If investors are dissatisfied with executive pay, voting results during this proxy season are certainly not reflecting that sentiment. An overwhelming majority of shareholders at the top banks gave their approval on executive pay. However, shareholders have shown a desire to have ongoing input into the pay decision-making process by strongly supporting annual say on pay proxy votes.
The enactment of Dodd-Frank makes it mandatory for all firms—not just TARP-CPP participants—to put advisory approval of executive pay on their annual proxy ballots. The Act also requires that shareholders be given the choice of annual, biennial or triennial votes on executive pay, with the opportunity to change the frequency at least once every six years.
This Alert summarizes McLagan research relating to the voting results among the largest 50 U.S. banks by asset size.
Our analysis focused on 50 of the largest U.S. banks by asset size, all of whom had reported voting results at the time of this publication. A list of firms in our study is included in the appendix.
Our analysis shows that, among the nation’s largest banks, 100% received approval from shareholders on executive compensation. At the median, 94% of bank shareholders voted affirmatively on pay for senior executives.
In addition, there was little dispersion in the voting counts, with three-quarters of firms reporting over 87% approval rates.
The lowest affirmative vote was 65% and the highest 99%.
When asked how frequently they want a say on pay, shareholders clearly supported annual votes. Ninety percent of firms tallied an annual frequency with the remainder receiving votes for a triennial say.
Management’s recommendation was not followed at a number of firms, as 23% of banks suggested a triennial vote. In these cases, management most often cited that effective measurement of pay and performance is better made over a period of three years.
Shareholders unanimously voted with management when the recommendation was annual, while only 44% of firms reported shareholder support when a triennial recommendation was made. Firms with less than $25 billion in assets were twice as likely to recommend a triennial vote than larger firms.
Does the ISS Recommendation Matter?
Of the top 50 banks, ISS recommended against nine management say on pay proposals this proxy season. In none of those cases did the ISS recommendation result in a negative vote; shareholders approved all proposals. It is important to note that while shareholders did not ultimately heed the recommendations of ISS, the impact on voting can be meaningful.
At the median, the negative ISS recommendation resulted in a 21% loss of favorable votes, somewhat lower than the 25% - 30% seen this year across all industries.
When considering its vote recommendation, ISS assesses a firm’s executive pay practices in two primary areas: “pay-for-performance” and “problematic pay practices.” Most companies that received an unfavorable recommendation from ISS ran afoul of ISS’s Pay-for-Performance policy. ISS’s Pay-for-Performance policy applies only if a firm’s one- and three-year total shareholder return fall below median of an ISS designated group of peer firms.
To mitigate the impact of a negative vote recommendation from ISS and other proxy advisory firms, many companies (both financial and non-financial) are actively engaging with shareholders to explain or justify perceived “problematic” practices. In our experience, active engagement with shareholders has been the most effective approach for mitigating negative vote recommendations. Issuing additional proxy solicitation materials that proactively address shareholder concerns and focus on the positive aspects of company performance, governance, and compensation practices has been the most effective communication tool. Merely issuing a rebuttal or critique of ISS policies has not been as effective for most companies.
What Can we Conclude?
If shareholders at the nation’s top banks are dissatisfied with executive pay, they aren’t speaking up. Regardless, firms must continue to be mindful of the potential impact of the shareholder vote on pay. Although non-binding, lessons from broader industry tell us unsuccessful say on pay ballots do have repercussions. In addition to the unfavorable publicity a failed “say on pay” proposal can bring, more serious ramifications can include votes against directors and, in extreme cases, shareholder lawsuits alleging breach of fiduciary duty.
Although infrequent, lawsuits do have precedence. In 2011, for example, more than 53% of Beazer Home's shareholders voted against the company’s “say on pay” resolution. Shortly after, a Beazer shareholder filed a derivative lawsuit against the company, as nominal defendant, the company’s board, its accountant and its compensation consultant. The lawsuit alleges that compensation increases for executives “violated the company’s pay-for-performance policy and favored Beazer’s CEO and top executives at the expense of the corporation.”
To avoid these outcomes and prepare for next proxy season, there are several ways firms can avoid potential pitfalls:
- Analyze the shareholder base to determine the level of ISS or other advisory firm influence.
- Monitor changes in each institutional investor’s proxy voting guidelines.
- Audit compensation and governance plans and programs for any potential exposure to guidelines of proxy advisor groups and institutional investors.
- Track 1-year, 3-year, and 5-year TSR relative to your ISS-established peer group.
- Use the proxy Compensation Discussion and Analysis to clearly tell the “story” of executive pay and explain pay and governance decisions.
- Be prepared to engage in meaningful dialog with shareholders.
- Determine whether any problematic pay and/or governance practices exist, and make adjustments as appropriate.
Of course, proxy advisory firms are constantly updating and changing voting guidelines. Future McLagan Alerts will monitor the ongoing impact of say-on-pay and changes in the way advisory firms determine their recommendations.