Rob Swystun, Pristine Advisers
Proxy statements are long, confusing pieces of tripe … at least that’s what a recent survey of asset managers found about them.
Okay, so the word ‘tripe’ almost certainly wasn’t used, but being a former member of the media, I — much like Brian Williams — enjoy a bit of embellishment. (In fact, terrorists are launching rocket propelled grenades at my apartment as I write this.)
The point is, proxy reports are long and confusing and they help surprisingly little when it comes to voting and investment decisions.
The aforementioned survey was performed in the fall of last year by RR Donnelley, Equilar and the Rock Center for Corporate Governance at Stanford University. It asked 64 asset managers and owners who control a combined $17 trillion in assets how these institutional investors use the information in proxy reports.
The results were not encouraging.
They were presented in a post on the Stanford Graduate School of Business site by Stanford professor David F. Larcker; Director of Corporate Governance Services at RR Donnelley Financial Services Group Ronald Schneider; member of Stanford’s Corporate Governance Research Program Brian Tayan and Director of Governance Research at Equilar Aaron Boyd.
Executive Pay Info Not Clear
A paltry 38% of the institutional investors surveyed said corporate disclosure about executive compensation is clear and easy to understand. And it just got worse from there:
- 65% said the relation between compensation and risk is “not at all” clear.
- 48% said it is “not at all” clear that the size of compensation is appropriate.
- 43% believe it is “not at all” clear whether performance-based compensation plans are based on rigorous goals.
- 39% cannot determine whether the structure of executive compensation is appropriate.
- 25% cannot understand the relation between compensation and performance.
- 22% cannot determine whether compensation is well-aligned with shareholder interests.
Basically, it looks like what’s happening is companies are making sure they meet minimum regulatory requirements … and that’s about it. But, way back when we were all getting our first menial jobs, didn’t we learn that giving people minimal customer service isn’t enough to keep them happy? Only when you really go out of your way to offer stellar customer service will you keep your customers really happy.
I think the same can be said for investor relations. The bare minimum just don’t cut it.
Here is Boyd saying that same thing, but much more eloquently:
“Corporations must do a better job of articulating the rationale behind plan design. It is not enough that disclosure in the Compensation Discussion & Analysis (CD&A) section of the proxy meets regulatory requirements. Companies should take renewed effort to be clear and concise in explaining their choices.”
Size (& Clarity) Matters
It’s no secret that business speak is pretty much the worst way to communicate with anyone. It’s a running joke that the terms of service for anything you agree to are meant to be as confusing and boring as possible and, unfortunately, that same lack of clarity has seeped into almost all business communications (which is a bit odd considering that when you study business communications, it teaches you to do the exact opposite of that).
To that end, the survey unsurprisingly found:
- 55% of investors believe that a typical proxy statement is too long.
- 48% believe that a typical proxy is difficult to read and understand.
- Investors say they read only 32% of a typical proxy, on average.
- Investors say the ideal length of a proxy is 25 pages (the actual average proxy length among companies in the Russell 3000 is a mind-numbing 80 pages)
I interview a lot of business people and one thing I’ve noticed is that the larger the company, the less able the people are to be brief and clear. I’m starting to think it’s a requirement for people working at large companies to have their ability to be succinct surgically removed.
That same sentiment from Schneider, minus the snark:
“Lengthy disclosure does not necessarily equate with clear and digestible disclosure, and can actually impede rather than improve shareholder understanding of governance choices. Plain English language which is well-organized and easily navigated, coupled with simple design elements to draw the reader to key content, are much more effective in conveying information.”
It’s not all terrible, though. The polled investors found disclosure about director nominee descriptions and qualifications, director independence, and shareholder-sponsored proposals to be most clear.
However, they also found disclosure relating to pay ratios between executives or executives and employees, corporate political contributions, corporate social responsibility and sustainability, and CEO succession planning to be least clear.
(Isn’t it funny how the items to do with money and social responsibility are the most hazy?)
Proxy Voting has Value
Despite having to slog through proxy reports, the majority of investors believe the whole process does have merit.
- 80% of investors believe proxy voting increases shareholder value.
- On a scale of 1 to 10, investors’ average level of confidence that proxy voting increases value was 7.2. (24% said 10).
Institutional investors are most likely to read:
- the proxy summary,
- total compensation tables,
- disclosure on long-term incentive plans and
- tables highlighting significant changes from the previous year.
For proxy voting decisions, investors rely most heavily on:
- disclosure relating to pay-for-performance alignment,
- performance metrics used in compensation plans and
- director independence.
In addition to proxy statements, investors rely on other sources of information for making voting decisions:
- 73% of the polled investors rely on internal policies or analysis.
- 63% rely on third-party proxy advisors
- 58% rely on direct engagement with the company.
Low Voter Engagement
While the majority of institutional investors reported that portfolio managers are involved in voting on specific proxy items that involve their investment vehicles, voter engagement among them is low:
- 76% of portfolio managers are involved in voting specific proxy items for the companies their organization is invested in.
- A typical portfolio manager is involved in only 20% of voting decisions.
- Among institutional investors who have greater than $100 billion in assets, portfolio managers are involved in only 10% of decisions.
Portfolio managers that participate in voting tend to weigh in on major issues:
- 89% vote on mergers and acquisitions.
- 82% vote on director nominations in a contested election.
- 75% vote on executive compensation.
- 70% vote on proposals to approve or amend equity compensation plans.
Sixty-eight percent of respondents reported that portfolio managers are involved in establishing their firm’s proxy voting guidelines.
However, only 59% of the polled investors actually use proxy information for investment decisions, relying most heavily on disclosure relating to performance metrics used in compensation plans, pay-for-performance alignment, the corporate governance profile of the firm, and risk oversight.
Say on Pay is Meh All the Way
While non-binding Say on Pay votes give investors a voice when it comes to executive compensation, the polled investors were a bit meh on whether it actually makes a difference and most of them couldn’t understand the compensation packages anyway:
- 54% of shareholders believe proxies allow them to make informed votes on executive compensation.
- 58% believe “say on pay” is effective in influencing or modifying pay practices.
- 21% of institutional investors believe CEO compensation among companies in their portfolio is appropriate in size and structure.
- 21% believe CEO compensation among companies in their portfolio is clearly linked to performance.
- 26% said they are able to understand the payouts that executives stand to receive under long-term performance plans.
“These are significantly negative perceptions of executive compensation,” Larcker said. “’Say on Pay’ is having some effect, engaging shareholders in a discussion about plan design. However, investors are still frustrated with pay levels overall and whether the packages awarded today are justified. Shareholders want to know that the size, structure, and performance targets used in executive compensation contracts are appropriate. Our research shows that, across the board, they are dissatisfied with the quality and clarity of the information they receive about compensation in the corporate proxy. Even the largest, most sophisticated investors are unhappy.”
It’s clear that proxy reports need a major makeover so they can be more useful for the people who are supposed to rely on them the most. However, for that to happen, the entire culture of business communication needs to change first so clarity and brevity are valued more than circumlocution. Maybe it’s time for business communicators to try leveraging some common sense.