Say-on-Pay Votes Are ‘Working’

Say-on-pay is working due to the influence of the proxy voting agents – but its affects are as of yet unknown.

(March 29, 2012)  —  Listed companies are taking increasing notice of proxy voting advisory firms when shaping the executive pay packages that are put to shareholders for approval, research published this week has found.

Listed companies are realising in growing numbers that the advisory firms’ advice has become more important to shareholders, a survey by The Conference Board, Nasdaq and The Rock Center for Corporate Governance at Stanford University has found.

The survey said: “The survey results clearly show that companies do respond to the ‘say-on-pay’ (SOP) policies adopted by proxy advisory firms. The majority of companies determine in advance whether their executive compensation programs are likely to receive a favourable recommendation from Institutional Shareholder Services (ISS) or Glass Lewis; and companies are likely to make changes to a program in anticipation of a negative recommendation from these firms. “

All areas of the compensation program are affected, the survey found, including disclosure, guidelines, and plan structure and design—although the degree to which these areas are affected varies considerably.

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The Dodd-Frank Act requires public companies allow shareholders the opportunity to cast an advisory vote on executive compensation- this is not a binding vote, but rejection of the vote is often viewed badly by shareholders and the market at large.

ISS and Glass Lewis were highlighted in the survey as having influence on companies in the United States. The two firms were reported to offer the same advice on votes 75% of the time, offering substantial influence over a company vote.

During the 2011 proxy season, no company that received a positive recommendation from ISS failed its SOP vote, and 12% of companies that received a negative recommendation from ISS failed their SOP vote.

“Evidence suggests that institutional investors respond to the voting recommendations of proxy advisory firms. For example, a negative recommendation from ISS, the largest proxy advisory firm, has been shown on average to influence between 13.6% and 20.6% of votes cast on management-sponsored proposals,” the survey said.

During the 2011 proxy season, 72% of companies reviewed the policies of a proxy advisory firm or engaged with them to receive feedback or guidance on their proposed executive compensation plan.

In the United Kingdom, the National Association of Pension Funds (NAPF) this week launched a joint initiative with Hermes Equity Ownership Services (EOS), under which pension fund investors will conduct open dialogue with some of the largest listed companies over their executive pay arrangements.