by Barbara Blackford
What are the biggest corporate governance challenges and
issues for 2012? I spoke with a number of investors and other governance
experts, and here's what they said:
- Executive
compensation will continue in the spotlight.
Jonathan Feigelson, general counsel and head of corporate
governance, TIAA-CREF predicts that executive compensation will continue to be
a lightning rod issue, especially during such volatile economic times. "In
2011, the expanded availability of say on pay proposals provided investors an
alternative avenue to express their views on corporate pay programs and
shareholders will most certainly continue to make their views known during
2012."
Mike McCauley, Senior Officer, Investment Programs &
Governance / Florida State Board of Administration (SBA) agrees, and predicts
that "in the U.S., year two of say-on-pay will be much more bumpy than 2011, as
many investors refine their approach to analyzing corporate compensation
frameworks. In response, many companies have made significant changes to their
compensation elements, or have plans to do so in early 2012. One of the key
points of discussion and review will be a company's peer group and the dynamic
between compensation levels and corporate performance. Advisory services have
made revisions to their methodologies, and there will likely be a laser-like
focus on some of the more granular elements of compensation design (LTIP
metrics, stretch goals, etc.), peer group design, and the quality of advice
provided by consultants to compensation committees."
Rhonda Brauer, Senior Managing Director - Corporate
Governance at Georgeson, adds more color. "In the second year in which
most public companies will have their shareholders vote on their executive
compensation, there are a few factors that should make it even more challenging
than in 2011. First, there is a combination of the impact of the "Occupy
Wall Street" phenomenon - with its ongoing focus on the 99% versus the 1%,
along with the still high US unemployment rate. Second, I have a sense
that investors feel that the average vote for say-on-pay was too high last
year, that they should have voted against more executive compensation packages
and that more companies should have lost their votes. In addition,
all companies are going to have to contend with a more complicated and
unpredictable ISS pay-for-performance analysis, notwithstanding ISS's
well-intentioned purpose to focus more on the longer term. While
all companies should continue to follow best practices in telling their
executive compensation stories in the clearest and most compelling way
possible, many will face challenges with ISS's new analysis. There are
likely possibilities for disagreement about peer groups and about comparing
apples to oranges when comparing a company's executive pay to the median pay of
ISS's peer group for that company."
One source noted that when investors assessed the first
round of say on pay votes in 2011, companies had the benefit of a general
upswing in markets to support pay increases. The more challenging markets of
the last year may provide greater differentiation among companies and the
pay for performance linkage.
Matteo Tonello, managing director of corporate leadership
at The Conference Board, believes that the second year of say on pay in 2012
will provide researchers abundant information to study the actual influence of
proxy advisory firms on the voting process. The Conference Board has recently
partnered with NASDAQ and Stanford University's Rock Center for Corporate
Governance to investigate the issue and observers can look forward to more on
this topic in the coming weeks.
Mike McCauley added that upcoming SEC regulations on
claw-back requirements will pose additional challenges to regulators trying to
balance the goals of investors with concerns of companies about the
difficulties of creating a hard and fast rule. Anne Sheehan, Director of
Corporate Governance at CalSTRS, agrees, and notes the significance of corporate
governance rulemaking expected from the SEC in 2012 on clawbacks, as well as
issues such as disclosure of pay ratios, pay for performance and hedging
policies.
Charles Elson, Woolard Professor & Director at the
University of Delaware's Weinberg Center for Corporate Governance, predicts
that executive compensation will remain in the spotlight for some time to
come. Elson believes that investors will grow more confident in executive
pay decisions only when boards clearly demonstrate that they are in fact and by
action truly independent of company management, have a real stake in company
performance, (e.g., meaningful equity ownership), and, as important, pay is set
not by what other companies pay, i.e., peer groups, but how executives actually
perform as compared to others."
2. Corporate
political spending will be highly scrutinized.
"Given the 2012 presidential election and the impact of
the 2010 Citizens United case removing restrictions on certain corporate
political contributions, companies should expect to see an increase in
shareholder calls for improved transparency and board oversight of corporate
political spending," said Feigelson, TIAA-CREF.
Brauer agrees. "Shareholder concern about
corporate political contributions and lobbying activities will continue to pick
up steam in this Presidential election year, as more money is expected to be
spent than in any prior election. Shareholder proposal proponents and
supporters express concern about whether corporate funds are being spent in a
way that is consistent with their companies' values and not in a way that will
risk embarrassing their companies. There are more variations in the
2012 shareholder proposals than there were in 2011. While negotiations
continue between proponents and companies, it is too early to tell how many
resolutions will actually go to a vote versus reaching a mutually acceptable
settlement, as well as how high the average vote may go if there are more settlements
and more corporate disclosure is provided. In any case, the general trend
is toward more disclosure being posted in easy-to-find ways on company web
sites and having thoughtful corporate policies in place on these issues.
As has been the case with other significant governance proposals, I
expect that the larger companies will take the lead, particularly with the two
political contribution disclosure & accountability indices that came out at
the end of 2011, rating and ranking the S&P 100 companies. Both
indices are expected to expand to the S&P 500 in 2012."
3. Proxy access
will gain steam.
Brauer explains that "after much drama, we are
finally seeing institutional and individual shareholders submit both binding
and non-binding proxy access proposals. As I expected, the
proposals are being submitted to a small number of companies that have
significant executive compensation and/or corporate governance
issues. Proxy access proponents (including the proxy advisory firms)
are generally supportive of proxy access in principle, regardless of the
reasons that a proposal may have been submitted to a particular company.
However, in the first year of these proposals, there is a sense that the
proponents want the proposals that go to a vote to do well, so that the
targeted companies appear to be easy targets. As these proposals
become more common in future years, certain ownership thresholds and by-law
procedures may become more standard, and some companies may take the
initiative to adopt or to submit to a shareholder vote their own proxy access
by-laws. In addition, proponents will be better prepared to submit more
proposals and to withstand the no-action challenges that companies file in an
attempt to exclude the proposals from their proxy statements. "
While Elson agrees that proxy access will be a popular
ballot item, he questions whether it is the ultimate solution to the
shareholder election participation conundrum. Elson believes that "proxy
reimbursement, which will appear on a number of ballots this year, is the
better approach. It is a self-executing separation of serious from
non-serious challenges and is popular with both investors and management
because of its simple, easy appeal."
Read the rest of this article on the Governance Center Blog
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