The Advisors' Blog

– Francis Byrd, Laurel Hill Advisory Group

Two weeks ago, a majority of Disney shareholders re-elected their Board of Directors and approved the company’s executive compensation program. Ordinarily this would have been a non-newsworthy event of concern only to Disney’s holders, senior management and directors. However, in the post-Dodd-Frank world of Say on Pay where “fear” of ISS (and Glass Lewis) vote recommendations hold sway, it has become a bellwether for public companies concerned with the passage of their own compensation plans and the potential for shareholder backlash against directors on various corporate governance issues where companies are deemed not to be following proscribed best practice.

Let’s discuss this year’s Disney vote both in immediate context of what it means for the company and for what it tells us about the broader influence of the proxy advisory firms on institutional investors. Last year, Disney was a among a number of mega cap S&P 500 companies to make changes to the pay arrangements of the CEO and senior team in response to concerns raised by proxy advisor ISS. The market presumed from the fact that Disney acceded to ISS pay concerns that the company passage of Disney’s SOP was in danger of failure. There was also a question of how the company would manage its board leadership structure and whether it would maintain a dual board leadership structure with an independent chairman or would recombine the roles under Mr. Iger.

In this instance, Disney’s pay plan once again raised concerns for ISS and the company’s plan to recombine the board leadership roles was also disconcerting to the proxy advisor and to many other shareholders. What appears to be different this year from last is that Disney was prepared and had engaged with its shareholders on compensation issues – whether they also held discussions with investors on dual board roles for Mr. Iger is unknown – the bottom line, the likely pre- and post-ISS recommendation engagement and Disney’s pushback was sufficient to provide Disney with passage of their executive compensation/SOP plan and to protect directors from ISS’ withhold vote recommendation for elevating Mr. Iger to Chairman of the Board.

Beyond the immediacy of the Disney case is the fact, as stated in previous columns, that institutional investors – beyond the governance advocates (public pension and Taft-Harley funds) – the majority are not advocates or drivers of corporate governance thought or practice. The other exceptions are the largest institutional investors: Blackrock (formerly Barclays), Fidelity, Vanguard, Capital Research, T-Rowe Price and State Street. These firms have made an investment of people and money in understanding and developing processes for voting the proxy assets of the funds they manage. The recent Disney vote coming in the wake of the Blackrock letter and comments from Vanguard have led some commentators to state that there is a new breath of freedom from proxy advisory firms blowing among institutional investors.

This is not really the case, but a slow trend in favor of developing internal corporate governance teams, having them make decisions on votes in conjunction with investment teams or committees is taking place. When Blackrock and Vanguard go “public” with their internal processes or ask companies to seek them out in advance of discussions with proxy advisory firms, that is not a sign of courage but an acknowledgement of standard operating practice. This is more a sign of issuer pressure on proxy advisory firms and the need of some investors to clarify to issuers how they arrive at determining their proxy voting guidelines – and the role proxy advisors play as aggregators of governance and compensation information – in helping them.

It is early yet in the 2012 proxy season. Out of the number of meetings held thus far ISS has made 166 “FOR” SOP recommendations and 27 “AGAINST” SOP recommendation. I would also guess, based on past statement made by the California State Teachers’ Retirement System (CalSTRS) as a proxy for other governance advocate funds that they might well have a higher number of rejections than ISS at this point. The large asset aggregators and mutual funds may well presently represent the balance between the proxy advisors and the governance advocates on pay and other governance issues, but those celebrating the “new found” independence of the institutions should keep in mind that the balance can swing both ways – pro-management today and pro-ISS or governance advocate tomorrow.