Investors Care Less And Less About Management's Recommendations

When it comes to the resolutions on the ballot this proxy season, does management’s opinion count for anything?

Some of the public company directors I’ve been talking to are starting to believe the answer to that question is ‘no’.

These board members – who wish to remain anonymous – expressed frustration with the outcome of management proposals on the frequency of say-on-pay votes. The overwhelming majority of shareholders are opting for annual votes regardless of the company executives’ recommendations and irrespective of the individual board’s reputation in the executive compensation arena.

The result of the frequency vote at Costco Wholesale is a good example: even at $3.5 million, the compensation awarded to the S&P 500 firm’s CEO, Jim Sinegal, has been categorized by corporate governance gurus and the media as restrained in light of the company’s significantly increased stock price and revenues. Nevertheless, at Costco’s annual meeting in late January shareholders defied management and backed annual advisory votes on compensation.

Outcomes like these are leading some public company board members to believe institutional investors are blindly following ISS’ opinions, or that shareholders have stopped heeding management’s recommendations on every issue.

That’s not the case, says Tim Smith, senior vice president and director of shareholder engagement at Walden Asset Management.

‘What management recommends is still exceedingly important on most issues,’ Smith insists. ‘The say-on-pay frequency vote is different because the issue has been talked about intensely for the last five years. Shareholders think annual votes on executive compensation make the board and management more accountable; they don’t need ISS to tell them that.’

Pat McGurn, special counsel to the ISS governance services unit, says the facts support Smith’s view. The overwhelming majority of ballot items are still passing by huge margins, and shareholder support for annual say-on-pay votes at companies with good governance reputations is simply the result of ‘institutional investors not treating the frequency issue on a case-by-case basis,’ says McGurn. ‘Even the ones that support triennial voting are doing it 100 per cent of the time.’

Although McGurn insists the results of frequency votes don’t in and of themselves represent investors’ defiance of management recommendations, he allows that the votes may make voting in opposition to management recommendations more customary.

‘There’s never before been an issue that shows up on so many ballots and gets such a high instance of investors actually voting against the board’s recommendation,’ he says. ‘The question is: how will it affect issues that normally get virtually automatic support?’

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