Leading companies that started innovating with their proxies a decade ago did so primarily based on insights they gleaned from engagement with their larger institutional investors on corporate governance and compensation issues. This governance engagement—supplementing the traditional IR dialogue—informed companies of investors’ informational needs and arguably launched proxies on their continuing march from dry compliance documents to more informative communications pieces.
Each year, RR Donnelley assists more than one-third of all listed U.S. companies with some aspect of the production and dissemination of their proxy statements, whether it’s printing, SEC filing, mailing, web-hosting or, increasingly, strategy and design. This gives us a front-row seat to both witness and participate in the accelerating transformation of the proxy. The following sections detail a few key elements driving these changes.
The main question investors ask, which often is not succinctly articulated in proxies, is how pay supports corporate strategy. The CD&A requirement, which came into existence in 2009, along with Say on Pay votes commencing in 2011, made many public companies more proactive and turbo-charged engagement with investors. This led to clearer descriptions of executive compensation practices, decisions and awards, accompanied by design changes that gave the enhanced disclosures more impact. On the reactive side, poor votes in one year often lead to a reassessment of company practices and disclosures, also resulting in transformed documents the following year.
Over the past five years, while most proxy innovation was focused on compensation, we also began seeing increased innovation in how companies convey key attributes of their boards, including independence, diversity (such as gender, ethnicity, geographic background, age and tenure) and perhaps most importantly, skills and qualifications.
Reasons for these innovations include heightened levels of activism—whether about corporate governance, strategy or performance—and increasing focus by investors on board diversity, tenure, refreshment and whether boards contain the right mix of skills and qualifications given the evolving challenges facing companies today.
Many companies, observing how their peer companies are enhancing the quality and clarity of their communications, are also following suit, not wishing to be perceived as relative communications laggards in the eyes of their investors. Concerns about proxy advisors and their influence is another reason companies are enhancing their efforts to effectively communicate their viewpoint directly to their investors.
This past year, RR Donnelley partnered with Equilar and Stanford University in our 2015 investor survey “Deconstructing Proxy Statements – What Matters to Investors.”
According to the survey and as depicted in Graph 1, the top areas of investor interest with respect to compensation issues are pay for performance alignment, performance metrics and peer group benchmarking. In terms of corporate governance and board issues, the top areas of interest are director independence, nominee bio history, qualifications and skills, corporate governance profile/shareholder rights and board oversight of risk.
These results validate the energy and creativity companies are putting into more effectively “telling their positive story” on a range of issues.
However measured, company performance rises and declines, and investors understand that. Given uncertainty about short-term performance, effectively communicating your company’s governance and compensation stories can help to gain you the understanding, confidence and support from a majority of your long-term, mainstream institutional investors. Specifically, strong communication can show that the company has the right leadership and strategies that are supported by appropriate compensation and corporate governance practices, and are overseen by a board that possesses the requisite independence, skills and qualifications to provide effective oversight.
The above foundation can help gain you additional leeway to permit your company to steer its own course through often-turbulent waters.
For many investors, the proxy is their primary window into the boardroom, and voluntary disclosures help them gain more understanding of and muster support for the board and the critical role it plays. That said, as companies increasingly add voluntary disclosures to the required disclosures, proxy statements unfortunately have grown in length. While this may discourage their use as “reading” documents, many investors report using them as “reference” documents, and this poses less of a problem.
Growing document length has led to innovations such as proxy summaries and CD&A executive summaries. The good news is that summaries are highly likely to be read. The bad news is that they typically contribute to some duplication and repetition and, yes, added page length. In our view, a little duplication is tolerable provided your key information is more likely to be read at least once.
Another innovation is the use of charts, graphs, checklists, time lines, icons, shading, callout boxes and other visual elements. These do help draw the reader’s eye to the content you consider critical. As with summaries, the downside—when such visual elements are used to supplement text—is that they also add to document length.
Recently, more companies are successfully using such visual and design elements to replace rather than supplement certain narrative disclosures. We believe that when this occurs, it is a win-win situation for companies and their investors alike.
As possible validation of this, we point to data from Equilar’s most recently available CD&A trends analysis, which indicates that CD&As have grown on average by 300 words per year since their inception in 2009. In 2014, this steady increase declined by just 100 words from its peak in 2013. We look forward to upcoming Equilar data covering the balance of 2015 to see if this “peak” is truly a “trend.” And if so, it may be attributable in part to companies replacing rather than supplementing text, in the process creating a more impactful and digestible document. Hmm ... if only I hadn’t written this last paragraph and simply let you absorb the image!