Bob Lamm's Golden Nugget's of Corporate Governance
Photo by Eric Roy/ Golden Nugget Casino, Las Vegas, late 80’s.

On September 30, Bob Lamm moderated a panel at a “Say-on-Pay Workshop” held during the 11th Annual Executive Compensation Conference in Las Vegas, Nevada.  The Conference is an annual event sponsored by and – and emceed by our good friend, Broc Romanek – and features many of the pre-eminent practitioners in corporate governance and securities law. 

The panel, entitled “50 Nuggets in 75 Minutes,” may just be the CLE equivalent of speed dating – each of five panelists covers 10 “nuggets” – practical and other takeaways to help them do their jobs better – in a 75-minute panel.

Here are Bob’s 10 “nuggets,” reprinted courtesy of the Conference sponsors and Broc. 

1.    Engagement is a Two-Way Street – At this stage of the game, shareholder engagement is – or should be – a given, and one of a company’s normal responsibilities.  Along with that is the mantra “engage early and often”; in other words, don’t wait until you are faced with a negative vote recommendation to start reaching out to your major holders. 

What may not be part of the mantra is that engagement is a two-way street.  Your job (and that of your colleagues and even some directors) is to take the time to educate your investors, and let them know that you’re credible and trustworthy.

However, another part of the job is to listen to your investors’ opinions and suggestions; where appropriate, to implement those suggestions; and where inappropriate, to explain why.

One area where this can be very important is executive compensation.  If a major investor says, for example, that it wants you to consider return on invested capital as a compensation metric, make sure your compensation committee knows of the suggestion, and in your next proxy statement either disclose that you’ve adopted it (and that it resulted from your engagement process) or that you didn’t (still disclosing that it resulted from your engagement process, but also why it didn’t work for you).  This will inform the world that you’ve really listened to your investors, even if you don’t take their suggestions. 

2.    Prominently Disclose Executive Pay Program Changes Year-to-Year – Increasingly, companies are tweaking their compensation plans every year.  These changes may be large or small, and they can result from a variety of sources – changes in tax laws or investor suggestions, among other things.  Particularly when these changes are shareholder-friendly (but even if they’re not), they should be disclosed – and not just disclosed, but prominently disclosed.

One great tool is to include a table with columns in which you list the plan, describe the change, and state the reason or reasons for the change (including if it was made in response to shareholder suggestions).  If the change is buried in paragraph after paragraph of legalese, your shareholders are likely to miss it.  This can be less than helpful if the change is shareholder-friendly, and damaging if it’s not, as you may be criticized not only for the change but also for trying to bury it.

A table or other graphic that shows changes in your compensation plans can be accompanied by a more detailed description, but think twice if that’s even necessary.  In any case, it shouldn’t supplant the table or other prominently placed, easy-to-follow disclosure.  My former company, Pfizer, has used tables of this type, and has received may compliments on it from investors and others.

3.    When It Comes to Your Compensation Disclosures, KISS – Compensation plans can be very complex.  The complexity may be driven by tax or other considerations, but in an effort to make sure that nothing material is omitted from your proxy statement disclosures on compensation, too many immaterial provisions are often included.

If you want to know why your investors may turn to ISS or Glass Lewis reports, that’s the reason why – your own may be far too complex and detailed.  In fact, these complex, wordy disclosures may incorrectly give the impression that your plans and your overall compensation program are far more complicated than they are.

Keep your disclosures simple and to the point, and focus on the issues that are (a) really material to the plan and (b) of interest to your shareholders.  Keep your paragraphs short; use bullet points with explanatory lead-ins (possibly in bold type) to save the reader from having to read the entire text to figure out what it is you’re saying; and – most important – precede the narrative with a table showing the elements of your compensation program and only the key provisions of each.  And remember – it’s a summary; you don’t have to include a discussion of every plan provision, particularly if the table is accompanied or followed by a detailed narrative discussion. 

4.    Draft Your Compensation Disclosures Defensively – If you had to file supplementary proxy materials in the past, think about why you had to do so and about whether you can avoid having to do so this time around.  Of course, sometimes there’s no alternative, such as when ISS or Glass Lewis gets a basic fact just plain wrong or makes a gross analytical error.

However, in other cases, it may be because you didn’t draft your proxy statement defensively – i.e., you didn’t anticipate the substantive criticism of your compensation program or of a director’s independence.  Take a look at the prior year’s ISS and Glass Lewis reports, your notes of meetings with shareholders and other communications from shareholders and note any criticisms leveled at you over the course of the year. And then when you start working on your next proxy statement, take this information into account and defend yourself accordingly.

In my opinion, relying upon supplemental proxy materials is risky and reminds me of the old saying that you never get a second chance to make a first impression.  That’s particularly true during the proxy season, when the investors whose votes are most important may never even get to read the supplemental materials.  So minimize the chances that you’ll have to file supplemental materials by drafting defensively in the first instance.

5.    Don’t Feel Obliged to Make Pilgrimages to Rockville – Some companies feel that they are obligated to visit ISS every year, whether or not there’s anything new or anything that needs to be discussed.  I’m not sure where or why this practice originated; perhaps the thought was to mimic Holy Roman Emperor Henry IV, who went on his knees to see Pope Gregory VII in the hope of reversing his excommunication.  (For the record, it worked.)

However, unless there is something you need to bring to the attention of ISS, there’s no need to reach out to them – much less to visit in person.  From the perspective of ISS, it’s like having an unwanted relative come to visit you; you have to put her up and put up with her for no apparent reason.  If you do have something you want to discuss with ISS, such as a new compensation plan or something along those lines, set up a conference call.  It takes much less time, and the folks at ISS will be happy that you saved them the time and inconvenience.

6.    Don’t Disclose Something Just Because It Makes You Look Good This Year – Unless You Know You Will Do Same Next Year – In preparing your proxy statement, you need to take a long view and consider whether disclosures that look good this year will look as good next year.  For example, you may be tempted to provide realized pay disclosure this year, because it will show a decline from one or more prior years.  However, you need to think about what the disclosure will look like next year.  What if the stock price goes up and you have to include in realized pay all the gains resulting from option exercises?  Even if the stock price doesn’t rise much, will options be exercised next year because they are approaching their expiration dates?

And you also need to think about how it will look if you include disclosures this year and omit them next year because they don’t look good.  At least some of your investors will notice (and likely so will ISS and/or Glass Lewis) – and you’ll have to explain why you didn’t include the same information, making you look a bit sneaky.

7.    Know the Voting/Governance Policies of ISS, Glass Lewis AND Your Major Institutional Owners – It’s pretty easy to find the voting and governance policies of ISS, Glass Lewis and, most importantly, your major owners.  You should check these policies when crafting your disclosures, because if there’s a hot button you can hit, you want to hit it.  (And if you can’t hit it, you may want to explain why – remember what I said about defensive drafting.)  Of course, you also want to consult these policies when you are adopting new plans or tweaking old ones, to make sure your plans are as user-friendly as possible. 

It may seem like a silly point, but you’re probably better off not printing out the policies and keeping them on your desk or in a drawer, because the policies may change from year to year and you don’t want to overlook the changes.  Instead, save them as bookmarks or favorites in your web browser so you’ll proceed to the latest version (and check that it is the latest version before you rely on it.)  Among other things, if you find you have questions about an investor’s policy, it may afford a great opportunity to engage.

 8.    Don’t Just Say You Welcome Engagement; Give Specifics – This is a pet peeve of mine.  So many companies provide proxy statement disclosure saying that they welcome engagement, encourage their directors to engage, etc.  However, these statements, without more, always strike me as shallow or even meaningless.

It’s nice to know that you welcome engagement, but did you actually engage?  Did your directors do so?  What did you discuss?  What feedback did you get and how did you react to it? This type of disclosure can make a difference in the ISS and Glass Lewis recommendations on say on pay votes.  In fact, when you say you “welcome” engagement but say no more, you’re creating the impression that you didn’t actually engage.  Again, Pfizer has done this and been praised for it.  Some other companies that have done this are FedEx and Weatherford International.

9.    Don’t Let Your Senior Management Talk to Investors About Your Executive Pay Program – This rule must be applied uniformly, without regard to the brilliance of your management or whether or not the question raised about your compensation program is hostile.  I can cite so many examples; for one, I recall the case of a CEO who was asked a very benign, technical question about his compensation during the Q&A portion of his company’s annual meeting.  Rather than refer the question to a member or the chair of the compensation committee, he wanted to look smart and answer it.  However, he got it wrong, and when he realized that he’d made a misstatement he had to backtrack and correct his error.  Not a big deal perhaps, but why take the chance that you’ll get it wrong and look uninformed or stupid in front of your shareholders? 

Of course, if the question is hostile, that’s an even stronger reason for the management not to tackle it and instead refer it to someone else.  It’s just plain silly for a CEO or other member of management to try to defend his pay package; that’s the role of the compensation committee, and there’s no reason why one of its members shouldn’t handle it. (Among other things, if your CEO also serves as chair and refuses to refer any questions to directors, he/she will likely create or reinforce the impression that he’s an imperial CEO and that the board is just a rubber stamp.)

10.    Make Sure At Least One Member of Your Compensation Committee Is “Investor-Ready” – I’ve already said that management should never, ever answer a question about its own compensation.  However, this means that there needs to be at least one member of the compensation committee who can talk intelligently and intelligibly to shareholders about the committee’s take on compensation generally or the compensation of a particular executive. 

If you don’t think that any of your compensation committee members can tackle questions, then train them and prep them.  I heard a great and hopefully apocryphal story at last year’s conference about a compensation committee chair not being adequately prepped for an investor meeting.  When he was asked why executive compensation was based upon a particular metric, he turned to the head of HR who had accompanied him to the meeting and said “That’s a great question – why DO we use that metric?”  Just sayin….