March 5, 2020
As proxy season approaches, companies are preparing to draft and organize their proxy disclosures. A document originally mandated by the SEC, proxy statements—or DEF 14As— have grown to become a tool with which companies can use to educate and interact with investors.
Equilar recently hosted a webinar with panelists Ron Schneider, Director, Corporate Governance Services at DFIN, and Marc Treviño, Partner at Sullivan & Cromwell to discuss the trends and analysis behind the present and future state of proxy statements and disclosure as we move into the upcoming 2020 proxy season.
Compliance versus communication
Over the last ten years, proxies have changed in their fundamental purpose. At first, proxy statements were strictly utilized for compliance purposes. Mandated by federal regulations, proxies used to be an extremely basic document that featured the bare minimum to meet the required threshold of information. Proxies were often not enough for investors, who opted to get their information from the annual statement or disclosures. As industry standards have evolved to favor increased transparency, proxy statements have become much more robust in their content.
Schneider shared some important insight as to why proxies need to be more detailed today. “Companies need to tell an effective story, tell what the intent is of the CD&A and the board's thinking, and tell why they do what they do and why it’s appropriate for the company”. Overall, if investors only get a snapshot of a company’s activities, it is essential that the company.
Apart from an increased understanding of a company’s pay story and activities, the proxy statement serves as an important benchmarking tool for year-over-year performance. Consistency may become an issue as companies develop their own pay for performance metrics, as they may change how they measure it. Comparing different targets each year may lead to inconsistency. “Discussing the fact that you’re changing how you’re measuring yourself may be something that investors are now beginning to focus on,” asserted Treviño. Comparing targets and actual results year over year will be difficult to remain consistent with each company setting different pay for performance metrics. The role of the proxy as a benchmarking tool may begin to arise in the coming years.
The rise of visual components
As proxies move away from being solely formal legal documents, they have evolved into an easily understood and digestible document for all stakeholders. Despite having longer page counts, proxies generally have fewer word counts. This can be attributed not only to companies having more to say in their disclosures, such as discussing emerging ESG, sustainability or human capital management initiatives, but also the use of visual components in proxies.
Schneider encourages the judicious use of visual elements. “You can’t assume less word count equals less information, it might actually be more.” Schneider stresses the importance of creativity in disclosures, and how balancing information with visuals is a good way to highlight key trends and ratios. Demonstrating things such as a pay for performance alignment or compensation checklist, using timelines, checklists, and graphs is a better way to present key information at a glance.
"People are trying to cut through to what’s really important,” Treviño added. As more and more people, turn to the proxy statement for information, a visually appealing, concise, and straight-forward proxy will appeal to a much broader audience.
For this same reason, proxies have become much more organized. Navigation tools, such as a table of contents, are an easy and visual way for readers to find exactly what they are looking for. Treviño explains that companies are seeking to make it easier for investors to find important information. Because proxies are getting longer, “readers are not looking to read the whole document.”
The fact that most proxies are accessed online is an important factor as well. None of those voters are looking at a paper copy as a majority of investors will be looking at proxies in a digital format. Schneider continues, explaining that “interactive features are nice because more can be done in a dynamic digital environment than a static environment.” Going forward, companies may need to add interactive elements to their proxies, in order to keep up with the digital landscape and appeal to investors.
The role of proxies in shareholder engagement
Proxies are a way for companies to communicate to their investors the plan for the coming year—direction, actions and compensation for top executives. Because of this, if a company organizes their proxy statement effectively, it can become a vessel for which to foster shareholder engagement.
As a result, companies need to ensure that their proxy statements prioritize the most important issues. “It is very difficult to rank issues because different audiences read different parts of the document, and they want to be involved in all parts of the chain,” explained Treviño. Therefore, it is more prudent to address the issues in a way that tells the story. Treviño suggests questions you should ask yourself before writing the story: how are the metrics you’re using to set pay aligned with business strategy? If the pay program is based on qualitative goals, how do these goals align with strategy and how do you set them? Investors like to see the plan behind the pay.
But most importantly, the proxy statement must be truthful. It must show shareholder value, and how the company is prepared for engagement season. It is a way for companies to get ahead of the conversation before there is an issue. Schneider reminds us that “changes to practices may come from post-meetings with investors.”
This is the importance of listening to your investors. “All investors have a joint interest in seeing issuers engage with them and respond to their concern,” Treviño added.
All in all, the proxy statement is more than just a legally mandated, high-level overview of a company. Today, the proxy statement is a way for companies to directly communicate with investors, share their key highlights and open up the channel for future engagement. As the role of the proxy statement evolves, companies need to keep up with the trends going into the 2020 proxy season.
Daniella Gama-Diaz, Associate Editor at Equilar, authored this post. Please Contact Amit Batish, Content Manager, at firstname.lastname@example.org for more information on Equilar research and data analysis.
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