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Jul 08, 2013

ProxyPulse argues for greater shareholder engagement

New proxy report shows link between negative director votes and failed say-on-pay votes by shareholders.

The second edition of ProxyPulse, released on July 8, shows that companies that aren’t getting at least 70 percent approval for their compensation plans still need to engage their retail shareholders more to strengthen support for these plans.

Produced collaboratively by Broadridge Financial Solutions and PwC’s Center for Board Governance, the latest ProxyPulse report covers 2,858 annual shareholder meetings held from January 1 through May 23, 2013, or 55 percent of the total estimated number of meetings that will take place during this proxy season.  

Shareholder votes in favor of companies’ say-on-pay proposals were generally strong. But 186 companies, or one in 10 that presented pay proposals at their annual meetings, failed to reach the 70 percent support benchmark that proxy advisory firms use as a measure of success. More than two-thirds of companies drew overwhelming support -- over 90 percent approval -- for their pay plans.

Smaller companies, which continue to get less support for their say-on-pay proposals than larger ones, need to rethink how they communicate with institutional shareholders and how to spur greater participation by retail investors, the report said. On average, only 29 percent of retail shares are voted, versus 91 percent of institutional shares.

Most instructive are the 77 companies that received 60 to 69 percent support for their pay plans, says Chuck Callan, head of corporate affairs at Broadridge.

‘If they did more outreach with their shareholders, particularly their retail shareholders because of unvoted shares, [they] could potentially hit or exceed the benchmark,’ says Callan. ‘It’s not that retail shareholders vote in lockstep. It’s just a matter of getting to them and making sure they’re engaged.’

Broadridge and PwC conducted a correlation analysis for the first ProxyPulse report to determine if there was any link between failed say-on-pay votes and failed director re-election votes. Contrary to one hypothesis that shareholders, given the chance to vote on company pay plans, might have less displeasure to express by voting against directors, ProxyPulse saw a high correlation between failed say-on-pay votes and failed director votes.

‘Generally speaking, when it rains it pours. When you see companies that may have negative sentiment in one area, there can be negative sentiment in multiple areas,’ Callan says.

The new report reconfirmed the tendency for directors on the boards of larger companies to receive higher levels of shareholder support than those at smaller firms. Across all companies, 81 percent of directors up for election received over 90 percent shareholder approval, while nine out of ten got at least 80 percent support.

Less than 3.0 percent of directors at large caps had less than 75 percent approval by shareholders, while 7.0 percent of small caps directors and 10 percent of micro cap directors received less than 75 percent approval. As noted in PwC’s 2012 Annual Corporate Directors Survey, three out of five directors said they would be concerned about re-nomination of a fellow director who got less than 75 percent support.

Proposals for board declassification received overwhelming support, with over 97 percent at small, mid and large cap companies. With annual elections much more pervasive at larger companies, more than 75 percent of board declassification proposals were at companies that are mid cap or smaller this year.   

The need for more engagement with shareholders, especially retail owners, was a clear message of the report.

‘Broad engagement gives companies a more complete view of shareholder sentiment and I think from a governance standpoint, that’s important,’ says Mary Ann Cloyd, leader of PwC’s Center for Board Governance. ‘Increased demand for better clarity and transparency in shareholder communications -- that’s a clear direction for governance professionals.’

For the full version of the ProxyPulse report, click here.

David Bogoslaw

Associate Editor and Online features producer for Corporate Secretary