the ideal proxy statement

8/9/2019 The Ideal Proxy Statement

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Topics, Issues, and Controversies in Corporate Governance and Leadership

S T A N F O R D C L O S E R L O O K S E R I E S

STANFORD CLOSER LOOK SERIES 1

The Ideal Proxy Statement

INTRODUCTION

Institutional investors are highly dissatised withthe quality of information that they receive aboutcorporate governance policies and practices in theannual proxy. Across the board, investors wantproxies to be shorter, more concise, more candid,and less legal. According to a recent survey byRR Donnelley, Equilar, and the Rock Center forCorporate Governance at Stanford University, 55percent of investors believe that the typical proxystatement is too long. Forty-eight percent believethat it is difficult to read and understand. Investorsclaim to read only 32 percent of a typical proxy, onaverage. Tey report that the ideal length of a proxyis 25 pages, compared with an actual average of 80pages among companies in the Russell 3000.1

Te fundamental complaint about proxies isrooted in a perception that companies are not com-municating candidly with owners. Shareholders want corporations to explain information ratherthan disclose it. Investors view corporations as usingthe proxy as a vehicle to meet disclosure obligations without a willingness to provide information in aformat that is clear and understandable to a typi-cal—or even sophisticated—owner.

Te largest complaint involves executive com-pensation and the inability of investors to read the

information that companies disclose and determine whether senior management is paid appropriately. According to the survey above, less than half (38percent) of institutional investors believe that ex-ecutive compensation is clearly and effectivelydisclosed in the proxy. Responses are consistentlynegative across all elements of compensation dis-closure. Sixty-ve percent say that the relation be-tween compensation and risk is “not at all” clear.

By David F. Larcker and Brian TayanFebruary 19, 2015

Forty-eight percent say that it is “not at all” clethat the size of compensation is appropriate. Foty-three percent believe that it is “not at all” cle

whether performance-based compensation plaare based on rigorous goals. Signicant minoritcannot determine whether the structure of executive compensation is appropriate (39 percent), canot understand the relation between compensatioand performance (25 percent), and cannot detemine whether compensation is well-aligned wishareholder interests (22 percent). Investors aexpress considerable dissatisfaction with the discsure of potential payouts to executives under lonterm performance plans.

Inadequate disclosure negatively impacts tvoting process. Only half (54 percent) believe th

the proxy allows them to make an informed decsion regarding “say on pay” (see Exhibit 1).

THE IDEAL PROXY

Te challenge that corporations face is to nd solution that satises investor demands for clar

while at the same time satisfying numerous regutory requirements for the disclosure of specic ements. Based on the feedback of major institutionasset owners and asset managers, the ideal pro

would include the following:

Context . Investors believe that proxies, as writttoday, lack of context. In the words of one invetor: “We’ve lost sight of what the proxy is for. Ibecome a catch-all for non-nancial informationInvestors want to know how the company’s govenance choices are informed by its strategic goalsparticular its choices relating to board compositioshareholder rights, nancial targets, performan


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THE IDEAL P ROXY STATEMENT

measurement, and executive compensation:

Contextualize it. I cannot recall reading a proxyand walking away with a full appreciation ofthe link between the pay structure, where thecompany wants to go, and how it will get there.

Instead, it’s a bunch of discrete information that’sdisconnected and too long. It forces the reader to

ll in the blanks.

Investors want companies to avoid the use of boil-erplate, legal, and compliance-oriented languageand instead to describe the context for corporatedecision-making in simple and direct language.Preferably, this information would come from theindependent chairman or lead director (~1 page inlength).

Investors cite Pzer as a company that does anotable job of summarizing governance informa-tion in the proxy.

Board Composition . Investors want a better under-standing of why each director is on the board andhow they contribute to the corporate strategy andgovernance of the rm. Tis information couldtake the form of a skills matrix that maps direc-tor qualications to the needs of the organization.Shareholders would be able to make decisions

about director reelection based on their assessmentof the company’s performance in each of these ar-eas. Investors also want to understand the processfor committee assignments, director evaluation,and refreshing the board over time, including someinformation about board succession planning.2 Inaddition, the proxy should continue to summarizethe company’s ownership guidelines and provide atable on director compensation and ownership lev-els (~2 pages). Investors cite Te Coca-Cola Company as an

example of a company that does an exemplary jobdescribing director qualications and the value theyadd to the board.

Compensation . Te compensation section of theproxy could be improved through a more concisepresentation of data and clearer description of howcompensation is tied to long-term strategy, nan-cial metrics, and risk. According to one investor,

the compensation section of the proxy would benet from context: “A big sticking point for us is th

we want to see better disclosure, not more discsure.” According to another, investors need bettinformation to help them determine whether palevels are appropriate: “Pay can be perfectly alig

with performance, yet still be too high.” o improvtheir understanding of these issues, investors woulike to see the following:• Te value of compensation granted, realized, an

realizable by named executives during the yea• Comparable data among peers or industry ave

ages.• Metrics, targets, and weightings used to awa

performance-based awards.• Te company’s actual performance relative t

targets.• Outstanding awards and the conditions unde

which they can be realized.• A justication for discretionary payments.• Ownership guidelines and ownership levels.

(~4 pages).Investors cite Apple and ExxonMobil as tw

companies that do a particularly good job framinand discussing compensation practices.

Shareholder Rights. Investors want a concise summary of charter and bylaw provisions that spells o

their rights to inuence the corporation, includinchanges made in recent years and an explanatiof why those changes were made. Tey want plainlanguage statements of company opposition shareholder-sponsored proposals, and an explantion of the process the board will take in responto shareholder engagement (~1 page, plus summadiscussion for each proposal).3

Ironically, the ideal proxy statement today

many ways resembles proxy statements as writtover fty years ago. Ten, a typical proxy was lethan 10 pages in length, was simple in design anlanguage, and contained a specicity of disclosuconsistent with what investors are requesting tday.4

Regulatory requirements and investor demanfor information make a return to historical proxformats unlikely. Still, one approach that sugges


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itself from the research above is to make expandeduse of a summary section at the beginning of prox-ies for increased clarity, while retaining detail in thebody. Investors express considerable preference forsummarized data, and respondents to the surveyabove claim that they are most likely to read thesummary section rst (see Exhibit 2). Tis is con-sistent with the practice of including a summaryprospectus in the event of a merger or acquisition.

WHY THIS MATTERS

1. Corporate proxies contain more disclosure thanever, and yet investors are highly dissatised withthe quality of information they receive. Whatchanges can companies make so that proxiescontain the detailed information that investors

want, in a format that is easy to read and navi-gate?

2. Would shareholder understanding of corporategovernance practices improve if companies pro-vided clearer and more succinct informationin a summary proxy statement—with detailed,supplementary information available on the In-ternet for those shareholders that value it?

3. How might the debate about executive compen-sation change if shareholders were given moreuseful information to determine whether pay

packages are appropriate? Would this improvethe effectiveness of “say on pay” voting to rein inbad practices?

1 All gures and quotes in this Closer Look are derived from: RRDonnelly, Equilar, and Te Rock Center for Corporate Governanceat Stanford University, “2015 Investor Survey: Deconstructing Prox-ies—What Matters to Investors” (2015).

2 For a discussion of committee assignments, see: David F. Larcker,Brian ayan, and Christina Zhu, “A Meeting of the Minds: HowDo Companies Distribute Knowledge and Workload Across BoardCommittees?” Stanford Closer Look Series CGRP-46 (December 8,2014).

3 Te recent controversy on proxy access proposals is one example of

an issue where shareholders want more information from the com-pany. For example, in January 2015, the SEC reversed a previousdecision to allow Whole Foods to exclude a resolution allowing cer-tain qualifying shareholders the right to nominate candidates to theboard of directors. Shareholders will want the company to explain

what actions, if any, it will take in response to the proposal and itsoutcome.

4 See: David F. Larcker and Brian ayan, “A Historical Look at Com-pensation and Disclosure: Cool and Refreshing!” Stanford CloserLook Series CGRP-04 (June 15, 2010).

David Larcker is Director of the Corporate Governance Re-search Initiative at the Stanford Graduate School of Busi-ness and senior faculty member at the Rock Center forCorporate Governance at Stanford University. Brian Tayanis a researcher with Stanford’s Corporate Governance Re-search Initiative. They are coauthors of the books A ReaLook at Real World Corporate Governance and Corpo-rate Governance Matters. The authors would like to thankMichelle E. Gutman for research assistance in the prepara-tion of these materials.

The Stanford Closer Look Series is a collection of shortcase studies that explore topics, issues, and controver-sies in corporate governance and leadership. The CloserLook Series is published by the Corporate GovernanceResearch Initiative at the Stanford Graduate Schoolof Business and the Rock Center for Corporate Gover-nance at Stanford University. For more information, visit:h t tp : / /w w w.g sb . s tan fo rd . ed u / f acu l ty - r esea r ch / programs/cgri .

Copyright © 2015 by the Board of Trustees of the Leland

Stanford Junior University. All rights reserved.

http://www.amazon.com/Real-World-Corporate-Governance-ebook/dp/B00DXQ0EC2/http://www.amazon.com/Real-World-Corporate-Governance-ebook/dp/B00DXQ0EC2/http://www.gsb.stanford.edu/faculty-research/programs/cgrihttp://www.gsb.stanford.edu/faculty-research/programs/cgrihttp://www.gsb.stanford.edu/faculty-research/programs/cgrihttp://www.gsb.stanford.edu/faculty-research/programs/cgrihttp://www.amazon.com/Real-World-Corporate-Governance-ebook/dp/B00DXQ0EC2/http://www.amazon.com/Real-World-Corporate-Governance-ebook/dp/B00DXQ0EC2/


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EXHIBIT 1 — INVESTOR PERSPECTIVE ON PROXY DISCLOSURE

TO WHAT EXTENT DO YOU AGREE WITH THE FOLLOWING STATEMENT: “THE TYPICAL PROXY STATMENT IS TOO LONG?”

TO WHAT EXTENT DO YOU AGREE WITH THE FOLLOWING STATEMENT: “THE TYPICAL PROXY STATMENT IS DIFFICULT TO READ AND UNDERSTAND?”

0%

11%

34%

39%

16%

0% 20% 40% 60%

Strongly disagree

Disagree

Neither agree nordisagree

Agree

Strongly agree

0%

16%

36%

33%

15%

0% 10% 20% 30% 40%

Strongly disagree

Disagree

Neither agree nordisagree

Agree

Strongly agree

IN GENERAL, DO YOU BELIEVE THAT INFORMATION ABOUT EXECUTIVE COMPENSATION IS CLEARAND EFFECTIVELY DISCLOSED IN PROXY STATEMENTS?

14%

48%

38%

0% 20% 40% 60%

Don'tknow

No

Yes


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EXHIBIT 1 — CONTINUED

ON AVERAGE, HOW CLEAR AND EFFECTIVE ARE PROXY STATEMENTS IN HELPING YOU TO UNDERSTAND THE FOLLOWING?

2%

4%

6%

2%

4%

5%

33%

48%

52%

59%

71%

73%

65%

48%

43%

39%

25%

22%

0% 20% 40% 60% 80% 100%

Relation between executive compensation and risk

Whether the size of the executive compensationpackage is appropriate

Whether performance-based compensation plans arebased on rigorous goals

Whether the structure of the executive compensationpackage is appropriate

Relation between executive compensation andcompany performance

Alignment between executive compensation andshareholder interests

Very Somewhat Not at all

ON AVERAGE, HOW CLEAR AND EFFECTIVE ARE PROXY STATEMENTS IN HELPING YOU TO UNDERSTAND THE FOLLOWING?

29%

15%

23%

65%

56%

62%

6%

29%

15%

0% 20% 40% 60% 80% 100%

Value of pay that an executive actually realizedduring the year

Value of pay that an executive can currently realize(i.e., by exercising vested equity awards)

Value of compensation granted during the year

Very Somewhat Not at all


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Source: RR Donnelley, Equilar, and the Rock Center for Corporate Governance at Stanford University, “2015 Investor Survey:Deconstructing Proxies—What Matters to Investors” (2015).

ON AVERAGE, DO YOU BELIEVE THAT CURRENT DISCLOSURE PRACTICES ABOUT THE POTENTIAL OUTS TO EXECUTIVES UNDER LONG-TERM PERFORMANCE PLANS ARE CLEAR AND EFFECTIVE?

IN GENERAL, DO YOU BELIEVE THAT THE DISCLOSURE IN THE PROXY STATEMENT ALLOWS YOURGANIZATION TO MAKE INFORMED DECISIONS REGARDING “SAY ON PAY?”

19%

56%

26%

0% 20% 40% 60%

Don'tknow

No

Yes

25%

21%

54%

0% 20% 40% 60%

Don't

know

No

Yes


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EXHIBIT 2 — INVESTOR USE OF PROXIES FOR VOTING AND INVESTMENT DECISIONS

WHAT THREE SECTIONS OF A COMPANY’S PROXY ARE YOU MOST LIKELY TO LOOK AT FIRST (PICKTHREE)?

21%

3%

5%

7%

7%

14%

19%

24%

24%

24%

26%

38%

43%

45%

0% 20% 40% 60%

Other

Auditor selection and oversight

Grants of plan-based awards

Severance and change-in-controlbenefits

Description of board committees

Description of risk oversight

CD&A discussion of annualbonus/incentive

Director biographies

Description of shareholderengagement

Summary at the beginning of theCD&A (if included)

Director skills and qualifications

CD&A discussion of long-termincentives/equity awards

The summary compensation table

A summary at the beginning ofthe proxy (if included)


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WHICH OF THE FOLLOWING SECTIONS OF THE PROXY DOES YOUR FIRM READ AND RELY ON TO MING VOTING AND INVESTMENT DECISIONS (SELECT ALL THAT APPLY)?

29%

16%

3%

5%

5%

12%

10%

10%

7%

5%

17%

5%

14%

22%

29%

19%

26%

33%

19%

40%

17%

34%

14%

7%

12%

19%

22%

24%

28%

28%

33%

33%

33%

34%

36%41%

43%

45%

48%

59%

59%

62%

62%

64%

0% 20% 40% 60% 80%

None of these

Other

Ratio of CEO/median employee pay

Political contributions

Ratio of CEO/named executive officer pay

CSR/sustainability profile

Clawbacks

Board evaluation process

Realized/realizable pay

Supporting statements to 14a-8 proposals

Succession planning (CEO and director)

Company opposition to 14a-8 proposals

Investor engagement

Peer group benchmarking

Risk oversight

Related-person transactions

Compensation philosophy

Shareholder rights/anti-takeover

Director nominee descriptions

Performance metrics

Director independence

Pay-for-performance alignment

Voting decision Investment decision

Source: RR Donnelley, Equilar, and the Rock Center for Corporate Governance at Stanford University, “2015 Investor Survey:Deconstructing Proxies—What Matters to Investors” (2015).

the ideal proxy statement

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