The holidays are quickly approaching, which means so is another proxy season. But this year is unique. With so many questions on so many fronts, including corporate governance, everyone’s wondering just what to expect in 2017. This uncertainty adds to the sense that much remains on hold. However, we expect the 2017 proxy season to move forward, despite legislative uncertainty, in a manner that reflects trends set in recent years, as outlined in comments from us and law firm Hogan Lovells in Equilar’s recently published report, Executive Compensation & Governance Outlook 2017.
Rules may change but shareholder relations remain key
Indeed, change in the regulatory environment will be closely watched with SEC chair Mary Jo White leaving at the start of the year (and Keith Higgins!), bringing the number of empty commission seats to 3 out of five. But corporate disclosure has become so important in fostering good relations with shareholders that it makes sense to focus on keeping up with best practices even as everyone wonders how regulation may evolve.
Starting with a complex topic, pay ratio, Hogan Lovells points out that in the absence of legislative changes, “pay ratio is a reality and it is time to dive full speed ahead into the hard work that will be required to determine the ratio and develop a plan for how best to disclose and explain the ratio.” While only one S&P 500 company disclosed its CEO-to-median-employee ratio in 2016, nearly a third discussed internal pay equity within the executive team.
Equilar’s study found a big jump in disclosure on clawback policies in the last proxy season, up to 92% of all S&P 500 companies, with more than half disclosing that a financial restatement may trigger their clawback policy. Hogan Lovells adds that companies are considering adopting clawback policies or modifying existing clawback policies “in advance of any SEC rulemaking.”
Pay for performance
An increasing amount of companies continue to discuss pay for performance in their executive compensation programs, 95.7% this year compared to 86% in 2012, notes Equilar. And a number of companies disclose comparison with peer companies on the correlation between executive pay and company performance. It is evident that many consider disclosing unrequired information in order to enhance disclosure.
Say on pay rules ‘revolutionized the way companies engage with their shareholders on executive compensation matters,” introducing a “referendum or shareholders to express their view” on the link between executive pay and company performance, notes Hogan Lovells. Equilar found that 66% of S&P 500 filings included disclosure on shareholder engagement, a dramatic increase from a mere 20% in 2012. This disclosure can come in the form of a graphic to illustrate engagement throughout the year.
As board diversity continues to attract shareholder attention, a majority of S&P companies note in their proxies that they consider ethnic or racial diversity when assessing the board or director candidates. Hogan Lovells notes companies need to have a “thoughtful approach” to issues such as “age and tenure of directors and the gender and ethnic diversity of the board.” We add that linking the board to the strategy of the business is key.