How to Win a Proxy Fight Despite a "NO" Recommendation from ISS and/or Glass Lewis
There is no doubt that Institutional Shareholder Services ("ISS") and Glass Lewis, as advisors to institutional shareholders, have a significant impact on the level of shareholder support for a company's Say on Pay and Incentive Plan proposals. However, a "no" recommendation from either ISS or Glass Lewis does not necessarily mean that you will fail a Say on Pay or an Incentive Plan proxy proposal.
Instead, if you received a "no" recommendation from either ISS or Glass Lewis, it is critical that you take a proactive approach and promptly put in place a shareholder outreach plan to directly engage your larger institutional shareholders to discuss your pay decisions and to ask for their thoughts on the ISS/Glass Lewis "no" recommendation. The shareholder outreach plan is most effective when orchestrated by a cross-functional team, including your proxy solicitor, inside and outside legal counsel, the Compensation Committee's chair and compensation consultant and internal HR and investor relations team members.
One of the first tasks for the team is to have your proxy solicitor arrange for telephone calls with your larger investors, and it is most effective, if possible, to have the chair of the Compensation Committee lead the calls. If that is not possible, investor relations, internal legal and the head of HR should take the call. If brief talking points are prepared to organize the discussion on the calls, they should not have to be filed in advance with the SEC. However, if an actual script is prepared, it would likely be considered "solicitation materials" and need to be filed with the SEC as supplemental proxy materials.
Some of the larger and more prominent institutional shareholders include the following:
Because these institutions have voting guidelines that are broader than the bright line quantitative tests of ISS/Glass Lewis and they tend to look at the big picture and larger time horizons, often these institutions will not follow the voting recommendations of ISS/Glass Lewis. These institutions will, however, want a clear explanation and perhaps additional disclosure of how the pay decisions are in the shareholders' best interests.
If the institutions express support for the "no" recommendation, then you should consider what the vote will be with a "no" vote by the particular institutions and whether it results in less than a majority or less than 70% approval. A vote of less than 70% support will result in greater scrutiny of the Compensation Committee by ISS in the following year, including a requirement that the company disclose whether and how it has adequately addressed shareholder issues and what changes the company has made to its compensation programs. Our next Alert will cover under what circumstances the institutions will vote against the re-election of the Compensation Committee members.
If the Company wants to win the Say on Pay proposal, it has two options. Depending on what the Company hears from shareholders, the Company can:
For example, the following is a case study with a couple of examples of strategies for supplemental disclosures or amendments to reduce compensation.
In preparing for discussions with these shareholders and preparing any amendments to compensation, it is important to know each of their proxy voting guidelines, as summarized in the charts. More significantly, it is important to know about these guidelines and the advisors' policies well in advance of the annual meeting when designing and disclosing the CEO's pay in the proxy to avoid a recommended "no" vote.
CLICK HERE TO VIEW VOTING GUIDLINE CHARTS
For more information, see our Alerts titled "The Importance of Good Compensation Committee Minutes – 7 Tips" and "How to Win Say on Pay Proposals." If you would like additional information on the topic discussed, please contact any member of Orrick's Compensation and Benefits Group.