Investor Relations 101

[Tina]

July 7, 2009

NIRI President’s Note

This past week I attended an SEC meeting where the topics of discussion were: 1) proposed rules for the implementation of federally mandated say-on-pay for TARP fund recipient companies; 2) a proposal for increased disclosure (related to risk and compensation) and to clarify proxy solicitation rules; and 3) a vote on the approval of an amendment to NYSE Rule 452 (to eliminate the broker discretionary for director elections). In my opinion, every IR professional should understand the implications of each of these matters.

Say-on-Pay
The proposed say-on-pay guidelines (pdf) are currently focused on TARP recipient companies, however federal legislation is pending that may mandate an annual advisory say-on-pay vote for all companies, so assume these proposed guidelines may ultimately affect everyone. The SEC’s 60 day comment period will end in September and I encourage all companies to review this with their executive and legal teams and consider commenting on any concerns you may have regarding the proposal. I believe one of the key issues is the period of any advisory vote. If this is done annually, will shareholders have the time and resources to properly review and evaluate each company’s executive compensation structure or will they simply accept the recommendation of the proxy governance firms? Many believe the proxy governance firms are potentially conflicted due to their corporate governance evaluation and consulting services, yet this could add to their influence.

Increased Disclosure and Clarification of Proxy Solicitation Rules

The proposed rules have not yet been released, so I will spend more time on this in a future IR-Weekly column. However, based upon the comments at the meeting and in the SEC news release, the issues are “intended to improve the disclosure provided to shareholders of public companies regarding compensation and corporate governance matters when voting decisions are made. These new disclosures are designed to enhance the information included in proxy and information statements, and would include information about:

• The relationship of a company’s overall compensation
policies to risk.
• The qualifications of directors, executive officers and nominees.
• Company leadership structure.
• Potential conflicts of interests of compensation consultants.

In addition, the proposals are aimed to improve the reporting of annual stock and option awards to company executives and directors as well as to require quicker reporting of election results. The Commission also proposed amendments to the proxy rules intended to clarify how they operate.” These proxy rules include requiring proxy voting results to be issued via 8-K within four within business days instead of the next 10-K or 10-Q, clarification of short slate eligibility requirements and other solicitor requirements. A sixty day comment period on this proposal will start immediately and end in early September.

NYSE 452 Amendment to Eliminate Broker Discretionary Voting for Director Elections

This proposed rule was approved by a 3-2 vote of the SEC Commissioners and is effective for all director elections after January 1, 2010. You may recall that NIRI sent a comment letter (pdf) to the SEC on this rule outlining our concerns and requesting improved shareholder communications ability before any action. The final Rule 452 Order (pdf) is 50 pages long, full of insightful commentary and its approval was not unexpected. The positive news from their public statements is that every Commissioner acknowledged the “m yriad” of issues that remain unresolved in the shareholder voting and communications system. However, those who voted in favor of this amendment dismissed the argument that these issues must be resolved before any amendments to Rule 452 are approved. During the meeting, Chairman Schapiro indicated a working group will be formed to address these issues later this year. I found it interesting that one of the arguments for approving the Rule 452 proposal is the fact that brokers have no “economic interest” in the shares that they are voting. Nevertheless, at least one Commissioner commented that approval will likely increase the influence of the institutional vote and correspondingly the influence of the proxy advisory firms, who also have no economic interest. I find this Commissioner’s comment to be very perceptive, and I have a growing concern that the conflicted interests of the proxy advisory firms are becoming even more troubling.

Over the past few weeks, I have written in this column about proxy access and areas of concern. To summarize, the issues mentioned to date include federal law usurping state corporate law and ensuring director “independence.” This week, I want to make you aware of another matter in the proxy access proposal – the ability of companies to recommend a slate of directors to shareholders. Under the proposal, companies will not be allowed to recommend a slate of directors on the proxy card for shareholders to choose as an election option. Many shareholders, particularly retail shareholders, review company voting recommendations when making their proxy voting decisions. This ability will be eliminated on the proxy card and shareholders will have to figure out who is the most qualified candidate to ensure long-term growth and success for the company, without any recommendation from management. I find this troubling, as retail shareholders may not have the resources that institutional voters have when it comes to determining proxy matters. I believe management’s recommendation is an important factor in a retail voter’s decision.

One of the ways companies can help shape the proxy access proposal is to submit comment letters to the SEC on this matter. Currently, comments must be received by mid-August, but NIRI has joined six other organizations requesting an extension (pdf) of an additional 30 days due to the complexity of this proposal. NIRI’s member survey on proxy access will be sent to you in the next two weeks as we work on our own comment letter to the SEC.