Risk & Compliance

The Growing Importance of Proxies

Aiming to thwart shareholder activism, public companies' proxy statements are presenting shareholders with ever-more information and greater detail.
David McCannFebruary 10, 2017
The Growing Importance of Proxies

Proxy statements continue to grow more robust and evolve as a central vehicle for telling a public company’s story to its shareholders. Proxies are getting longer, providing more disclosure and greater detail, and adding graphics and other visual elements, all designed to improve transparency around boardroom decisions.

17Feb_ProxyThe trend has been increasingly evident following the enactment over the past decade of new laws and rules related to executive compensation. The Dodd-Frank Act, passed in 2010, required public companies to submit to annual shareholder advisory (“say on pay”) votes on the acceptability of their executive compensation programs. Four years earlier, the Securities and Exchange Commission required a “compensation discussion and analysis” (CD&A) section to be included in proxies, explaining the rationale for the design of such programs.

Those measures, together with a raft of provisions in Dodd-Frank aimed at reining in excessively aggressive behavior by financial institutions, launched an era of heightened shareholder activism that has gone well beyond executive-pay matters.

And bidding to mollify shareholders, companies are increasingly willing to provide more information in proxies than is required.

“Proxies are clearly becoming more important, especially considering the rise of shareholder activism and the level of companies’ engagement with long-term institutional shareholders,” says Dan Marcec, content director for Equilar.

In 2012, just 12% of S&P 100 companies disclosed in their proxies detailed programs through which they engaged with shareholders, according to Equilar, which recently released its fifth annual report on proxy-statement trends among S&P 100 companies. By 2016, that proportion reached 63%.

Also over that time span, the number of S&P 100 companies that reported changes they made as a result of shareholder engagement swelled from 14% to 42% (see chart, above).

“For companies that performed poorly in recent shareholder votes or that may otherwise be flagged for performance or governance lapses, it’s generally expected that they will go beyond [merely] discussing the scope of their engagement” with shareholders, says Ron Schneider, director of governance services for Donnelley Financial Solutions, who provided commentary for the report.

The proportion of S&P 100 companies that specifically disclosed the responses they made to say-on-pay votes almost doubled, from 17% in 2012 to 32% in 2016.

Companies are also ramping up efforts to help proxy-statement users navigate their way through the increasingly robust documents. In 2012, 39% of S&P 100 firms included at the top of the proxy a summary addressing the most important topics, often with the use of colorful graphics. By last year, 79% of such companies did so.

Another tool for aiding comprehension is a checklist showing what types of executive compensation the company does and does not use. Where in 2012 just 5% of the studied companies presented such a checklist, last year more than 13 times as many companies (66%) did so.

The checklist approach “provides companies the ability to highlight strong governance practices and design features while also clearly confirming for proxy advisors and shareholders that the company does not engage in poor practices,” says Christine Skizas, a partner with Pay Governance, a firm that advises compensation committees, who also provided commentary for the report.

Companies are even doing something as simple as making greater use of color to transform the technical language and data in the CD&A section into something more aesthetically pleasing and easier to read. In 2016, 77% of companies used color in their CD&As, up from 48% in 2012.

Equilar presented interesting information on the longest and shortest CD&As in the proxies of S&P 100 companies in 2016. The longest, from Walgreens Boots Alliance, clocked in at 18,494 words. Next came Amgen, Honeywell, Bristol Myers Squibb, and Pfizer.

Among the five shortest were CD&As from General Electric, Alphabet, Costco, and Amazon.com. The briefest, though, came from Berkshire Hathaway, at a concise 512 words, a third of the length of the next-shortest. As usual, Mr. Buffet likes to keep things simple.