Checklist for the Board: How to Respond to a Say When on Pay Vote
(The following post originally appeared on ONSecurities, a top Minnesota legal blog founded by Martin Rosenbaum to address securities, governance and compensation issues facing public companies.)
April 17, 2011
In the next few weeks, more public companies will hold their annual meetings, which will include the shareholder advisory votes on compensation required under the Dodd-Frank Act. One of these votes allows the shareholders to select the desired frequency of Say-on-Pay votes. Under this frequency vote, sometimes called “Say When on Pay,” shareholders may express a non-binding preference for whether Say-on-Pay votes should be held on an annual, biennial or triennial basis. After the annual meeting, the company will be required to report on the frequency with which it will actually hold Say-on-Pay votes, in light of the results of the shareholder vote – see new Item 5.07(d) of Form 8-K (PDF).
Therefore, once the annual meeting is held, the board of directors will need to report their response to the non-binding shareholder vote. So, what steps should the board of directors take following the Say When on Pay vote? Of course, if the shareholders chose the alternative that the board had recommended in the proxy statement, the determination is pretty easy. If the shareholders chose a different alternative, it’s a little more complicated. The process will be different for every company, but here is a checklist of governance steps and tips to consider:
- The rule gives you five months – take it. Item 5.07(d) gives the company 150 days to file the 8-K that includes the response (but no longer than 60 days before the deadline for submission of shareholder proposals for the next year’s annual meeting under Rule 14a-8). The consideration of this determination should be put on the agenda for a future board meeting in advance of the deadline for reporting.
- Consider the factors listed in the proxy statement. Many companies included in their proxy statement a list of factors they considered that caused them to conclude that the recommended frequency was in the best interests of the company and it shareholders. At the meeting, the board should discuss these factors once again, and balance them against the will of the shareholders expressed in the vote.
- Consider the strength of the views expressed in the shareholder vote. Presumably, a strong majority vote in favor of one of the alternatives should be given more weight than a close vote where none of the three alternatives received a majority. In either case, it is perfectly appropriate for the board to follow the preference of the shareholders despite the board’s prior recommendation of a different alternative.
- Consider having the compensation committee make a recommendation. Especially if the compensation committee initially recommended to the board the frequency expressed in the proxy statement, it may be appropriate to have the committee recommend the ultimate frequency of the Say-on-Pay vote to the board for its approval.
- Document the deliberations carefully. Make sure the minutes reflect the matters considered by the board and/or the compensation committee in making its determination.
Frequency Vote Update
Mark Borges just published his updated tally (as of April 15) of 1,976 companies’ proxy statements in his Proxy Disclosure Blog on compensationstandards.com (subscription site). According to Borges’ tally, these companies recommended as follows in their “Say When on Pay” shareholder advisory votes on frequency:
Triennial Say-on-Pay vote recommendation: 839 companies (includes 36 smaller reporting companies)
Biennial Say-on-Pay vote recommendation: 66 companies (includes two smaller reporting companies)
Annual Say-on-Pay vote recommendation: 1,009 companies (includes 11 smaller reporting companies)
No recommendation: 62 companies (includes six smaller reporting companies)
As for the results of the votes to date, Borges provided a good summary:
. . . . 252 companies [have] reported the voting results from their annual meeting of shareholders.
Here are the shareholder preferences for the frequency of future "Say on Pay" votes:
- Of the 15 companies that have recommended a biennial vote, 11 have seen their shareholders express a preference for annual votes.
- Of the 145 companies where the Board of Directors has recommended that future "Say on Pay" votes be held every three years, 63 (or 43%) have seen their shareholders indicate a preference for annual "Say on Pay" votes. That number decreases to 42% - 52 of 125 companies) when you exclude smaller reporting companies.
- Of the nine companies where the Board of Directors has made no recommendation at all with respect to the frequency vote (excluding smaller reporting companies), eight have seen their shareholders state a preference for annual "Say on Pay" votes.
And, at one company, Qualstar Corporation, where the Board of Directors had recommended annual "Say on Pay" votes, shareholders expressed a preference for a triennial vote.