If you look beyond the dense text and confusing images, proxy statements are a mine of useful information and when done right, it can serve as a powerful narrative that can entice investors and satisfy regulators. For those responsible for drafting a proxy statement, i.e., the corporate secretary—the challenge has always been trying to strike the right balance between meeting SEC compliance requirements and gauging investor interests with practical information.
Another part of the problem is that companies want to keep shareholders engaged and up-to-date by providing timely information, but sometimes this does not always go as planned. “When it comes to disclosures, more is not always better,” said Robert McCormick, Esq, Chief Policy Officer, Glass Lewis & Co., in a recent episode of “Inside America’s Boardrooms” hosted by TK Kerstetter. “If you can’t explain in 40 or 50 pages how your compensation program works as a lawyer, then the blame is on the drafter and not the reader.” While McCormick recognized that some programs can be complicated to communicate, he stressed that disclosures should avoid the boilerplate approach and instead provide some context to shareholders that will help them make informed decisions.
On the other side of the spectrum, the SEC wants companies to be more transparent. For example, take the hotly debated topic of diversity disclosures. In an effort to help investors make better decisions, the SEC is planning to propose a new rule requiring companies “to include in their proxy statements more meaningful board diversity disclosures on their board members and nominees,” said the regulator’s Chairman Mary Jo White earlier this year. She also complained that companies are too “vague” when reporting their board’s diversity plans to the authority. Case in point: The watchdog believes that companies need to do a better job at communicating how they are selecting candidates from a wider, more diverse pool of talent to fill boardroom positions.
And this is where Corporate Secretaries are left scratching their heads.
According to an investor survey, “Deconstructing Proxy Statements—What Matters to Investors,” across the board, shareholders are dissatisfied with the “quality and clarity” of information they receive in the corporate proxy. The study, which was conducted last year by Stanford Rock Center for Corporate Governance and Equilar found that 55 percent of investors believe that a typical proxy statement is too long. Moreover, they report that the ideal length of an easily digestible proxy is 25 pages—compared to the actual average of 80 pages among companies in the Russell 3000.
“When we draft a proxy statement, we think about the different readers on the receiving end,” said Irving Gomez, Assistant Corporate Secretary and Managing Counsel, Corporate Legal Group, Intel Corporation (pictured right). “Proxy statements have shifted from serving as a compliance document to a way that keeps investors engaged and it should be carefully crafted.”
In Gomez’s role, he leads the team responsible for preparing and reviewing proxy statements, required by the SEC to ensure securities law compliance. “The proxy statement should be treated like a story with a short table of contents, followed by a brief summary of highlights that contain keywords, which easily catches the reader’s eyes,” added Gomez. “We use graphs that show a history of executive compensation and how it relates to company performance and this is particularly important to our big institutional investors who are our long term holders.”
On the production side, some emerging trends are shaping the future of proxy statements as well. Liam Power, President, Vintage, a division or PR Newswire/ SVP Cision, has found that proxy statements are increasingly replacing annual reports in terms of emphasis of design and importance to both the issuer and the investor. “Juxtaposed to the evolution of glossy annual reports into vanilla 10-K wraps, the proxy statement is quickly becoming the marketing document, specifically because the issuer needs to set their narrative and the subsequent call-to-action of voting in their favor.” Power added that the proxy summary “can be a very strategic competitive section during a proxy battle” because it captures the key discussions within the full document to ensure that shareholders clearly understand management’s position on significant voting concerns and other governance issues. Read the full interview with Power here.
Case Study: Listening to Investors
Jean Weng, SVP, Deputy General Counsel and Corporate Secretary at Voya Financial (pictured right), emphasized that it is essential to think about the audience when crafting a proxy statement. “Institutional investors often go through hundreds of proxy statements to help them determine how they will cast their votes at these companies’ annual shareholders’ meetings during the proxy season, therefore these investors have limited time to review their portfolio companies’ proxy statements,” added Weng. “At Voya, our focus has been to draft the proxy statement so that an investor can understand the main components of our governance and compensation practices by just reading the first five pages of the proxy statement.
In our executive summary, we present color pie charts that succinctly provide the components of our CEO and senior management’s compensation as well as the portion of the compensation that is equity-based or performance-based. In addition, our executive summary includes a checklist of ‘what we do and what we don’t do’ on our corporate governance and compensation practices that allows the reader to understand our principles and practices in a quick glance.” Weng explained that they also value shareholders’ feedback. “We listen to our investors during our shareholder engagement process and incorporate their feedback. For example, our 2016 proxy included an expanded Chairman’s letter that included a focus on the company’s governance advancements because of a major investor’s feedback. Read the full interview with Weng here.
