The Advisors' Blog

It’s early September, so “sweater weather” is around the corner, and Spirit Halloween stores have started conveniently popping up everywhere for people whose kids are willing to use those easy costume packages. For those of us in this space, anticipating all things fall also means anticipating (and planning for) off-season engagement meetings with shareholders to gather feedback that will inform compensation design. This FW Cook memo won’t help you children understand that there are not enough hours in the day to buy or craft a million pieces for their Halloween costumes, but it will help you make the most of the precious time you have with your shareholders this fall/winter. It starts with this thematic reminder:

Companies should generally avoid asking shareholders to pre-clear a special equity grant, incentive design for the coming year or other Board action. Instead, shareholder engagement gives investors an opportunity to communicate their priorities and explain how they are likely to assess a particular issue. The compensation decision should stay with the Board. The value of engagement is understanding how investors will evaluate it.

It continues with detailed, specific suggestions. Here are my 10 favorite tips (condensed):

1. Build the agenda around what the company needs to learn. Useful say-on-pay analysis identifies which major holders changed their votes, where opposition concentrated and whether supportive investors raised concerns despite voting “For.”

2. Sophisticated stewardship teams know roughly when compensation committees make their decisions. A meeting scheduled after the design work is effectively complete can feel more like a courtesy call. Investors know when their input can influence the Committee’s thinking.

3. Preparation should be investor-specific: how the institution voted, what its published policies say, what it raised in prior engagement and who inside the firm will actually drive the voting decision.

4. A review of the latest ISS and Glass Lewis perspective on the company is also suggested, particularly after an adverse recommendation. Know it, but do not build the meeting around it. The purpose is to understand the shareholder’s own reasoning.

5. When a director joins, investors expect to hear the Board’s rationale directly and in the director’s own words. Redirecting those questions to management undermines the value of having the director participate in the first place.

6. Spend more time listening. A rough test: if the company has been talking for more than half the meeting, the agenda was too full.

7. The compensation discussion itself should focus on the issues that are actually consequential for the company. The relevant issue may be goal rigor, use of discretion, a retention award, an executive transition or an unusual pay outcome [. . .] A generic walk-through of compensation practices is unlikely to surface much that the Board does not already know.

8. Similar-looking votes can reflect very different judgments. An investor applying a hard voting-policy constraint presents a different issue from one expressing a preference about plan design. The company needs to understand how strongly the view is held and whether it could eventually affect support for directors.

9. Those distinctions rarely emerge from a presentation. They come from asking follow-up questions and giving the investor room to answer them.

10. The meeting also should not end with a commitment to make a change. Management’s job is to understand the feedback accurately and bring it back to the Committee or Board.

There are many more suggestions in the memo, which I encourage you to read in full. And for even more, check out our “Shareholder Engagement” Practice Area and register for our Proxy Disclosure and Executive Compensation Conferences — which are only a month away!

– Meredith Ervine