Regulatory changes: what do IROs think?

Oct 13, 2010
<p>IR professionals give their reactions to Dodd-Frank, proxy access, say on pay et al</p>

Taken alone, any one of the massive regulatory initiatives currently being considered or implemented could have a profound impact on the way IROs do their jobs in the US. These initiatives include the groundbreaking Dodd-Frank Act, rules governing proxy access and a 151-page SEC concept release that opens up wide areas of proxy plumbing – including the distinction between non-objecting beneficial owners (NOBOs) and objecting beneficial owners (OBOs) – to potential change.  

IR magazine talked to a range of industry leaders to see which regulations are taking up the most space on their radar screens – and whether they see their impact as positive or negative. Here’s what they had to say.

Andrew Kramer, director of IR at Interactive Data Corporation
On NOBO-OBO
My view is that the process for reaching out and soliciting votes – on the OBO or NOBO side – is complicated. It doesn’t need to be. Even the separation of investors into NOBOs and OBOs creates confusion, and not only from the companies’ perspective; more importantly, it’s confusing for the investor. I’m hoping there will be modifications so it’s easier for shareholders to make their votes count.

On proxy access
It’s a good thing the process is being reviewed comprehensively and holistically. But if you look, for example, at the issue of the nomination of directors, it’s clearly going to be a challenge – particularly for smaller companies. They need to be vigilant and work collaboratively with shareholders. If somebody owns 3 percent or more of your stock, he or she could nominate a different slate of directors and, to the extent this provides a platform for special interests, it could be a concern. IROs will need to be very diligent in working with their management teams to manage the proxy process.

For one thing, they will have to maintain good relationships with larger shareholders and, as far as possible, avoid surprises. You need the equivalent of a crisis plan in place to deal specifically with activists. It needs to be very loose and flexible because you can’t possibly foresee all the issues activists may want to pose. 

Sally Curley, senior vice president of IR at Cardinal Health
On the concept release
The SEC’s concept release contains more than 160 questions, so reading through it can be overwhelming. I would advise IROs to read it with a careful eye on the topics that will affect their company; not all the questions are applicable to all issuers, let alone to every company.  

We don’t know whether the SEC will provide final guidance on proxy plumbing in the next week, month or months, but we do know it’s coming relatively soon. If you are a company with a calendar fiscal year, you may have to implement some of the changes quickly. That, among other reasons, is why it is important to remain current and work closely with your senior management and legal teams. 

On intermediaries, share lending and vote counts
I am primarily focused on under-voting and over-voting, as well as empty voting, largely because I’ve had some experience in these areas. These are key issues for companies during times of shareholder meetings, as they can significantly affect the outcome of the vote. They also relate to shareholder identification: if people were better able to understand who held their company’s stock, they could then verify the shares voted as well as ensure that all shareholders received company communications in a timely manner. 

On NOBO-OBO
Another big section of the release focuses on shareholder transparency. While this is its own topic, it is also a subtext of the under/over/empty voting discussion. If issuers could more accurately identify shareholders in a more timely manner, it would reduce – if not eliminate – the errors resulting from over/under voting. It would also provide issuers and shareholders with access to information, likely more so than occurs today.  

Ken Cooper, former vice president of finance in charge of IR at Life Time Fitness
Cooper has recently moved to an operational role. He won the award for best IRO at a small-cap company at the IR Magazine US Awards 2010.
On NOBO-OBO
From our perspective, if it makes it easier to state our case to our investors, we’re all for this change. Messages can get muddled when I talk to someone, who talks to someone, who talks to someone else. Changing the NOBO-OBO distinction would allow us to send investors more reminders and ensure clarity, because we’d have a direct connection.  

On the Dodd-Frank pay disparity ratio
I think it’s a great idea. Anything that allows companies to explain and support their position makes sense to me. It’s going to be challenging for some companies, but if investors have another data point, another way to measure whether they want to invest or not, I think that’s great. A company should be able to explain whether its CEO salary is an outlier.     

Douglas Wilburne, vice president of IR at Textron and chairman-elect of NIRI
On proxy access and proxy advisory firms

Institutional investors have, in many cases, abdicated their voting and governance responsibilities to proxy advisory firms, thereby giving them way too much power and dividing the governance process from the investing process. Now that there may be competing slates, proxy advisory firms will be asked to make recommendations on which directors to vote for: the management slate or the investor-proposed slate. This just exacerbates the problem. 

To me, what’s happened in this country is this: because of the need for due diligence or a standard of care in respect of governance, many investing firms seek a safe harbor, abdicating their responsibility to proxy advisory firms and washing their hands of it.  

Many of them claim they don’t have the staff, which is a very weak argument. They are managing billions of dollars of investments and really ought to be able to manage the governance process in tandem. There are analysts following companies every week who are unable to vote because of the bifurcation between governance and investing. Many are frustrated by their companies voting against management because of some proxy firm’s advice. 

The SEC should think more globally and find a way to encourage firms not to outsource the governance process. They should be encouraged to do this as part of the investment process. The SEC needs to find a way to allow or force institutional investors to pursue governance in-house.  

Jeffrey Morgan, president and CEO of NIRI
On the Dodd-Frank pay disparity ratio
In Dodd-Frank, the big question mark is about the nuances. Of particular concern is the new requirement to compare the CEO’s compensation with the average of all employees. There are still lots of questions about how you calculate that.

If people are looking at a couple of numbers without a complete picture, it makes it harder for an IRO to tell the story. If you publish charts showing five-year stock prices and CEO compensation along with the average salary for the last five years, you may not be showing the big picture. If it’s a turnaround company that brought in a CEO, for instance, the press could have a field day with that, but it wouldn’t tell the full story. 

On proxy access
Proxy access is another big issue, and it’s one where the SEC has already ruled. If you have held 3 percent of a company’s shares for three years, you can nominate directors to the board – so IROs will be on the front lines trying to find out who these shareholders are and what their motives are. Are they long-term investors? How do they perceive the company? If they want to get on the board, why?  

On say on pay
Say on pay is not necessarily a problem but, from a company standpoint, it will have to be evaluated and the right information provided so you get a positive vote. From an IR standpoint, you’re going to have to really know the story and communicate it outwardly.

The concept release is probably the positive side of the changes. The SEC is looking at overhauling the proxy system and this is something we have been working on to get it to update. The fact that it is discussing it is terrific. Given the SEC’s workload, however, the earliest we’re going to see anything implemented is 2012. This gap is a great time for issuers to share their problems and solutions with the SEC on things like shareholder communication, proxy advisory services and fees.

David Myers, vice president of IR at Express Scripts
Myers won the award for best IRO at a large-cap company at the IR Magazine US Awards 2010. 
On the Dodd-Frank pay disparity ratio
Dodd-Frank will add to the complexity of what we do but we really pride ourselves on tying our long-term compensation into how we perform against a peer group of other large healthcare companies, in terms of superior earnings growth and superior stock performance. That’s how we compensate our key people – on shareholder-aligned concepts – so we don’t feel these new reforms will be a problem for us.

On proxy access
We’ve reviewed this and we don’t have a problem with the reform, based on the way we have built our company, our policies and our shareholder value over the years. But we’re still reviewing it and thinking about it.

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