Key Concept

Proxy statements are often unclear on major issues, notably executive pay questions such as the appropriateness of compensation size and structure, according to a new survey of major asset managers and owners. They also lack clarity on pay ratios, corporate political contributions, corporate social responsibility and sustainability and CEO succession planning.

Idea Summary

A new survey from Stanford University’s Rock Center for Corporate Governance on how investors use information from corporate proxy statements reveals deep dissatisfaction with corporate disclosure about executive compensation. The survey, based on responses from 64 asset managers responsible for a combined $17 trillion — show that even the largest and most sophisticated investors find the information in the proxy statements unsatisfactory. The proxies, the respondents believe, do not clearly answer the questions in investors’ minds on this issue — questions such as whether the size and structure of compensation packages are appropriate, and exactly how the compensation is tied to performance.

According to the survey, conducted in collaboration with RR Donnelley and Equilar, only 39% of investors believe that the information in proxies about executive compensation is clear. In contrast, 65% say the proxies are “not at all” clear in explaining the relation between compensation and risk, while 48% say that the proxies are “not at all” clear in explaining how the size of the compensation is appropriate. Finally, 48% of respondents say the proxies are “not at all” clear on whether performance-based compensation is tied to clearly defined, rigorous goals. As a result 25% of respondents could not tell if there was any relation between compensation and performance, and 22% could not tell if the compensation package offered was aligned with their interests as shareholders.

Other results from the survey include the following:

• Proxy statements are too long (45%) and too difficult to read (45%). The ideal length, according to respondents, should be 25 pages, not the average 80 pages. Respondents believe corporations communicate effectively on issues such as the descriptions and qualifications of director nominees or shareholder-sponsored proposals but are less clear on issues such as pay ratios between employees and executives, corporate political contributions, corporate social responsibility and sustainability and CEO succession planning.
• Proxy voting is a valuable exercise. On a scale of 1 to 10, respondents gave an average score of 7.2 on whether proxy voting was valuable, with almost a quarter (24%) assigning a value of 10. 
• Proxy voters focus on only a few major decisions. Proxy voters usually focus on just 20% of the voting decisions — decisions involving major issues such as mergers and acquisitions, nominations of directors in a contested election, and remuneration of executives.
• Proxy statements are not too helpful for ‘Say on Pay’. Just above half (54%) of respondents believe proxies provide the necessary information to make informed votes on executive compensation — and only a slightly higher percentage (58%) believe shareholding voting on compensation (known as ‘Say on Pay’) is helping to improve pay practices in corporations. These results reflect a general dissatisfaction with executive pay. Only 21% of respondents believe that CEO compensation in their portfolio’s companies is appropriate in size and structure, and an identically small number believe that CEO compensation is linked to performance.

Business Application

Most corporations, it seems to many, disclose the information required under law, but go no further. They disclose without clarifying or explaining; that, according to the survey respondents, is not good enough.

At the root of the problem is a deep dissatisfaction with executive pay in general, and whether executives are being paid according to rigorous performance metrics. ‘Say on pay’ loses its power if investors don’t have the information they need to make the right decisions.

Corporations must improve their proxy statements and remember that the goal is not to meet legal guidelines, but to inform and empower their shareholders. Otherwise, investors will continue to become increasingly frustrated by both the executive compensation decisions in the firm, and their inability to meaningfully participate because of long, overwritten but sparse on clear information proxy statements.