Impacts of a Negative Say on Pay Recommendation From Major Proxy Advisors

Farient Advisors took a deep dive into say-on-pay recommendations from both Institutional Shareholder Services (ISS) and Glass Lewis (GL), the two largest proxy advisors, and their impacts on vote results at S&P 500 companies. The article reiterates the fact that a negative recommendation from ISS has a greater impact than a negative recommendation from GL, but it provides a detailed breakdown on the variability within that statement.

• If both ISS and GL recommend against, the median support level from investors is 54%. 
  • When ISS recommends against but GL recommends for, the median support is 70%. 
    • The reverse (ISS for, GL against) has a median support level of 86%.
      
      
• If an SOP vote receives less than 70% support, ISS will perform a qualitative analysis of the company’s shareholder engagement and response the following year. For GL, the responsiveness review is triggered at 80%.

The article highlights some illustrative cases demonstrating the variability within the statistics. The authors compare results at Chipotle and Kraft Heinz, noting that each received an against recommendation from ISS (and a for from GL). However, Chipotle nearly failed the vote, getting 51% support versus 84% support for Heinz. Chipotle made several discretionary adjustments in response to the pandemic which resulted in above-target awards and a lower level of shareholder support. Heinz saw low support (78%) in 2020 and implemented an extensive shareholder engagement process. Given that changes might take a year to show up, ISS still identified a pay-for-performance misalignment and recommended against in 2021, but the engagement efforts appeared to pay off.

The cases are central to the article’s overall recommendation. Robust shareholder engagement, effective communication, and transparent disclosures can markedly improve shareholder vote results and blunt the impact of an against recommendation from a proxy advisor.