At the great majority of companies that have already held their 2011 shareholder meetings, investors have voted in favour of conducting say-on-pay votes annually, and for the most part, boards are acceding to their demands.
But at least one major union and a maverick few management teams – including those at Pfizer and Prudential – are still backing biennial or triennial votes, arguing that they allow more time for thoughtful analysis and a more accurate window for evaluating company performance trends.
‘Annual is always the better position,’ says Tim Smith of Walden Asset Management. Smith is referring to the frequency of advisory (that is, non-binding) shareholder votes on executive compensation, which are mandated at big companies as of 2011 under the Dodd-Frank Wall Street Reform and Consumer Protection Act. He’s one of the leaders in the push to get companies to adopt polices providing that the votes be held every year.
It’s a position that was initially embraced by a clear majority of the boards of US companies that had filed proxy statements early in the year. According to a study conducted by the corporate and shareholder consulting firm Georgeson and the law firm Latham & Watkins, 57 per cent of the boards of the 300 companies that had filed proxy statements as of the first week in March recommended that investors vote in favour of a triennial vote, while 8 per cent recommended biennial votes.
Only 27 per cent recommended that investors support annual say-on-pay votes. Many of those proxy statements were likely set down in ink before the strength of an investor push for annual votes became clear, however.
What investors want
On January 31 this year, some 39 institutional investors representing more than $830 billion in assets – including heavyweights like Vanguard, Fidelity and a number of state pension funds – laid out their positions in a statement declaring that holding shareholder votes on executive compensation annually would allow for ‘maximum accountability’. Annual votes are ‘standard in all other major markets’ and ‘encourage companies to communicate effectively with shareowners’, they further contended.
These institutional investors backed up their position with actions, voting down board recommendations for biennial or triennial say-on-pay proxies at annual meetings held by Woodward, Accenture, Costco Wholesale, Air Products and Monsanto, among others. At some companies – including the investor-friendly Monsanto and Emerson Electric – the majority of ‘no’ votes on the triennial option resulted in directors quickly retreating back into their boardrooms and deciding to hold annual votes in keeping with investors’ demands.
All told, of the 24 S&P 1500 companies that have recommended the triennial option and taken investor tallies, only five have received majority support for their position, according to Georgeson.
Not everyone believes annual votes on executive compensation are the best option, however. Edward Durkin, director of corporate affairs for the United Brotherhood of Carpenters and Joiners of America, is among the dissenters.
‘Studies have shown that individual investors have fallen away from voting and it’s the institutional investors who vote,’ says Durkin, whose union has 100 pension funds and $45 billion in assets, with equity holdings in 3,600 different companies. ‘We are a typical pension fund, and I’m telling you, you can’t do thoughtful analysis of 3,600 plans on an annual basis. It’s just not possible.’
Durkin has logged up a lot of time lobbying lawmakers on Capitol Hill in the months leading up to the Dodd-Frank vote for language that would ensure triennial say-on-pay votes and other reforms his union felt would improve the process of having investors vote on executive compensation. His plan would have limited the annual advisory votes to more manageable rotating pools of 350 companies with $1 billion in revenue and higher in the Russell 1000, where Durkin argues the vast majority of pay scandals reside.
Durkin also wants to see say-on-pay votes broken down into three sub-categories: annual incentives, long-term pay and post-employment compensation.
His battle has been a lonely one. ‘We did not find other institutional investors during legislation or even right now that really support anything but annual shareholder votes on executive compensation,’ he says.
Finding allies in the corporate community is getting harder too, as corporate boards watch other triennial proposals defeated, Durkin notes.
There are some companies that have continued to announce their intent to offer triennial or biennial votes, however. Citigroup, Prudential Financial and Pfizer are among them. Smith predicted Citibank’s proposal would fail, given the company’s ‘very, very questionable record over the past five years and the financial crisis.’ Citigroup did not return calls seeking comment.
But both Prudential and Pfizer, says Smith, offer more convincing cases and have won deeply rooted goodwill among the investor community by adopting say-on-pay voting early and on their own, and by making aggressive efforts to engage shareholders. Even so, he says, ‘our simple answer is ‘no’. Annual is always the better position.’
A slow process
Matthew Lepore, Pfizer’s corporate secretary, says that in Pfizer’s case, annual voting simply doesn’t make sense. The profit cycle of the pharmaceutical industry operates over the long term, since drugs undergo a great deal of research and development, and it’s difficult to accurately assess a company’s performance by looking at one year’s results, he argues.
Lepore notes that Pfizer’s board settled on a biennial say-on-pay review back in 2009, and says he has ‘no reason to believe that the board believes it’s in the interest of shareholders to move to an annual review.
‘One of the key issues with say on pay is tying pay to performance, and doing that over the longer term is a better approach, in our view,’ he adds. Lepore notes that many of Pfizer’s investors had also echoed Durkin’s opinion that conducting exhaustive annual reviews would be difficult.
‘We talk with our shareholders all the time about what is important to them, and I have heard feedback that the burden of conducting an annual say-on-pay review would be too great,’ he says.
Prudential adopted say-on-pay voting prior to Dodd-Frank and also opted for a biennial review last year after extensive discussions with its shareholders, says Peggy Foran, Prudential’s corporate secretary and chief governance officer. The biennial approach was a compromise between investors pushing for the three-year option and those pushing for the one-year option.
‘In our cycle, given the work that has to be done communicating with investors and given the amount of time that we hope investors will put into analysing the numbers, we decided every two years works best,’ says Foran, who notes that without sufficient time, many investors would likely delegate the responsibility for analysis and simply rely on the recommendations of a proxy adviser such as ISS.
‘Investors really do have rights – they own us,’ Foran says. ‘But they also have obligations to spend some time to get to know our issues and vote thoughtfully.’
Though Foran has heard from institutional investors that they might actually make an exception in Prudential’s case and support a biennial vote, the board recently reconsidered its approach in light of the aggressive push by institutional investors to standardize one-year votes. The board decided to switch to an annual vote, and will soon announce that decision in its proxy, she says.
This decision does not surprise Durkin. ‘There’s very little appetite for pushing back against the shareholder view on the frequency issue,’ he complains. ‘What you are starting to see and will continue to see is less recommendations for triennial, because they are reading the tea leaves.
‘But if companies really believe that triennial is the best way to go, they ought to do it anyway and take the consequences, even if that means ISS gets mad,’ Durkin continues. ‘Quite frankly, we need companies to make their voices heard on this issue. Failure to do this is how we get bad policies.’
Foran predicts that many companies will return to the issue in the years ahead. ‘We need to get through the next couple of years,’ she says. ‘I think the dust needs to settle; people need to get comfortable and figure out who they can trust. Once everything’s calmed down, you may see some differentiation.