Investors Told To Reject Proxy Advisor Recos, Approve Executive Compensation

With the advent of universal say-on-pay votes this proxy season, a broader and more enhanced IR portfolio may be emerging as companies directly communicate details of executive compensation policy and philosophy as well as the numbers. 

IROs and corporate secretaries have been super vigilant watching for recommendations on their compensation report from proxy advisers ISS and Glass Lewis. As a result, several high-profile disputes have emerged – including at Disney, General Electric, Northern Trust, Textron and Tyco International – where issuers have challenged negative recommendations from proxy advisory services head-on, with beefed-up compensation discussion and analysis (CD&A) documents or supplemental proxies. 

In the case of Textron, that includes a letter from the vice president of investor relations (and current NIRI chair) Doug Wilburne, sent directly to shareholders urging them to ‘dismiss the Glass Lewis recommendation’ against Textron’s executive compensation proposal, coming up for a vote at the company’s annual meeting to be held on April 27.

Textron received a thumbs-up from ISS but a negative recommendation from Glass Lewis, according to Wilburne, so he began calling investors ‘we understood to be automatically following Glass Lewis recommendations’. The letter was sent as a follow-up to those conversations, he adds.

Wilburne’s letter charges that Glass Lewis’ recommendation ‘does not appropriately reflect the substantial accomplishments being made by Textron and its new management team, and… its analysis contains several quantitative flaws.’

The letter details operational changes made after the new CEO and CFO were installed in mid-2009, and points out the ‘600 per cent-plus recovery in our stock price from our low point in March 2009 and the fact that there are 12 ‘buy’ ratings among the 17 sell-side analysts who actively cover Textron.’

Wilburne’s letter also lays out a common complaint that many proxy advisers overstate actual compensation. In Textron’s case, Wilburne tells shareholders that Glass Lewis’ valuation methodology is flawed, in part, because it ‘assumes that ‘grant date fair value’ is an appropriate measure of compensation actually paid.’ 

He points out that performance share units awarded to Textron executives paid out only 2.9 per cent of their target value during the 2008 to 2010 cycle, because Textron’s actual results were ‘well below performance targets’.

Wilburne says the letter came under his signature rather than the corporate secretary’s because he has the ongoing relationship with Textron shareholders. Even though the portfolio managers he deals with are not always charged with voting the proxies, they can be ‘a window into the firm’ to reach the governance department within the institution.

Because proxies are not voted by portfolio managers who are most familiar with the company performance and who IROs typically deal with, the institutional audience for executive compensation discussions can be different. 

‘Companies have begun to realise that the readers of the proxy are not the same as the readers of the 10K,’ observes Donna Anderson, corporate governance analyst at T Rowe Price.

Anderson, who was a member of the CFA Institute’s CD&A working group that issued guidelines last January for issuers, heads up the Baltimore-based mutual fund giant’s global proxy voting, and she and her peers have been watching the changes with great interest.

‘In the past, companies dived into compensation with very little context,’ Anderson says. ‘Now they’re starting out with a brief recap of the year, and then saying, And here are the decisions we made about compensation.’ 

Gary Tygesson, a partner specializing in governance practice at Minneapolis-based Dorsey & Whitney, says his firm has been busy this season rewriting client CD&As. ‘The end game here is to drive companies to talk more with their shareholders about compensation issues,’ Tygesson comments. ‘When companies do so on a regular basis – get feedback, find out what investors’ hot buttons are – [the investors] will ultimately get involved in the process.’

Even if IROs are successful in broadening the compensation discussion, Tygesson believes ISS will continue to hold sway over other proxy items, such as stock plans. ‘It has a really tight grasp’ he notes. ‘Unless somebody finds a way to push back or it becomes subject to regulation, its influence is going to continue to grow. I don’t think ISS has hit its apex yet.’

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