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December 09, 2011
Shareowners Support Annual Say-on-Pay Votes
    by Robert Kropp

An analysis by GovernanceMetrics International finds that while 42% of companies recommended a shareowner vote on executive compensation every three years, 72% of shareowners voted in favor of annual votes.

In its third and final report covering shareowner voting on management say-on-pay proposals this past proxy season, GovernanceMetrics International (GMI) analyzed the frequency of advisory votes at 2,176 companies in the Russell 3000 index.

Along with mandating that public companies provide shareowners with an advisory vote on executive compensation this year, the Securities and Exchange Commission (SEC) also required a shareowner vote on the frequency of say-on-pay votes.

According to the Dodd-Frank Reform and Consumer Protection Act, companies must ask shareowners at least every six years whether say-on-pay votes should occur every one, two, or three years. "GMI maintains that an annual advisory vote on compensation provides the highest level of accountability to shareholders," the report states. "As proxy statements are filed annually, this vote allows shareholders to provide input on the most recent compensation disclosures."

In addition, while Institutional Shareholder Services (ISS), the influential proxy advisory firm, stated in its updated guidelines that it will issue recommendations on the frequency of say-on-pay votes on a case-by-case basis, it also said it would recommend voting against the reelection of board members, "if the board implements an advisory vote on executive compensation on a less frequent basis than the frequency which received the majority of votes."

While many shareowner activists and corporate governance advocates were disappointed by this year's votes on executive compensation—ISS found that on average, 91.2% of shareowners supported management proposals—shareowners did vote in favor of an annual vote at 72% of companies.

Furthermore, while 42% of management recommendations were for a vote every three years, shareowners voted in favor of those recommendations at only 13% of companies.

Following shareowner voting on frequency this proxy season, "50% of boards have adopted annual Say on Pay voting, 10% have adopted a triennial vote, and 40% of companies surveyed have yet to decide which policy to adopt," GMI found.

Two companies—Annaly Capital Management and American Reprographics—adopted triennial votes despite shareowners voting in favor of an annual vote.

Noting the "stark contrast" between management recommendations for triennial votes and shareowner support for annual votes, Greg Ruel, Research Associate at GMI and author of the report, said, "That gap shows a real disconnect between how management and boards believe companies should be run and the way shareholders want their companies to be run. We'll be watching closely to see which policies the remaining 40% decide to adopt."

GMI's earlier reports in the series found incremental progress on the design of executive compensation packages at S&P 500 companies in 2011, and identified 42 S&P500 companies at risk for failed say-on-pay votes in 2012.

According to ISS, "Investors appeared to be in agreement that less than 70 percent shareholder support on management-say-on-pay proposals is a reasonable trigger for boards to take explicit action with respect to compensation practices."


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