 Voted on 2008-2012 700 652 600 587 531 Number of Proposals 500 400 300 200 100 417 454 Number of Proposals 400 350 300 250 200 150 100 339 371 342 240 269 50 0 2008 2009 2010 2011 2012 0 2008 2009 2010 2011 2012 13
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
New ISS Policy on Shareholder Proposal - 2010 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 - 2011 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 - 2013 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
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
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