The Advisors' Blog

– Francis Byrd, Laurel Hill Advisory Group

I was struck recently by a story, in the New York Times, written by Gretchen Morgenson regarding retail shareholder restiveness. The article focused on a group of individual shareholders of the Celgene Corporation, inspired by the Arab Spring revolutions and the use of social media, to push back against the board’s Say on Pay request. According to the story, the shareholders are upset with a perceived CEO/NEO pay-for-performance disconnect. There are a couple of lessons here for companies, directors, shareholders and Ms. Morgenson from the Celgene cyber battle:

– While institutional investors are often supportive of management, retail shareholders tend to be far more supportive of management positions (when they vote) than institutional investors. Retail holders are more likely, in our experience (and those of solicitation firms), to back a management request or vote against a shareholder proposal. In the instant case with Celgene it is much more the exception than the rule.

– Boards and their advisors need to pay much more attention to the still untapped and vast potential of the social media. 2.7 million shares may seem to be a very small amount but for some of the companies that lost their advisory vote on executive compensation small shareholders could have tipped the balance – remember in a tight contest every vote counts.

– Bad news or perceived bad news is a strong motivator for both institutional and retail shareholders. Boards and senior management need to maintain control and disseminate positive and honest messages to their investors on strategy and growth prospect to stay one step ahead of problems.

Stop the ‘ISS Ate My Homework’ Comments

As the first portion of the 2011 proxy season comes to a close, we have detected not only the usual weariness from the institutions we’ve spoken with but some frustration from some of the issuer engagements they have had thus far this year.

The point of contention is the issuer attacks on ISS for their negative vote recommendations, whether the vote in question is on Say on Pay, a stock incentive plan or the proxy advisor’s support for a shareholder proposal. Issuers will disagree with a specific recommendation from ISS (or Glass Lewis) and that is not unusual, however many institutional investors have grown tired of hearing ad hominem attacks on the proxy advisory firms during dialogue with companies.

As one major investor put it to me earlier this week, “…we are not stupid. ISS does not think for us. If you have done a poor job of crafting your CD&A and proxy – don’t blame ISS for your sub-par disclosure.” This is not to say that issuers should not file 8K’s pushing back against ISS, but that the tactic should focus on clarifying the earlier disclosure from the proxy statement not railing against ISS or Glass Lewis.

In issuers’ defense, while many major investment firms and the governance advocates spend the time and money necessary to review the information from the proxy advisory firms they subscribe to, they are also willing and able to engage with companies and importantly are open to voting with the board and against the recommendation of the proxy advisory firms. However, far too many institutional investors use the proxy advisory firms as a shield against undertaking investment in the staff and resources necessary to make informed decisions – that is the issue requiring attention from investors, issuers and regulators.