2012 Proxy Advisory Survey

2012 Proxy Advisory Survey

David F. Larcker, Allan L. McCall, Brian Tayan
The Conference Board, NASDAQ, and Stanford University. March

Study conducted by The Conference BoardNASDAQ, and the Rock Center for Corporate Governance at Stanford University shows that proxy advisory firms have a substantial impact on the design of executive compensation programs.

More than two-thirds of U.S. companies say that their executive compensation program is influenced by the policies and voting recommendations of proxy voting advisors like Institutional Shareholder Services (ISS) and Glass Lewis, according to new research from The Conference Board, The NASDAQ OMX Group, Inc., and Stanford University’s Rock Center for Corporate Governance. In particular, a majority of corporate boards are likely to change CEO compensation to gain a favorable “say-on-pay” recommendation from these firms.

The research — published in the latest issue of The Conference Board’s Director Notes — is based on a survey of 110 large and mid-cap public companies conducted this winter.

Key findings include:

  • Of surveyed companies, 72 percent review the policies of a proxy advisory firm or engage with a proxy advisory firm to receive feedback and guidance on their proposed executive compensation plan, and 70 percent report that their compensation program is influenced by the guidance or policies of these firms.
  • Companies are most likely to introduce performance-based equity awards, reduce or eliminate benefits, reduce or eliminate severance, change the construction of their peer groups, or enhance their proxy disclosure.
  • Over half (57 percent) of companies plan to seek input or guidance from a proxy advisory firm ahead of this year’s say on pay vote of shareholders.
  • Companies that received low level of support on their say-on-pay vote in 2011 are more likely to make changes to their compensation program this year. These firms are most likely to enhance disclosure (57 percent), introduce performance-based equity awards (36 percent), reduce severance (29 percent), change their target pay positioning (29 percent), or reduce compensation levels (14 percent).

“During the second year of implementation of the say-on-pay rules, the interest in this topic by the corporate community cannot be overstated,” said Matteo Tonello, Managing Director of Corporate Leadership at The Conference Board and founder of Director Notes. “We are pleased to collaborate with NASDAQ OMX and Professor Larcker’s team at Stanford, and we plan to continue to document the business practices that are developing in this area.”

“It’s evident that proxy advisory firms are inducing broad changes to executive compensation programs,” said Stanford Graduate School of Business Professor David Larcker, who co-authored the Director Note with PhD candidate Allan McCall. “In particular, while many companies check boxes that I would consider low cost, like enhanced proxy disclosure, others that are doing more costly things — reducing CEO’s pay, taking out benefits, and amending contracts that are in place. It’s not clear whether these changes are ultimately beneficial to shareholders.”

“Before this survey, we never had direct evidence,” added McCall. “It’s one thing to hear anecdotally that the board of a certain company revised a compensation practice for the specific purpose of securing the positive recommendation of ISS or Glass Lewis. It’s quite another to learn that the number of companies that do so can be as high as 70 percent.”

Source: “The Influence of Proxy Advisory Firm Voting Recommendations on Say-on-Pay Votes and Executive Compensation Decisions,” Director Notes, DN-V4N5.