The Advisors' Blog

– Subodh Mishra, ISS Governance Exchange

As the U.S. annual meeting season reaches its peak, an ISS analysis of early shareholder voting finds less dissent on say-on-pay compared with this time last year, while support for some shareholder proposals has slipped from levels evidenced in 2012. As of May 6, average support for say-on-pay resolutions across the Russell 3000 stands at 92.5 percent, a nearly two point jump over this time last year and three point increase over 2011. ISS is also tracking fewer votes receiving less than majority support this year – six – compared with eight during the same period in 2012 and 11 in 2011. Notably, 2012 and 2011 numbers are based on voting results for 345 and 383 companies, respectively, well below the 417 results collected by ISS through May 6 of this year.

When examining majority supported yet low votes, ISS finds just 4.3 of Russell 3000 companies fall within the 50-70 percent support level range, compared with 6.7 percent through early may 2011. Companies falling between the 70 and 90 percent support level also has dipped by nearly one point to 13.9 percent thus far in 2013.

Larger Companies Lead Gains
Parsing the numbers, large capital companies appear to account for much of the gains in 2013 shareholder support levels. S&P500 firms saw the lowest average support level compared with the broader S&P1500 and Russell 3000 last year at 88.3 percent, which represented no change from 2011 while both of the broader indices saw gains from 2011 to 2012 of roughly one point each. This year, however, large capital companies have seen the greatest growth in average support levels of 3.5 points, compared with three for the S&P1500 and just under two for the Russell 3000.

Driving the change are companies such as International Game Technology, The Bank of New York Mellon, C.R. Bard, Johnson Controls, and Huntington Bancshares, which, as S&P500 constituents, comprise five of the top 10 companies seeing year-over-year gains in say-on-pay voting. By contrast, just one large capital firm–Tyco International–is among the top 10 decliners thus far in 2013, having gone for 94.9 percent support of votes cast “for” and “against” in 2012 to 68.5 percent this year.

Governance watchers suggest large capital firms are doing a better job this year than last in communicating to shareholders steps taken following low support for say-on-pay and also taking steps better align pay and performance. When examining pay-for-performance concern levels undergirding ISS’ pay vote evaluations, S&P500 firms again show the greatest improvement reducing to 7.1 percent the portion of companies deemed to have “high” concerns, compared with just under 12 percent last year. The Russell 3000 broadly, by contrast, has seen no year-over-year change with 10.1 percent of companies analyzed thus far in 2013 netting “high” pay-for-performance concerns. Overall, ISS recommendations against S&P500 companies’ advisory pay resolution are down from 13.5 percent this time last year to 8.2 percent. The figure stands at 10.1 for Russell 3000 firms this year.

“Say-on-pay has proven quite effective in addressing and discouraging cases of pay practices and structures that are viewed by investors as ‘egregious’ or ‘out of line’,” Harvard Law School Prof. Lucian Bebchuk noted on a May 7 ISS GovernanceExchange webcast. “This is an improvement,” he acknowledged.

Bebchuk cautioned, however, that more needed to be done to fully leverage the right, noting the vote has been “less effective or not effective at all” in addressing and discouraging practices that are widespread yet still “subpar and suboptimal.” Bebchuk suggested this will be an issue for institutional investors to “think about, going forward” and, specifically, how investors can use say-on-pay to go beyond addressing egregious practices to include those that are prevalent yet still problematic.