Thursday, February 10, 2011

Mackenzie Partners' Alert on Say-on-Pay

With say-on-pay (SOP) and say-when-on-pay (SWOP) now in effect, informed shareholder communication is more important than ever. While public companies with a float lower than $75 million are exempt from the Dodd-Frank provisions on SOP and SWOP until January 21, 2013; all other companies are now legally required to host a SOP vote either annually, biennially, or triennially and a SWOP vote at least once every 6 years (both of which are non-binding).

Mackenzie Partners, a leading proxy solicitor and consultant, recently sent a memo to its clients highlighting some technicalities of SOP and SWOP.

SOP and SWOP technicalities
  • Effective as of this proxy season, instead of recommending a withhold vote against certain directors, in most cases, ISS and Glass Lewis will just simply recommend a negative vote for SOP - for issues pertaining to executive compensation.
  •  "ISS will continue to recommend votes against compensation committee members, but only in rare 'egregious' situations or if you are continuing to engage in a problematic pay practice that has already been the subject of a withhold recommendation".
  • Some institutions have stated that if they vote NO on SOP, they will also vote against the comp committee members.
  • Dodd-Frank officially made SOP a non-routine issue and, as such, SOP does not allow for discretionary voting by broker non-votes. This change in definition is particularly relevant to companies with a large retail shareholder base.
  • ISS will no longer reverse a negative vote recommendation based on a subsequent 8-K filing. Companies won't have the luxury of "lets see what ISS says and then we can decide".
  • For SWOP, ISS and Glass Lewis will recommend in favor of annual SOP votes.
  • Thus far, for SWOP, it appears that a majority of companies will be recommending a triennial vote.
  • Mackenzie Partners "expect[s] many large companies to concede to the inevitability of the influence of ISS and recommend an annual vote in the proxy statement".
  • Companies abstaining from a SWOP recommendation (ie. leaving it up to shareholders to decide) will not be able to have discretionary voting authority over proxy cards that are returned blank.
  • A company can exclude a shareholder proposal on SOP only when it has adopted a SOP measure that accords with shareholder majority approval, as opposed to just shareholder plurality approval.
  • Companies must disclose the frequency of SOP vote by issuing an 8-K filing "no later than 150 calendar days after the annual meeting in which the vote took place, but in any event no later than 60 calendar days prior to the deadline for submission of Rule 14a-8 shareholder proposals for the next annual meeting".
  • 13-F filing companies will need to disclose how they voted on SOP, SWOP, and golden parachute compensation issues.

How to plan for SOP and SWOP

1. Know your shareholder base.
     a. What is the institutional, retail, hedge fund mix.
     b. How many shares will be heavily influenced by ISS or Glass Lewis.
     c. What are the voting policies of the top holders and how do they view SOP and SWOP.

2. Determine early on if you may have compensation concerns.
     a. Read the last few ISS and Glass Lewis reports. There may be issues that were raised that have not been resolved. These points may not have been significant enough to lead to a vote against director nominees at the time, but could now result in a recommendation Against SOP.

3. If you believe you have a significant issue, you should engage with your holders before the proxy is filed and be prepared to do so on a broader scale once you are soliciting proxies.
     a. This should not be a casual outreach. Target who you should contact and go in with a team that is prepared and can discuss compensation knowledgeably.
     b. Know which firms are open to this type of governance and compensation related engagement.
     c. Know who you should be talking to - it may not be the portfolio manager or analyst that investor relations departments usually talk to.
     d. Know the voting process and spheres of influence at each firm.
     e. Come out of the call or meeting with notes on any concerns and keep these organized. This is key for ongoing discussion, and particularly important when trying to discern what a negative vote on SOP means.

Mackenzie Partners' memo can be found here.

Posted by David Schatz