by Cydney Posner
Let’s reconsider: is it really necessary – or even useful – to have a proxy statement for an ordinary annual meeting that exceeds 100 pages in length? Does responsibility for bloated proxy statements lie with legislators and regulators or must we practitioners (and may I include comp consultants in that group?) shoulder a large part of the responsibility for that result? Are we overly obsessed with elaborate graphics, multiple increasingly lengthy executive summaries (some of which are longer than IPO prospectus summaries, extending beyond 12 pages by themselves) and extensive detailed disclosure regarding complex — sometimes downright Byzantine — compensation plans? And will this trend be exacerbated if the SEC opts, as floated by Corp Fin Director Keith Higgins at a recent PLI conference, to require inclusion, for some management proposals submitted in lieu of or in response to shareholder proposals, of a section comparable to the ornate “background of the merger” section found in merger proxies?
That’s why it was with delight that I saw this survey conducted by Stanford University’s Rock Center for Corporate Governance, along with RR Donnelley and Equilar, referenced in this post in the WSJ. The survey of 64 asset managers and owners with a combined $17 trillion in assets concluded that 55% of investors “believe that a typical proxy statement is too long,” reporting that “the ideal length of a proxy is 25 pages, compared to the actual average of 80 pages among companies in the Russell 3000.”
Executive compensation disclosure appears to be the most problematic. As reported, only 38% of investors “believe that corporate disclosure about executive compensation is clear and easy to understand.” According to a Stanford GSB professor who was a co-author of the study, “Shareholders want to know that the size, structure, and performance targets used in executive compensation contracts are appropriate….Our research shows that, across the board, they are dissatisfied with the quality and clarity of the information they receive about compensation in the corporate proxy. Even the largest, most sophisticated investors are unhappy.” The study found that
“[s]ixty-five percent say that the relation between compensation and risk is ‘not at all’ clear. Forty-eight percent say that it is ‘not at all’ clear that the size of compensation is appropriate. Forty-three percent believe that it is ‘not at all’ clear whether performance-based compensation plans are based on rigorous goals. Significant minorities cannot determine whether the structure of executive compensation is appropriate (39 percent), cannot understand the relation between compensation and performance (25 percent), and cannot determine whether compensation is well-aligned with shareholder interests (22 percent).”
The authors speculate that dissatisfaction with compensation disclosure “may be related to dissatisfaction with pay practices in general. Only one-fifth (21 percent) of institutional investors believe that CEO compensation among companies in their portfolio is appropriate in size and structure. Twenty-one percent believe that CEO compensation among companies in their portfolio is clearly linked to performance. Only a quarter (26 percent) are able to understand the payouts that executives stand to receive under long-term performance plans.” (But that seems at odds with the “pass rate” for say on pay, which, as the WSJ reports, “has hovered between 97 and 99% over the past four years….”)
Interestingly, investors say that the best disclosure is in the sections related to “director nominee descriptions and qualifications, director independence, and shareholder-sponsored proposals. They believe that disclosure relating to pay ratios (the ratios of CEO pay to median employee pay and CEO pay to other named executive officer pay), corporate political contributions, corporate social responsibility and sustainability, and CEO succession planning are least clear.”
According to the study, investors “claim to read only 32 percent of a typical proxy, on average.” The study reports that the sections that institutional investors are most likely to read are the summary (if included), total compensation table and CD&A disclosure on long-term incentive plans. A table highlighting significant changes from the previous year was also recommended.