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Apr 05, 2015

Leveling with investors in the proxy statement

Institutional investors more and more are calling for straightforward explanations of how director qualifications and executive pay tie into strategic goals

When George Orwell famously said ‘the great enemy of clear language is insincerity’, he wasn’t referring specifically to proxy statements. Still, it’s fair to wonder whether he might have been on to something when it comes to documents full of information that often don’t tell investors very much.

In its recent proxy season preview for 2015, EY’s Center for Board Matters summarizes findings based on conversations with 50 institutional investors, investor associations and advisers about their corporate governance views and priorities. The center gleaned additional insights from investors, directors, corporate secretaries and advisers through ‘proxy season dialogue dinners' in New York and Chicago. Although topics ranged from board composition and refreshment to executive compensation, a consistent through-line was investors’ dissatisfaction with the level or quality of companies’ disclosures.

For example, while companies are making more concerted efforts to describe directors’ qualifications in their proxies, just 24 percent of investors surveyed think most companies do a good job of explaining why they have the right directors in the boardroom; 76 percent say companies aren’t doing this well. Fifty-one percent of long-term institutional investors would like to see better disclosure about board composition, director diversity, skill sets and refreshment in proxies.

When it comes to executive pay, 41 percent of investors seek enhanced disclosure in proxies. ‘There is a general consensus that pay disclosures have become dense and uncommunicative. The use of tables and charts, when applicable, is generally preferred. Some investors also express interest in seeing more realized/realizable pay disclosures and additional clarity around how the goals of the compensation program align with company strategy, including sustainability goals,’ the center’s report notes.

‘Other than the numbers already provided, what I heard from institutional investors from these conversations is that they’re saying, You’re giving me a lot of detail but what is it you’re saying? Over and over again I heard that,’ says Kellie Huennekens, assistant director at the center. ‘And I found that fascinating because there’s so much disclosure on executive compensation. Just pages and pages.’

She doesn’t believe companies are trying deliberately to conceal things about their policies and practices in their proxies, and says how the proxy comes off depends largely on the investor. ‘Some of them really appreciate that level of detail. And what others are looking for is the big picture,’ she observes. ‘And to some extent even investors who appreciate the detail also want to know what the bottom line is, how it ties into strategy. That is fundamentally what they’d like to see more clearly in the proxy statement disclosures and in the engagement conversations.’

Wintergreen Advisers, whose criticism of Coca-Cola’s proposed 2014 equity plan garnered a lot of attention, recently praised the company’s board for ‘beginning to take a tougher line with management. It took the view – shared by us – that [CEO and chairman] Muhtar Kent didn’t get the job done for Coke shareholders in 2014.’ In an email to Corporate Secretary, however, the value investor calls out Coke’s proxy statement for making ‘a big deal about Muhtar respectfully declining his $2.5 million bonus, but glosses over the fact that his stock and option awards rose by $2.3 million, essentially making him whole. The 10-year equity options he was granted are likely more valuable than cash, and they vest immediately if he is replaced or if there’s a change-of-control event.’

After pointing out that Coke fell short on ‘every company performance factor used to determine annual incentives’, Wintergreen says the performance hurdles the company has set for itself for 2015 are low. It also points out that disclosure of $873 million of ‘asset impairment/restructuring’ expenses over the past four years is buried on the penultimate page of the proxy statement.

Earlier this year, the National Association of Corporate Directors published a summary of discussions held in October by the Compensation Committee Chair Advisory Council. One of the concerns voiced by delegates is that disclosing performance goals and targets could reveal confidential strategic details to competitors. While several participants granted this, they said ‘compensation committees can find ways to satisfy investors’ desire for more disclosure about the link between goals and compensation outcomes without harming the company’s competitive standing.’

Compensation committees and the larger teams responsible for telling companies’ stories need to think carefully about this and check their sincerity about having their proxies actually serve the people they’re designed for – because more and more investors are growing tired of proxies that don’t level with them.

David Bogoslaw

Associate Editor and Online features producer for Corporate Secretary