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Apr 07, 2021

Improving shareholder support for remuneration reports

Poor shareholder returns are the most accurate predictor of a vote down on pay, according to Guerdon Associates

For many, achieving successful say-on-pay votes via insightful remuneration reporting can feel like a lottery – a resounding Yes! vote might be followed by next year’s highly adverse vote, even if there are few changes to wording in between.

Invariably, the fickleness in investor support for your remuneration report can be predicted, and turned around. Here is how – and how not.

Anticipate the potential for a train wreck

A hefty proportion of our new clients arise because the board did not understand investors’ views, and suffered adverse proxy adviser reports, a high proportion of ‘no’ votes on the remuneration report, a hit to their reputational standing, and poorer company ESG ratings.

So the first step is knowing what investors’ likely response is by:

  • Receiving proxy adviser reports. A review of the prior years’ reports may reveal, in effect, shots across the bow that the board needs to address a few failings or provide additional disclosure. Some failings are easy to address. Others will need more work
  • Look out for proxy adviser guideline changes. Unfortunately, this tends to occur well into the financial year after remuneration policy is in place. It might be too late to change your policy in response, but at least you know what is coming and can tailor your messaging accordingly
  • Look at changes in your register. An influx of new institutional investors will always result in a change in remuneration report voting. Look at their stewardship guidelines. Look at their annual stewardship reports. You will find some are more inclined to vote no than others. The differences can be stark
  • Be wary if hedge funds and activists appear on the register. Some are adept at identifying remuneration issues and leveraging these to create instability, and achieve change
  • Seek regular input from a good quality, independent remuneration adviser who will tell you the hard truths. They will be in touch with the investment community perspectives and views on remuneration, voting trends, and the poor souls who have been there before you
  • Understand that investors are wary of innovative practices. This is not to say doing the same as everyone else will provide any competitive advantage, because it will not. So get to know how you are different, and consider if these differences may trigger a negative response
  • Know the trigger points. There are several of these that will push investors too far. The most common trigger that predicts a high ‘no’ vote? Poor shareholder returns. Every year we track the extent of ‘no’ votes across a range of variables, and shareholder return is always the best predictor or no votes.

Lipstick is no cure

Superficial or cosmetic changes to a remuneration report in a futile effort to disguise an executive pay framework’s fundamental failings will not work. Institutional investors and their proxy advisers are adept at seeing through superficial or inadequate disclosures.

In these circumstances the best thing you can do is ‘fess up. Admit to your failings. But also say how you are acting to remedy these issues.

  1. Exchange the lipstick for a complete makeover

If you anticipate significant resistance, and the resistance has a degree of validity that cannot be resolved with a bit of lipstick, consider whether there are alternative remuneration frameworks and/or outcomes that will win support. Even if the changes will not be implemented until the next financial year, they can be flagged in the remuneration report following the confession that the current framework is no longer ideally suited to the company’s situation.

  1. Engage

The type of engagement with external stakeholders will depend on where you are listed. Some geographies, like Australia and the UK will enable and expect a high-touch approach from the board chairman and/or the remuneration committee chair. Other geographies, such as the US, have high barriers to personal engagement, and when it occurs it tends to be via company management rather than board directors.

If this ‘anticipation’ work uncovers potential problems, and you are in a ‘high-touch’ geography, consider a two-step engagement process. The first is to engage to put across alternatives the remuneration committee is considering. In doing this, be aware that some external stakeholders have policies that will not allow them to express approval or otherwise. But there are various methods that can be employed such that you will get a very good idea of the extent of support while permitting the stakeholder to stay within their policy guidelines.

After feedback, settle on the approach, and re-visit to explain the approach. The timing of the second visit depends on the stakeholder: some proxy advisers’ policies will not allow engagement after you have published remuneration disclosures.

  1. Ensure groundwork for the bad years is laid during the good years

If the board meets, follows a detailed process considering risk and performance outcomes, and finally comes to the conclusion that no discretion is necessary, the detailing of this process and outcome in the remuneration report will lay the groundwork in providing investors with the confidence that a robust process is followed when exercising discretion, and up or downwards discretion in future years may receive support.

Michael Robinson is director at Guerdon Associates