Better late than never, as they say. The law firm of Wachtell, Lipton, Rosen & Katz — famous for fending off and fighting against shareholder demands — seems to be turning the page on its traditionally contentious approach. Perhaps best known for creating the “poison pill” takeover defense, Wachtell, Lipton has been a staunch defender of corporate control. The corollary to that was the strong perception over the years that the leading corporate law firm had very little tolerance for interference of any sort from investors and shareholders, particularly when it came to corporate governance issues. It is therefore noteworthy that Wachtell, Lipton is now advocating a strategy for its clients that emphasizes speaking with, and listening to, investors instead of more obstructionist strategies.
Indeed, in a recent company memorandum on “say-on-pay” voting results from the 2012 proxy season, the firm emphasizes a kinder, gentler strategy on “how to win the vote”:
The following are several actions that a company may wish to consider taking to help achieve a successful say-on-pay result.
- Understand How Compensation Programs Stack Up Against ISS and Shareholder Standards. While there is no need to conform executive pay practices to the standards of ISS and institutional shareholders, companies should understand how their practices deviate from such policies and be prepared to explain why their practices differ. In addition, companies should understand where their practices deviate from ISS standards.
- Disclosure. Companies should include an executive summary to the CD&A section of their annual proxy that clearly states its targets (to the extent not competitively harmful) for performance-based compensation, the actual performance and the payout based on that performance.
- Assemble a Task Force. In advance of the proxy season, companies should identify a task force to evaluate the prior year’s say on pay vote and consider issues that might arise with respect to compensation matters in the upcoming proxy season.
- Know Your Limits. … Comments should focus on factual errors in the report and on toning down rhetoric in the report that may be inflammatory but irrelevant to the say on pay question. While ISS is not always willing to fix errors in its reports, it is sometimes willing to do so.
- Reach out to Shareholders. No technique is more effective in winning the vote than direct shareholder outreach. The difference between companies that have passed and those that have failed the vote in the face of a negative ISS recommendation is often willingness to engage directly with shareholders.
- Importance of Listening. Meetings with shareholders should be viewed as an opportunity to listen to shareholder concerns.
- Who Should Speak. In our view the question of who should speak with a shareholder should be evaluated based on the reason for the shareholder’s concerns about the company’s practices and the relationships that may exist with a particular shareholder.
- Use Relationships with Investment Decision Makers. Companies should consider reaching out directly to those making investment decisions.
- Supplemental Materials. Many companies have filed supplemental proxy materials as a way to communicate directly with their shareholders.
- Changing Compensation Practices. While ISS has made clear that prospective commitments to change compensation practices will not be effective in changing its recommendation, ISS has changed its vote recommendation where companies have agreed to change compensation practices retroactively. This will not be a solution for most companies, nor should companies make substantive decisions not otherwise in the best interests of its constituents in order to win the support of ISS. However, it has proven successful in certain circumstances and may be appropriate where a company feels upon reflection that the criticism leveled by ISS or by other investor groups is valid.
We have on occasion touched on a number of these points, including in last year’s Compensation Discussion and Analysis Template and the just-published Visionary Board Leadership Report, which stresses among other things that a board focus on better shareowner communication — with an emphasis on listening.
If corporations and boards embrace this advice (they should) and investors take the opportunity to ramp up their engagement efforts with the companies they own (they should), we may just see the number of say-on-pay “no” votes decline from the 54 failed votes thus far this year. The purpose of say on pay all along was to get people talking. It looks like that may just be happening.