Boards’ New Mantra: Communicate


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Expert Perspective by Grahall’s OmniMedia Editorial Board

Joann Lublin wrote a very interesting article for the Wall Street Journal recently, titled Season of Shareholder Angst: U.S. businesses are bracing for a noisy proxy-voting season this year, although we think the anxiety may be felt more fiercely by board members than by shareholders.  In her article, Ms. Lublin covers a variety of topics weighing heavily on the minds of boards and shareholders alike, including say on pay, political contributions, succession planning, board elections and environmental concerns. 

Say on pay has been in the headlines for years. It was a campaign issue in the 2008 presidential elections and we have been discussing this subject in our blogs for that long as well.  The Dodd Frank Act mandated that all public filers hold “say on pay” votes in 2011, so this proxy season has companies scrambling to make recommendations to shareholders on the frequency of these votes. 

Most of the rhetoric from institutional shareholders and from proxy advisors has demanded that public companies institute annual voting (Dodd Frank permits voting every one, two or three years on executive pay.)  But it seems that when it comes to the recommendations that public companies have made so far, the size of the company matters.

As Garry Rogers wrote on our blog last week (Say on Pay Voting Periods: Size Does Matter): “Although it’s still early, at this point the three year time period is clearly the most popular.  However, seven of the ten largest companies have recommended annual reviews, and the overall rate of annual review recommendations is noticeably higher for companies with over $1 billion in market capitalization when compared with smaller companies”.   (Click here to read more in our blog about say on pay.) Of course, the time and money spent administering an annual review  would weigh more heavily on the smaller, rather than larger, companies.

In her article, Lublin also raises the issue of succession planning. Neither Dodd Frank nor any other regulations stipulate the need to provide disclosure on succession planning.  But there is no doubt that CEO succession planning is a key to sustaining corporate profitability.  Too often succession planning is a subject that is cloaked in concerns about competitiveness.  As Lublin writes: The computer giant, Apple, says the measure to have boards divulge detailed succession-planning policies for CEOs would offer rivals an advantage, hurt recruitment and constrain the board’s actions.

But compensation for the CEO and the top five named officers can also shed some light onto the succession planning approach (or lack thereof) taken by companies, and Grahall’s 2009 study of executive pay can highlight some useful considerations. (Download the first in this seriesof reports.)

The first thing to look at is the difference in pay between the CEO and his direct reports.  If there is a large gap on average by industry, then the CEO may be what we refer to as “an imperial CEO” and may not have cultivated one or more individuals to succeed him.  The second thing to consider is the pay differential among the CEO’s direct reports.  If the pay is similar for this group then that suggests there is a large “stable” of individuals who might succeed the CEO.  If there is a disparity and one individual is significantly higher paid than the others, this high paid individual might be the anointed successor.   (Click here to read more in our blog about succession planning.)

Of the topics addressed in Lublin’s article only say on pay has regulations behind it requiring enhanced shareholder disclosure and voting.  The others (political contributions, succession planning, overhauling board elections and environmental concerns) are areas of focus that are being raised by shareholders and, in some cases, proxy advisors. There is unquestionably a drive by shareholders for more transparency in a wide range of areas.  It is time for Boards to improve communication with shareholders. To borrow from the world of real estate, the three most important things for boards are now communication, communication, communication. Shareholders and proxy advisors want companies to be more communicative and open. And the need for communications is not just with shareholders, but with stakeholders as well.  Stakeholders are those constituents who have a stake in the company, but are not investors; they could be suppliers, or neighbors, or customers or employees, or other local businesses.  They care about the welfare of a company because its success or failure will impact them even if they do not hold stock – they have a stake in it.

The ability to communicate effectively with shareholders and stakeholders will differentiate companies.  Certainly there are risks to some disclosures, but boards must weigh and manage all risks. Failure to frequently and transparently communicate will create suspicion and anger impacting reputation and good will. Managing those risks may prove to be highly burdensome and costly.  Companies may find that their best competitive advantage lies with transparency.

Contact Grahall’s OmniMedia Editorial Board at

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