Executive compensation
provides several bases for exclusion, some of which have recently been revised by the Securities and Exchange Commission (SEC) to promote more consistency and predictability in application. “On a non-binding basis, shareholders can express that they would like a certain action taken, though they must reach minimum thresholds in terms of the value of shares and the holding requirements, from one to three years,” explains Nathan Williams, lead consultant at Meridian Compensation Partners.
“Almost all shareholders can reach the thresholds, but we see activist investors engaging in those proposals very frequently, often around social or environmental issues,” Williams continues. “Companies try to exclude them from the proxy statement through the SEC ‘no action’ process and there are 13 grounds for exclusion.”
One basis for exclusion is ordinary business matters. This means that if the SEC believes a management issue is at the discretion of the board, then it is outside the scope of what shareholders can seek to change. Another example is substantial implementation that means if the board takes some action, the proposal can be excluded – even if it wasn’t the exact action shareholders desired. “On compensation, which is what Meridian focuses on, a shareholder proposal might concern submitting severance arrangements to shareholder votes. There is a big uptick in such proposals this year, with 43 compared with 16 last year,” Williams explains. “That is because there has been some traction, though less than 10% that went to vote passed. But boards were making concessions to get proposals withdrawn.”
Compensation, concessions and clarity Although the compensation area is not the main focus for shareholder proposals, it is nevertheless a crucial issue – especially in an era where executive pay is under the microscope.
“Every company has a ‘say-on-pay’ vote – a tool for shareholders to express their feelings on compensation – and that is a better tool to express dissatisfaction with pay programmes,” notes Williams. “But shareholder proposals on compensation have been getting more traction,” which as Williams explains, acts as a means to address discrete pay issues.
“That said, compensation proposals are rare,” he adds. “Being a large-cap company makes it more likely though for a company to be targeted. While institutional investors look at the proxy statements of all their portfolio companies, they more closely scrutinise large-cap companies, which represent a significant proportion of their assets under
Chief Executive Offi cer /
www.ns-businesshub.com
management. Ultimately, the shareholder proposal process tends to lead to more engagement with investors, which is often what shareholders want.” Severance proposals that did result in meaningful action over the past three years were largely focused on resistance to excessive payments. Broadly speaking, those proposals were successful because large institutional investors such as BlackRock and State Street supported them. “When our clients were involved, the proposals led to more engagement with key shareholders, and some concessions were made,” says Chris Havey, a partner at Meridian. “When proposals focus on governance, many are concerned with getting an independent chair in place, or majority voting to approve director elections. Those issues are clear and straightforward, which is why those proposals are relatively common.”
Indeed, proposals concerning governance issues are generally most successful, and have brought many changes to how large companies run. Those positive changes to corporate governance ultimately trickle down to smaller companies as well. On ESG-related issues, however, the picture is more complex. Generally, they focus on issues of disclosure, where companies are asked to make public certain information that their competitors do not, which could harm competitive performance. Another common question is whether shareholders should have a say on climate action plans. For instance, if shareholders seek proscriptive goals for greenhouse gas emissions, it could damage a company’s performance.
Shareholder proposals on compensation, meanwhile, are sometimes withdrawn by the proponent – because a company can show it has made some concessions, often bringing pay or severance packages in line with accepted market norms.
“The kind of concessions made vary, but they tend to be in areas such as excessive severance arrangements over 2.99x base and bonus, which is typical for the market,” Havey says. “Normally, that would apply to just the cash part of the severance, but there have been attempts to apply it to both cash and equity. One client put in a policy that any cash severance above that level would be approved by shareholders, so the concession was to limit cash severance while removing the equity element from the equation.”
Shareholders who bring such proposals are usually aware of the company’s ability to make concessions – and that bargaining process is in their minds at the outset.
“Shareholders often put forward proposals that may not be in line with market practice, such as demanding lower severance amounts for
Chris Havey, partner, Meridian Compensation Partners
Nathan Williams, lead consultant, Meridian
Compensation Partners
“On
compensation, a shareholder proposal
might concern submitting severance arrangements to shareholder votes.”
29
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44
