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.
Have you given your board the tools it needs to navigate the coming proxy season? It’s up to you to see that your board is prepared.
The Dodd-Frank Act creates new requirements for board disclosure and greater transparency. Governance power has shifted to shareholders, who are now empowered to hold boards and management accountable. How your board moves forward in this new environment is critical.
CEOs need to see their boards as helping them to restore confidence in the system. If you wear the mantle of both CEO and chairman, it’s even more critical that you set the tone for clear disclosure and genuine engagement with shareholders. It sends a signal that you respect their importance in the long-term health of the organization.
The new disclosure rules encourage boards to build trust with shareholders through the application of sound principles, transparent communications and actively engaging with them to secure a favorable vote. Board members will need to become better communicators. But they need guidance in demonstrating independence and credible oversight. Some basic communication planning should begin now.
What may prove to be a best in class approach is for the board to articulate its principles, its own “Articles of Governance” to serve as the source for board communication and shareholder engagement. By reviewing its current identity, which resides in governance and legal documents, the board can craft a comprehensive board governance doctrine that prepares the board for the upcoming proxy season and beyond.
This proactive approach enables the board to discuss and decide in advance how it will handle critical issues. By working through issues in an atmosphere of calm, the board is better prepared to face a crisis and even avoid or mitigate one.
Disclosure in governance is an area we understand well and we would be happy to assist you.
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.
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