The Advisors' Blog

– Francis Byrd, Laurel Hill Advisory Group

Last week, we saw “Say on Pay”/”Say on When” votes at four companies – Air Products, Monsanto, Woodward and Jacobs Engineering – where board recommendations for triennial Say on Pay were defeated by shareholders supported by ISS’ recommendation for an annual advisory vote on compensation. While the pushback from shareholders for an annual vote on executive compensation was expected there remains a certain amount of shock amongst governance experts, the business media and issuers about what looks like a developing trend toward annual SOP votes. The real story here however, may be the low level of support for Monsanto’s SOP request and the defeat of the Jacobs’ SOP vote.

A vote of 65% of the share voted in favor of a company’s SOP request is worrying, but it is still quite different from a losing vote. With that said, let’s examine the Jacobs results (according to the company’s recent 8K filing and making some assumptions) and do some Monday morning quarterbacking in line with what we (and other advisors) have been recommending to our clients.

ISS Influence among the Top Holders

We begin by taking a quick look at Jacobs’ top twenty-five institutions – we noticed that 18.9% of the shares outstanding appear to be strongly influenced by ISS and would be encouraged to vote in accordance with their recommendation. If that is indeed the case, the company would need to garner voting support for its SOP among its other investors. Had this issue been flagged as a serious challenge to the company’s SOP vote strategy?

Had the company made a determination, by indentifying and engaging with its shareholders, that it had the votes needed for passage? The company had engaged with ISS (according to the ISS’ published analysis) and had not been able to persuade the proxy advisor on pay for performance and/or compensation committee discretion in the award of a non-performance grant of restricted shares. Clearly 54% of the company’s investor base agreed, but could Jacobs have taken any action that would have spared them a defeat?

Going It Alone – Not A Viable Option

In reviewing the firm’s previous proxy statements, going back as far as 2007, it appeared that Jacobs has not used a proxy solicitor. The lack of a proxy solicitor is usually not critical to the success of a routine annual meeting, however 2011, the first year of mandatory Say on Pay, is not a routine year. In reviewing the company’s 8K filing and making some educated assumptions, we identified some key factors that might have made a difference in both the strategies that could have been employed and the ultimate outcome of the advisory compensation vote.

For example:

– We estimate the ISS influence level at approximately 18.9% of the outstanding.

– 36. 2 million shares were not voted – according to the 8K filing 16.2 million shares were held by brokers in street name accounts; and the remaining 20 million shares were likely held by a combination of registered holders, insiders and employees.

– Brokers are no longer allowed to vote shares, per the amendments to NYSE Rule 452, in 2009 by the SEC and further amendments resulting from passage of Dodd-Frank.

– Of the 36.2 million shares unvoted some portion of those shareholders would have been NOBOs and could have been reached via a calling campaign aimed at both registered owners and at brokerage clients (asking them to contact their broker and instructing them to vote for management).

– The lack of an annual-NOBO, a suggestion made to the SEC and included in their concept release, but not acted upon, might have allowed the company an opportunity to reach a greater number of shareholders.

– 10 million additional shares in support of management would likely have made a difference in the outcome of the SOP vote (less than 1/3 of the unvoted shares) – this is where a retail shareholder outreach campaign could have made a difference as well.

– The ability of a quality solicitor/governance advisor to reach out and contact the staff responsible for proxy voting at many institutions might have made some difference in turning around a negative vote.

Could a proxy solicitor/corporate governance advisor made a difference in this instance? It is, in our opinion, hard for experienced proxy hands to look at the numbers and conclude otherwise. While no firm, neither us nor our competitors, could offer a guarantee of a victory, the retention of a top-flight solicitor/governance advisor might have brought the company closer or helped tip the balance in management’s favor.

The lesson here is not about ISS’ influence or governance advocates or the margin of defeat of management’s frequency proposal. It is about the now limited range of options for a compensation committee, board and senior management that will be absolutely needed to “win” next year’s SOP vote or face the prospect of negative recommendations from the proxy advisory firms and potential Vote-No campaigns from public pension and union funds. In the new normal of the post-Dodd-Frank world, issuers need to create their own luck and develop scenarios for winning their SOP vote if even by razor thin margins – so as to provide their directors with the time and flexibility to deal with shareholders displeased with their executive compensation programs – and hiring quality proxy/governance advisors is a key way to do it.

Broc’s note: After I posted this, I realized that according to Jacobs Engineering’s SEC filings, they did hire Innisfree to conduct some type of solicitation for them, as referenced in their subsequent filings.