June 14, 2013
Of the twenty Russell 3000 companies who failed their say on pay votes as of mid-May, only two were supported by proxy advisory firms ISS and Glass Lewis, according to a report released this week by proxy solicitor Georgeson. ISS recommended against 18 of the 20 companies, while Glass Lewis recommended against 15 of the 20, and both cited problematic compensation practices and pay for performance disconnects as the primary drivers of the negative recommendations. On average, the 20 companies underperformed their peers on total shareholder return on a one-year, three-year and five-year basis, lending support to the commonly heard refrain that “say on pay” is really “say on performance.” Meanwhile, a separate study by transfer agent Broadridge and the PriceWaterhouse Coopers’ Center for Board Governance assessed the influence that retail investors have over say on pay votes, noting that although most shareholder engagement focuses on large institutional investors, retail investors (who make up, on average, a third of shares) are more likely to vote with management. The report notes that in key circumstances, successful engagement of retail investors could move the needle above 70 percent support. This is crucial, since companies below 70 percent support are likely to receive further scrutiny of their pay plans and possible recommendations against directors by proxy advisors if changes are not made in the following year. According to the report, despite the high level of retail support for management, “low rates of retail shareholder participation left 70 percent of retail shares un-voted.” The report notes that only 17 percent of retail voters that received a mailed notice to vote electronically actually voted while 36 percent who received full paper proxies voted.