Record opposition this year to soaring CEO compensation sparked what some observers called a “shareholder spring” in the US and Europe. Executive pay packages for 12 S&P 500 companies failed to win majority shareholder support, while several high-profile CEOs in the UK lost their jobs at least partly as a result of investor “say on pay.”
While these compensation and governance ballot proposals can put corporate communicators on the defensive, they can do a lot to level the playing field in advance of their next annual meeting. That way, when shareholder votes become public, they're armed with effective messages and communications strategies.
First, some background. Financial and corporate communicators and their companies entered uncharted waters following the January 2011 adoption of new rules by the Securities and Exchange Commission. Mandated by the Dodd-Frank Act, these rules gave shareholders a voice in how executives are compensated.
While shareholders' votes in the US are only advisory and nonbinding and pertain to the previous year's compensation levels, anything less than full-throated support of executive compensation now sparks a big impact on reputation and executive authority. CEOs' loss of credibility, as measured by Edelman's 2012 Trust Barometer survey, also contributes to anxiety over executive pay. Trust in CEOs dropped to just 38% in 2012 from 50% in 2011, making boards of directors even more attuned to the reputational risks of a negative say on pay vote.
Faced with the prospect of higher rejection rates of CEO pay packages, what lessons can corporate communicators apply to next year's annual meeting season?
- Don't expect PR to do it alone: Several corporate departments play a role in communications around proposals voted on at the annual meeting. Clients should strive to ensure that PR is working closely with: investor relations, which typically liaises with institutional investors; the corporate secretary or general counsel, who oversees the conduct of the meeting and typically manages the outside proxy solicitation firm; management executives and board members.
- Recognize the importance of the proxy advisory firms: Proxy advisors, the two largest being Institutional Shareholder Services and Glass Lewis & Co., evaluate companies' proxy statements and counsel institutional shareholders on how to cast their votes. They are extremely influential, with shareholder support 28% lower at companies with an ISS “against” recommendation in 2012.
- Proxy advisory firms welcome meeting with companies well in advance of their annual meetings to explain their compensation plan and governance structure. PR should be looped in when a company knows the opinions of these firms, especially if they do not approve a compensation or governance proposal, to avoid surprises. Investor relations, which typically is in touch with major shareholders, offers another source of early warning if a compensation proposal meets resistance.
- Be proactive in your shareholder communications: Reach out to shareholders to explain the company's compensation structure and its link to performance. Shareholder opposition can sometimes be neutralized or the proposal amended after a dialogue with key investors.
- Take proactive steps if you anticipate a negative vote: If a company expects to receive less than 50% support for its executive compensation plan, it should prepare statements and responses in advance, clearing them with all relevant parties. Executives should anticipate questions they likely will receive at shareholder meetings and from the press. Reflecting recent shareholder meetings, it is prudent to anticipate and develop a contingency plan for outside protesters gaining a voice on the floor.
- Use the board in the communications process: Annual meetings are governance events. For that reason, the independent chairperson or, if the chairman is also CEO, the lead director should play a major role in the company's press release and communications strategy.
As board directors and executives face new governance challenges, so do communicators charged with explaining their policies. Forewarned is forearmed, however, and the prepared communicator can assemble information and allies to help navigate uncharted waters.
Darius Razgaitis is a senior account supervisor in Edelman's financial communications practice.