Among the many requirements for Compensation Committees under Dodd-Frank is the heightened independence standard they must satisfy for any comp consultants. The Comp Committee has the authority to appoint, compensate and oversee compensation and other consultants. For most board members, “other consultants” or advisors would translate “attorneys.” Yet, what a chance for Comp Committees to get some real communication help.
If ever there was a time for compensation committees to clearly and credibly communicate, given the scrutiny they are under for creating and approving executive compensation, it would seem to be this proxy season. The first step in “Say on Pay” would be for the committee to clearly articulate their decisions in arriving at the executive compensation decisions. It gives them an important chance to “tell their story.”
“Directors must ensure that the CD&A—which is the primary tool for shareholders to understand executive pay—is straightforward, complete and written in plain English,” said Warren Batts, veteran CEO, chairman, director and NACD “Director of the Year” in a blog on executive compensation. “In addition, directors need to respond to shareholder questions and concerns as quickly as possible. I have stood up as chairman of the Compensation Committee more than once to explain what we were doing and why—and never had a negative comment afterwards.”
Compensation Committees that take the time to carefully explain the philosophy and background of its decisions is a sign of respect for shareholders. Getting advice on how clearly you’ve accomplished that assignment could be the most cost-effective risk mitigation tool of the season.
During a NACD Webinar, DC in the Boardroom: A Board Level Briefing on Proxy Access, the three attorney panelists—David Caplan a partner at Davis Polk & Wardell, John Gorman, partner at Luse Gorman and former Special Counsel, SEC Division of Corporation Finance and Annette L. Nazareth, also a partner at Davis, Polk & Wardell and former SEC Commissioner, all agreed that directors should enhance their communication with shareholders. They also agreed that the time to act is now.
During this period leading up to the proxy season, directors should be engaging in some form of self-evaluation to understand what their vulnerabilities are—do shareholders have concerns about executive compensation, the capabilities of the current board of directors or other governance issues?
Nazareth reminded the participants that “investor protections has been a focus of the SEC and one way of ensuring protection is good corporate governance.”
Directors should “consider ways to enhance shareholder communication so that you’re not in the position of your 3% shareholders feeling that they need to nominate their own directors because they are not being represented appropriately by the current board.”
With the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, power has shifted to shareholders. The 2011 proxy season is a game-changer as the rules require boards to seek shareholder support for compensation programs and even directorship candidates.
Directors, do you have a shareholder engagement program? Have you reviewed and assessed the board capacity for shareholder communication and dialogue? Have you discussed how you will handle increased dialogue and interaction with shareholders?
The board world has changed. Shareholders have greater power to influence board composition and executive pay based on the provisions of Dodd-Frank for proxy access, say on pay, limits on broker discretionary voting.
By remaining silent, boards increase the power of proxy advisors as the only independent guidance to shareholders on how to vote. Boards increasingly need to engage with key shareholders, initiating communication and dialogue.
Get started now.