Thursday, June 3, 2010

Say on Pay and Proxy Access – Start Thinking Now About Talking to Investors

The history of legislative and regulatory reform relating to Wall Street is one of egregious excess, followed by financial distress, resulting in laws and regulations being enacted. It first played out with the boom and bust of the Great Stock Market Crash of 1929, which gave us the Securities Act of 1933 and the Securities and Exchange Act of 1934. We saw a replay following the Enron/Adelphia/Worldcom/Tyco frauds in 2000, which resulted in the Sarbanes/Oxley Act. And now we are seeing the same scenario following the financial crisis of 2008 – 2009 as Congress is feverishly putting together a financial reform package.

I generally try not to pay too much attention to the legislative process, as things change frequently and the process is not pretty to watch. However, there are a couple of things that will likely be included in the current bill relating to corporate governance – proxy access and say on pay - that investor relations officers should be thinking about.

Corporate governance issues have traditionally been an area that falls within the purview of the Corporate Secretary or General Counsel with investor relations only becoming involved if the vote doesn’t look good or if some form of a contest is looming. As activist investors have increasingly turned to proxy proposals to agitate for corporate change, investor relations has gradually become more involved in the process because they are the ones that know the investors. If proxy access and say on pay are going to open up corporate governance to more public scrutiny, it behooves investor relations practitioners to start to get more engaged with the people who vote the proxies.

Of course, when you take a hard look at who does the voting, you realize that IR people have their work cut out for them. You can generally break down investor voting blocs into three categories: active long-term investors, passive investors and active short-term investors.

Active long-term investors usually don’t want to be bothered by this stuff. Portfolio managers and analysts want to analysis stocks, not get involved in corporate governance. Their compensation is benchmarked against their performance relative to an index, not against good corporate governance and they spend their time accordingly. The result is that these decisions are handled by either subscribing to one of the services such as ISS/Riskmetrics, handing it off to an internal committee if the firm is large enough, or by voting with their feet and selling the shares if they don’t like what management is doing. As a result, the typical investor relations officer usually doesn’t talk to the person casting the proxy vote.

Passive index investors can’t vote with their feet by selling the stock as long as a company is in an index, so they all have committees and policies regarding how to vote on governance items. From an investor relations perspective however, you never talk to these passive shareholders, so you don’t know anything about their committees.

Active short term investors are here today and gone tomorrow, so by the time they appear on a 13 D report, they may have well sold the shares and moved on.

I would suggest that investor relations departments need to be proactive in discussing potential vote issues with the people who actually vote the shares. I’ve written about this before (see my post of February 10, 2010), but here are a couple of suggestions to bridge this gap: First, well in advance of proxy season, investor relations officers, together with their securities law counsel, should schedule a number of calls to key investors (both active and passive long-term investors) to discuss current disclosure issues in areas such as compensation and governance. The calls should be designed as a dialogue to discover how these investors view the topics, not as advocacy. as you can’t solicit votes without a proxy statement. What investors are interested in can then be incorporated into your compensation and governance disclosures. Secondly, when you’re out on non-deal road shows, ask to spend five minutes at the end of a visit discussing the firm’s views on disclosure issues, whether they be compensation, governance or social responsibility. This actually makes for a nice break in the road show meeting rat race as it introduces a new topic into the discussion. In the larger firms this will mean that they will have to bring in someone at the end of the meeting, as there is usually a separate person that deals with proxy voting, but it is well worth the effort as it gives upper management an opportunity to hear investors’ concerns and thinking.

This doesn’t solve all issues, as sometimes the interests of investors about compensation and governance structures are different from management’s, but at least you’ll know prior to the vote being cast and can do more accurate predictions at proxy time.

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