The Advisors' Blog

– Francis Byrd, Laurel Hill Advisory Group

You should be aware of an effort by GovernanceMetrics who is providing its investor clients with analysis on executive compensation that can utilized in deciding to support a company’s advisory vote on executive compensation (Say on Pay – SOP). This effort represents a first for GovernanceMetrics International (the firm is a recent combination of The Corporate Library, Audit Integrity and GovernanceMetrics) which has not heretofore been involved in making direct recommendations on issues appearing in proxy statements.

The analysis does not make recommendations on a company’s SOP disclosures or CD&A, but instead reviews compensation disclosures to determine if a company generates a number of redflags on issues seen by GovernanceMetrics International as determinative of receiving “high”, “moderate” or “low” concern with respect to company’s compensation practices. No recommendation is attendant to these determination, so it is up to the investor to make their own decision as to how to interpret GovernanceMetrics’ concerns and their impact on the investor’s SOP vote.

Over the course of many governance-related events speakers from all sides in the governance debate have argued for a more qualitative review and analysis, by proxy advisory firms, of executive pay that spotlights positives and negatives in an issuer’s compensation practice (from the point-of-view of the reviewer) and allows the investor to make their own decision as to whether to support the board’s recommendation.

This type of analysis is reminisce of the work of the Investor Responsibility Research Center (IRRC). The IRRC, which was purchased by ISS, had a huge storehouse of governance data on compensation, shareholder resolutions, and other issues that could be put at the service of institutional shareholders seeking data to make decisions about proxy voting, investor engagements on governance, social and environmental issues. IRRC did not make recommendation on issues in the proxy statement, but did provide management’s case and the opposing view (or shareholder proponent’s view) without providing a recommendation to investors as to how their vote should be cast.

While GovernanceMetrics International’s effort does not fit the format of the well-remembered IRRC analysis model, it is can be seen as a move back in that direction. Irrespective of the potential impact on SOP votes, the reactions of institutional investors and issuers to this new model should be positive as it offers more than a simple up or down vote recommendation.