When COVID-19 changed the world, we were smack in the middle of proxy season. Most CD&As for regular calendar-year filers had been drafted and approved. Proxy statements were waiting in their queues for printing and posting, which was probably the best thing, as companies were focused on much bigger challenges.
Now, almost four months later, the challenges continue. In addition to the global pandemic and its massive impact on the business landscape, companies are under pressure with respect to corporate responsibility, sustainability, and social concerns. The uncertainty and volatility have added layers of complexity and stress to the workforce that make thinking about proxy planning for 2021 in July and August seem like a joke. Don’t we have bigger fish to fry? Yes, of course we do.
However, it is critical to keep in mind that all these issues must be a part of our CD&A narratives come next year’s proxy season—regardless of actual performance and pay outcomes. In a white paper published by ISS in June, Patrick McGurn, ISS Public Counsel said “Looking ahead to 2021, all eyes will be on compensation committee members as investors scrutinize directors' responses to the fallout from the pandemic...the year-over-year drop in 30-percent plus negative votes on say-on-pay resolutions—may be the calm before the storm.” We also know that 2020 produced an all-time high in support for shareholder proposals focused on a range of environmental, social, and governance (ESG) issues.
This means that companies—even those that have enjoyed historic high levels of say-on-pay support—should be planning ahead for content changes to ensure their CD&A narratives are responsive to the expectations of investors, proxy advisory firms, and the general public, including the media, customers, and the workforce. Here’s what companies can be doing now to get ahead of the game:
- Documenting decisions: Compensation committees should be keeping track of discussions as the year goes on since certain activities and changes could be important to your story and may be too easily forgotten when the heavy lifting on drafting begins later this year. This becomes even more important if contemplating actions to compensate executives for salary reductions, restructure incentive programs for the balance of the fiscal year, and/or apply discretion.
- Demonstrating responsiveness: In addition to making sure narratives are transparent about how your organization responded (and continues to respond) to the unprecedented challenges of 2020, content about shareholder outreach as it relates specifically to executive compensation can not be ignored. ISS and Glass Lewis continue to stress the importance of being transparent about shareholder outreach, with SOP vote thresholds of 70% and 80% driving the expectations for substantive descriptions of shareholders engagement initiatives and descriptions of actions taken to address those concerns. So, if your company’s say-on-pay support was below 80%, now is the time to be doing your outreach—not in December and January.
- Drafting diligently: Compensation committees should be integral in the overall CD&A drafting and review process and partnering with management to agree on key themes, even before performance results are finalized and compensation decisions are approved. There is no doubt CD&As will have more content this next year, so make sure that all stakeholders who are involved in the development process are clear on the overall proxy production timeline, roles for drafting and reviews, and the protocols for approval. Consider building reviews of content ideas, narrative outlines, and even preliminary working drafts into your Q3 and Q4 compensation committee meetings, so you’re not dealing with a CD&A fire drill come Q1.
