Caught between ISS and a Hard Place

All we seem to hear about approaching this proxy season not surprisingly is say on pay. All of the blogs, articles and webinars are focused on what to expect. Clients are buzzing about whether to recommend annual, biennial or triennial votes and hoping to be able to see what their peers will recommend before they have to make their own recommendations.

One of the more interesting questions I got recently was what you should do if your shareholders vote for triennial voting frequency when ISS has come out in favor of annual and whether this could lead to negative recommendations even when the company was following shareholder preferences. I have to wonder, since the question was anonymous via a user group, whether this was just a hypothetical or whether this happens much.

I thought I would share with you my response none the less and you can weigh against ISS US corporate governance policy updates for 2011 and perhaps share your perspective for others facing similar issues.

"One would think that if shareholders vote for triennial that this would be the way to go but it does remain a sticky issue. You need to consider by what margin your vote passed, just how well educated your shareholders are on the issue and in particular how heavily influenced your significant shareholders are by proxy advisory firms who are going to recommend an annual vote. Not all institutional investors support annual votes due to the work associated with analyzing proposals and the SEC requirements associated with reporting votes so they may want to be convinced.

What is key is having a well-reasoned rationale for triennial voting and making sure this and the rest of your comp philosophy and plan design are clearly explained in your proxy. Stressing the need to synchronize the vote with the end of multi-year performance periods and the need to have time to understand and react to the prior vote are both things that are legitimate reasons for a longer period between votes in addition to the support of your shareholders should validate the practice.

In light of the elimination of discretionary broker voting on comp matters negative votes could be more prevalent in future so the less frequent the vote the lower the risk. Probably if you are following best practices you run a lower risk both of a negative vote in say on pay situations as well as negative reception to a triennial vote.

No doubt it is safer to opt for an annual vote regardless of the shareholder vote but I think regardless of ISS recommendations that you can make the triennial fly assuming you have shareholder support, are using best practices and have a well thought out reason for it."