Thank you for your interest in WorldatWork articles and publications. To order full copies of WorldatWork publications, please contact WorldatWork Customer Relationship Services or call 877-951-9191 (United States and Canada) or +1 480-922-2020 (other countries).
As investors show increased interest in environmental, social and governance (ESG) issues, the responsibilities of compensation and governance committees continue to move beyond oversight of executive and director pay.
ESG will likely draw more attention in 2020, with a heightened focus on human capital management. Reflecting on this shift, CEOs of leading companies are urging a broader perspective on corporate purpose beyond creating shareholder value, and investors are using engagement and shareholder proposals to push for change, according to Mercer.
Meanwhile, the SEC has proposed rules to regulate proxy advisers and to make it harder for shareholders to submit proposals, which could give organizations more leverage when they are challenged by proxy advisers or shareholders.
In light of these developments, Mercer has developed 10 tips to help organizations prepare for the upcoming proxy season.
- Focus on human capital management (HCM). ESG issues dominated the 2019 proxy season, with a focus on human capital issues. Companies are increasingly recognizing that a company’s workforce is not just a cost, but a critical asset. CEOs from the Business Roundtable issued a Statement on the Purpose of a Corporation, advocating that companies deliver value not only to shareholders, but to all stakeholders. And, the SEC has proposed a rule requiring companies to disclose information about their HCM policies and practices.
- Examine the use of incentive plans to reinforce ESG. A recent Mercer survey found that half of respondents currently use ESG metrics in incentive plans or are considering their use to support their strategy. Tying pay to ESG metrics could send a message to executives, employees and shareholders about the company’s commitment to sustainability.
- Consider adding context for CEO pay ratio. Investors and lawmakers are asking organizations to provide more information about workforce pay and demographics, going beyond the required disclosure of the ratio of the CEO’s pay to that of the median-paid employee.
- Avoid complacency about say-on-pay support. Shareholder support for executive pay programs continues to average about 90%, with just 2% falling below 50%. However, organizations receiving less than 70% or 80% support will draw increased scrutiny from proxy advisers. It is important to demonstrate responsiveness to shareholder concerns about pay programs to help boost support in the following year.
- Do not take equity plan approval for granted. Most equity plan proposals received majority support from shareholders with support averaging about 89% in 2019. But equity plan votes are binding, so the impact of a failed vote — despite the low probability — is significant. Also, lawsuits alleging inadequate or inaccurate disclosures are targeting equity plan proposals, so it is important to be meticulous about plan disclosures.
- Validate director pay-setting process. Rising board pay — S&P 500 company director pay hit a new high in 2018, according to a Mercer study — brings risks. Starting in 2020, proxy adviser Institutional Shareholder Services (ISS) will recommend that shareholders vote against board members responsible for setting director pay at companies with a pattern of “excessive” director pay. Also, investors are likely to continue targeting director pay programs in court. A rigorous process for determining director pay and describing it in proxy statements is advisable.
- Review board makeup. Average investor support for directors up for reelection in 2019 remained high (over 98%), but more directors faced significant opposition (less than 80% support) because of two key concerns: overboarding and diversity. Investors are voting against directors who sit on too many boards or on the nominating committee of boards without a sufficient number of women. And, lawmakers are pressuring companies to increase female and minority board representation.
- Monitor changes in proxy adviser policies and process. Organizations should monitor ISS and Glass Lewis policy changes and how they may affect 2020 voting recommendations. A negative say-on-pay recommendation from ISS is generally associated with a 20% to 30% reduction in shareholder support. Recent SEC guidance and a proposed rule that would regulate proxy advisers may result in a decline in influence, and require proxy advisers to be more transparent about methodologies and conflicts of interest.
- Expect uncertainty in shareholder proposal process. Shareholder proposals are nonbinding, but have a track record of promoting corporate change. Recent developments from the SEC, including a proposed rule that would make it harder for shareholders to submit proposals, and a new approach to addressing no-action requests could dampen the effectiveness of the shareholder proposal process.
- Prepare for new hedging disclosures. The Dodd-Frank rule now requires organizations to disclose hedging policies in their proxy statements. Companies without a policy must state this fact. While most large companies have and disclose hedging policies, disclosures that address only named executive officers will have to be expanded to describe how their policies apply to all employees and directors.