With all the legislative changes, additional required disclosures, say on pay and corporate governance issues percolating in the background, investors, companies, and investment managers are faced with a challenging 2012 proxy season. Today we alert you to two issues involving proxy advisory services and point you to a resource for navigating the 2012 proxy season.
Potentially Faulty ISS Peer Group Comparisons
Among the changes ISS made to its methodology this year was one involving their method of constructing the peer groups used in evaluating executive compensation. Under its new methodology, ISS constructs a peer group of 14-24 companies using market cap, revenue (or assets for financial firms), and GICS industry group and compares the subject company to the group's median in terms of revenue/asset size. This method of constructing peer groups can lead to problems when companies' compensation committees use a peer group that they believe is tailored to be comparable to their specific issuer. The use of a different peer group by ISS can then lead to differing judgments in an appropriate amount of executive pay.
Two large players,
Walt Disney and
United Technologies recently pointed out the potential inappropriateness of their respective ISS peer groups in their SEC filings. United Techologies' filing lays out the source of its disagreement with ISS's peer group:
The ISS analysis is materially flawed as its peer group methodology does not present relevant comparisons.
Twelve of 15 ISS identified peers are not industrial companies, rendering financial performance comparisons meaningless.
Eight of 15 ISS peers had not filed their 2011 proxy as of ISS’ report – meaning UTC’s 2011 CEO compensation has been compared to 2010 compensation for the majority of the peer group.
Point-in-time TSR measurement fails to account for the impact of material events.
The ISS statement that UTC’s long-term incentive plan (“LTIP”) goals are “less than rigorous” is without merit, as the payouts over the most recent three years are at or below target level.
The ISS valuation significantly overstates the value of CEO pay.
Disney does much the same in its filing and creates its own more appropriate peer group:
In recommending against the Company’s position on say on pay, ISS has again substituted its opinion for the studied analysis and judgment of the Board as to the compensation that was appropriate to secure Mr. Iger’s services for the Company through mid-2016.
. . .
The Committee looks at performance and compensation in relation to the single most appropriate set of peers available: the five major publicly held entertainment companies whose management issues and challenges most closely resemble those of The Walt Disney Company (News Corporation, Time Warner, Comcast, CBS and Viacom).
It is likely we will see more companies distinguishing themselves in their filings from the ISS recommendations on compensation recommendations based on what they see as inappropriate peer group comparisons on ISS's part.
Dutch Report on Proxy Advisory Firms
In line with the global trend toward regulating proxy advisory services, Dutch regulators appointed a committee to conduct a study of the use of proxy advisory services by Dutch investment managers and the potential regulatory changes that may be necessary to govern them. The committee has issued its
report finding that the influence of proxy advisory firms is not as pervasive nor as great as had been anticipated. Rather, the findings show that, though investment managers use the proxy services to for the mechanics of voting, they rely on proxy advisory services to a lesser extent. Also, investment managers' voting decisions are generally governed by pre-established proxy voting policies, and the outside advice provided by proxy services are merely an input in to the internal decision making process. The results suggest that institutional investors take a much more active approach to research on proxy voting decisions, and rely less on the advice of proxy services. Though the momentum to regulate proxy advisory services in the US is strong, the findings of the Dutch committee suggests that Holland may buck the trend and refrain from imposing a system of regulation on an industry that seems to be functioning as it should.
A Field Guide to Proxy Season 2012
Against this backdrop regulatory change, heightened shareholder activism, and an ever-increasing focus on compensation and corporate governance disclosures, the Morrison Foerster firm has published its annual "
Proxy Season Field Guide"providing a handy overview of recent legislative, regulatory and shareholder developments, and provides information on how these developments may affect the 2012 proxy season.
The Field Guide is broken down into sections on:
- Legislative and regulatory developments,
- Say on pay,
- Key disclosures, and
- Shareholder activism and corporate governance.
The Guide is an excellent way to get on top of the issues that will no doubt make the 2012 proxy season one of the most challenging yet.