This year has been a tough one for compensation committees. A GMI analysis out this week shows that a combined 200 companies in the Russell 3000, or 6.7 percent, had significant problems in their mandatory say-on-pay votes in 2011 as of October.
These companies either failed or received less than 70 percent support, a critical point that shows significant shareholder dissatisfaction. And that may be just the tip of the iceberg, with many more companies under quiet scrutiny by institutional investors.
Although the percentage is small, it’s also significant, according to GMI’s senior research associate Paul Hodgson. ‘In no other country has such a large number of companies received this many negative votes,’ he says.
For example, the UK mandated say-on-pay votes starting in 2002 and, since then, you could count ‘on the fingers of one hand’ the total number of companies in which the measure failed, he explains.
From January to October, the Russell 3000 saw 38 outright failures, with 8 of those companies in the S&P 500. An additional 157 in the Russell 3000 – 42 of them in the S&P 500 – failed to reach the magic 70 percent of votes in favor.
‘Maybe on pay’
GMI has dubbed the results ‘maybe on pay’. When companies release such results, even big investors that voted in favor might decide to take another look and see if they were ‘missing something’, as Hodgson puts it.
‘Historically, there has certainly been a large amount of investor unrest [in the US],’ Hodgson says. ‘It’s nothing new. They just have a more direct way of voicing dissatisfaction now.’ Companies may claim that they pay for performance, he notes, but the ‘shareholders clearly have a different take on that’.
According to Hodgson, recommendations on ‘no’ votes by ISS and Glass Lewis took many companies by surprise. IR departments had to go into overtime and release a flurry of additional proxy materials that argued against the recommendations.
One-year reprieve
On the surface, it would seem as though IROs were largely successful. Hodgson says that less than 20 percent of the companies targeted by the proxy advisory service actually had problems in their votes. But GMI’s experience in speaking with institutional investors suggests that, at best, companies won a one-year reprieve.
‘They indicated that a number of companies called them and said, Can you give us a break this year and we’ll make some changes if you’re unhappy with what we’re doing?’ Hodgson says. ‘They basically said, That’s fine.’
GMI has tried to monitor companies that have received such a ‘warning shot’ and said none have made any significant changes because they didn’t file an 8K that would have signaled it, although directors might be doing some ‘tweaking’ of policies that wouldn’t be immediately visible.
Although the say-on-pay votes are non-binding, according to GMI, institutional investors apparently are ready to vote against directors on the compensation committee if they find it necessary. So the potential for significant consequences is quite real.
