The Advisors' Blog

– Francis Byrd, Laurel Hill Advisory Group

While we do not expect a huge amount of investor rejections of the SOP vote request, there will be a number of negative recommendations from proxy advisory firms (ISS and/or Glass Lewis (GL)) against issuer plans in 2011. The question for companies is how to react if and when you receive notification of the negative vote advisory from ISS and/or GL. Last week, Katie Wagner of Agenda had a story discussing the tactics and strategies used by certain issuers to fight back against negative vote recommendations from the proxy advisory firms, not always successful.

Hitting the Reset Button

For the issuer whose SOP vote request is in the crosshairs of either proxy advisory firm, the release of a negative vote recommendation requires the affected company to take immediate steps to communicate with ISS/GL, and shareholders, it’s point of view concerning the proxy advisors’ analysis – why the company disagrees as it relates to the pay package approved by the Compensation Committee.

While the proxy advisory firms have spoken through their vote recommendations – and they have an amplified voice – issuers have the ability to communicate to the broader market via SEC disclosure and to strategically communicate to specific investors whose support will be key to overcoming ISS or GL. This represents a second opportunity to present the Compensation Committee’s philosophy of pay in the context of the company’s performance and to rebut the contentions and factual inaccuracies, if any, from the proxy advisory analysis.

Using The SEC Disclosure Regime: 8-K or Additional DEF 14s

An issuer in this situation should take a moment to view the points of disagreement with the proxy advisory firms and develop strong and contextual responses to refute their analysis. Those key points of response then become the heart of the company’s communication to shareholders. Once disclosed, as an 8K or DEF14 filing, the company can then reach out to those shareholders identified, by their governance advisor/proxy solicitor, as open to dialogue on the compensation issues in contention.

Some advisors have suggested, to companies in the middle of contested SOP votes, that the Compensation Committee make immediate changes to CEO or named executive officer pay in an effort to appease the proxy advisors and announce the adoption of their concept of “best practices in pay”. We would counsel that such a course of action in advance of conversations with shareholders would be premature and harmful to the issuer’s cause. If an issuer is prepared to seriously consider potential “horse-trading” on a compensation issue, it should be after discussions with shareholders, not prior to them. Issuers forced to undertake this effort should be focused on educating their shareholder base.

Who Speaks to the Shareholders

Usually the CEO or other members of senior management speak for the company on all issues. In this instance, however, having the CEO or one of the named executive officers discussing the board’s rationale for the officers’ compensation might appear self-serving and may be viewed as if the board and compensation committee is a rubber stamp for management – a belief held by many shareholders. The company should be prepared, if necessary, to have a member of the Compensation Committee (if not the committee chair) involved in the engagement discussions. Engagement with a director often underscores for shareholders the fact that the board was involved and knowledgeable about the company’s executive compensation process and that the CEO’s pay was not determined by executive fiat.

The disclosure and communications strategy outlined above provides a company with a fighting chance against the proxy advisory firms, could potentially shift shareholder votes, and, irrespective of the immediate 2011 outcome, creates the basis of a strong shareholder engagement program for the 2012 and 2013 proxy seasons.