Board Response to Management Say-on-Pay Frequency Vote (U.S.)
Background and Overview
Under the Dodd-Frank Wall Street Reform & Consumer Protection Act, the SEC required U.S. corporate issuers to provide shareholders with an advisory vote to choose the preferred frequency of management say on pay (MSOP) votes at the first annual shareholder meeting occurring on or after Jan. 21, 2011, and at least every six years thereafter. The resolution allowed shareholders to vote for a frequency of every year, every two years, or every three years.
Key Changes Under Consideration
ISS is proposing the following new policy/vote recommendation with respect to MSOP frequency:
- Vote WITHHOLD/AGAINST on all incumbent director nominees if the board implements an advisory vote on executive compensation on a less frequent basis than the frequency which received the majority of votes cast at the most recent shareholder meeting at which shareholders voted on the say-on-pay frequency.
- Vote CASE-BY-CASE if the board implements an advisory vote on executive compensation on a less frequent basis than the frequency which received a plurality, but not majority, of votes cast at the most recent shareholder meeting at which shareholders voted on the say-on-pay frequency, taking into account:
- The board's rationale for choosing a frequency that is different from the frequency which received a plurality;
- The company's ownership structure;
- ISS' analysis of the company's executive compensation and whether there are compensation concerns or a history of problematic compensation practices; and
- The previous year's support level on the company's say-on-pay proposal.
- The difference between the frequency adopted and the frequency supported by shareholders.
Intent and Impact
In cases where the MSOP frequency receives the majority support of the votes cast (i.e., 50 percent or more), companies should implement the option preferred by shareholders, regardless of whether it is the same option recommended by the company. This policy is akin to ISS' policy to recommend withhold/against votes for directors when the board fails to act on a shareholder proposal receiving majority of votes outstanding for one year, or majority of votes cast twice in the last three years. However, in this case, the policy is triggered after one year of receiving majority of votes cast. This is considered appropriate given that the MSOP frequency vote is a management proposal, not a shareholder proposal. Further, the fact that there were three options and one such option received a majority of the votes cast strengthens the argument that such option is the preference of shareholders. It is also noted that the MSOP frequency vote does not occur every year. Therefore, the opportunity for two majority of cast votes within three years does not exist.
In cases where no option received a majority of the votes cast, the preference of shareholders may be unclear. If no single frequency receives majority support, the choice preferred by plurality vote may not represent the choice preferred by the majority of the company's shareholders. Therefore, if a board implements an option that is less frequent than that which received a plurality, but not majority, of votes cast, additional factors should be taken into consideration including the board's rationale for implementing a less recurring say-on-pay vote, ownership structure, compensation concerns, and say-on-pay support level from the prior year:
- Board's rationale:If the board is implementing a less frequent say-on-pay vote, its rationale for doing so should demonstrate how a less frequent vote would be more beneficial to shareholders, compared to a more frequent vote which provides shareholders with a greater opportunity to voice their concerns;
- Ownership structure:If the company has a shareholder with a significant ownership stake, this may be considered in the context of the shares cast for each frequency option to determine the effect the significant owner could have had on the vote outcome;
- Compensation concerns:If ISS has identified significant executive compensation concerns or a history of problematic compensation practices, a more frequent MSOP vote may be crucial to give shareholders the ability to encourage improvement and provide feedback to the board;
- MSOP support level:Significant levels of shareholder disapproval on the prior year's MSOP may also indicate that shareholders would benefit from a more frequent MSOP vote that would allow them to monitor and provide feedback to the board.
With regard to the frequency implemented by the board, ISS is not concerned with cases where the board implements a more frequent say-on-pay vote than that which received a majority or plurality. In line with good corporate governance, a more frequent advisory vote provides shareholders with greater opportunity to voice their concerns. Therefore, boards should not be penalized for providing shareholders the opportunity to vote on a company's executive compensation practices on a more regular basis.
Investors supported annual MSOP at 79 percent of companies, followed by tri-annual MSOP at 17 percent, based on a majority of votes cast, as of Aug. 17, 2011. Twenty-five percent of the companies have a preferred frequency different from the management recommendation. Based on available disclosure, less than 1 percent of the companies chose to implement a frequency that differs from the frequency preferred by shareholders. Therefore, the impact of recommending a vote to WITHHOLD/AGAINST on all incumbent director nominees if the board implements an advisory vote on executive compensation on a less frequent basis than the frequency which received the majority of votes cast at the most recent shareholder meeting is expected to be minimal.
Request for Comment
Please feel free to add any additional information or comments on the proposed policy change. In addition, ISS is specifically seeking feedback on the following:
- In cases where a company fails to adopt an MSOP frequency that received majority support by shareholders, should there be additional considerations given to these companies?
- In cases where a company implements an option that is less frequent than that which received a plurality, but not a majority, of votes cast (e.g., one year received 43 percent of votes cast, two year received 1 percent, and three year received 39 percent, excluding abstentions), would the proposed factors help your organization analyze such situations? Are there other factors that your organization would recommend?
To submit a comment, please send via e-mail to policy@issgovernance.com.Please indicate your name and organization for attribution. While ISS will consider all feedback that it receives, comments will not be published without attribution.
All comments received will be published as received, unless otherwise requested in the body of the e-mail submission.