The Advisors' Blog

– Ted Allen, ISS’s Governance Institute

Many institutional investors will have their first chance to express their views on the frequency of advisory votes on compensation when Monsanto, an S&P 500 company, holds its annual meeting on Jan. 25. Under the Dodd-Frank Act, companies are required to hold “say on pay” votes at their first annual meeting after Jan. 21 and to ask investors to vote on whether to hold future votes on an annual, biennial, or triennial basis. Both the pay vote and the “say when” frequency vote will be non-binding. Frequency votes also will be the ballot next week at the annual meetings of Johnson Controls (Jan. 26), Costco Wholesale (Jan. 26), and Visa (Jan. 27).

These early votes may have a significant influence on companies with later meeting dates that still are deciding which frequency to recommend. Most companies with early meeting dates have recommended triennial votes, but two recent surveys suggest that more large issuers will endorse annual votes as the traditional U.S. spring proxy season gets under way.

Pay vote advocates and corporate lawyers will be watching closely to see whether investors follow the triennial vote recommendations of management at Monsanto, Johnson Controls, Costco, and other firms. Monsanto, which doesn’t have a significant insider share block, should be a good test of institutional views on frequency. The agricultural products company’s five largest institutional holders (which all have less than a 5 percent stake) include: PRIMECAP Management, Marisco Capital Management, Vanguard Group, BlackRock Fund Advisors, and State Street Global Advisors, according to FactSet data. Johnson Controls and Costco also don’t have large insider share blocks. If a plurality of investors defy management and vote for an annual frequency at these companies, it’s likely that other large issuers will take notice. Visa is recommending an annual vote, so presumably most of that company’s investors will support that recommendation.

So far, it appears that many institutions plan to back annual votes. In a Jan. 20 webcast hosted by ISS’ Governance Exchange, representatives from State Street, Vanguard, and the California State Teachers’ Retirement System all said they would support annual votes. (Editor’s Note: ISS has advised its benchmark policy clients to vote for an annual frequency.)

Walden Asset Management, Connecticut’s state pension system, and the American Federation of State, County, and Municipal Employees (AFSCME) are among the activists that are urging investors to support annual votes. These activists argue that compensation is too important of an issue for only biennial or triennial consideration. Given that compensation committees typically make annual decisions on executive salaries, bonuses, and severance, the investors contend that an annual vote is central to proper shareholder oversight. They also assert that annual votes would not be overly burdensome for investors, pointing out that shareholders already vote annually on the election of directors and the ratification of auditors. The activists further point out that annual votes are standard practice in other markets with shareholder votes on pay, including Australia, the United Kingdom, France, the Netherlands, Norway, Spain, and Sweden. However, some investors may be swayed by the arguments of the United Brotherhood of Carpenters and Joiners, which has argued that triennial votes would be more meaningful and less burdensome.

So far, a majority of issuers that have filed early proxy statements are advising their investors to support a triennial advisory vote. As of Jan. 20, 125 companies had filed proxy materials that include a “say when” ballot item. Among those companies, 66 (52.8 percent) had a triennial recommendation, while 40 companies (32 percent) endorsed an annual vote, according to ISS data. Eleven issuers supported a biennial vote, while eight companies gave no recommendation. Apple, TD Ameritrade, Oshkosh, and Beazer Homes USA are among the well-known companies that have endorsed annual votes.

While many companies have focused on pay vote frequency during their engagement efforts before the 2011 proxy season, some institutional investors have expressed frustration that corporate officials are not doing enough to address concerns about their underlying pay practices. These investors see the debate over frequency as distraction away from the more important question of whether a particular company’s pay practices merit investor support.