Let’s talk: governance – May 2014
Companies respond to calls for meaningful governance disclosure
Many companies are voluntarily enhancing proxy statement disclosures, highlighting new and leading governance practices and improving readability through enhanced formatting and graphics.
More and more, proxy statements are serving as a component of corporate engagement efforts. They are taking the company’s targeted governance message beyond its largest and most vocal shareholders to a broader audience of investors, proxy advisors and other stakeholders. As companies respond to requests for more meaningful disclosure around decisions on governance matters, investors become better informed and positioned to support the board.
This publication reviews developing trends in proxy statement disclosures among S&P 500 companies. These trends reflect evolving corporate governance practices on key areas of investor interest: company-shareholder engagement, board diversity and evaluations, and executive compensation.
Introduction to the proxy statement
Some companies are using the opening of the proxy statement to immediately communicate the company’s approach and decisions on governance topics, highlight leading governance practices and provide an overview on company financial performance.
42% Executive summary
Highlighting leading governance practices, shareholder engagement efforts, and governance and executive pay changes made over the last year
4% Letter from the board
Communicating the board’s message to shareholders around topics such as board composition and effectiveness, shareholder engagement, enhancements to executive pay, and company performance
Company-shareholder engagement — a leading trend of the last two proxy seasons — continues to rise. Many companies are disclosing their engagement efforts and highlighting changes that are made in response to shareholder feedback. Disclosure of this engagement is important because some investors and the proxy advisors consider responsiveness to investors in their proxy voting decisions and recommendations.
Board diversity and evaluation process
Board diversity: Most companies use a broad definition of diversity in implementing the SEC’s proxy statement disclosure enhancement rules.
At the same time, many companies are going beyond the required disclosures and affording information on how gender is considered in the broader context of board composition.
57% are specifically identifying gender and ethnicity as a consideration when identifying director nominees
21% are including whether the board has adequately considered diversity as part of the board evaluation process
53% are providing photos of the full board
10% are calling out the gender and ethnic makeup of the board
Some investors are increasingly interested in understanding the evaluation process that a board utilizes to assess its performance. They view these evaluations as key to a board managing its own renewal in alignment with the company’s strategic goals.
Companies are disclosing:
74% — The committee or board position that leads the evaluation process
59% — The frequency of performance evaluations
6% — That board, committees and individual directors are each assessed
5% — Whether one-on-one discussions with directors are held in connection with the evaluation
3% —The specific categories under which the board, committees and directors are evaluated
1% — That evaluations are facilitated by an outside party
Many companies are using supplemental disclosures to highlight specific pay practices and pay for performance alignment, which are factors some shareholders consider when evaluating say-on-pay proposals.
Other emerging disclosure trends
Several other new disclosure trends are bringing transparency and clarity to key areas of investor focus and making proxy statements easier to digest.
Tenure charts: A small number of companies have begun including charts showing a breakdown of director tenure. Lack of turnover on boards is raising concern among many investors that fresh and diverse perspectives may be lacking from strategic discussions.
Letters from key committees: Some companies are beginning to include letters to shareholders from the key committees or key committee chairs, which highlight committee decisions and developments over the previous year.
Infographics: A number of companies are utilizing infographics and visual aids that make sprawling proxy statements more visually compelling and readable.
Hyperlinks: Some companies include links to key governance documents (e.g., charter or bylaws, sustainability report, committee charters, governance guidelines) on the company’s website to easily direct shareholders to more information.