Talking to Investors: A Snapshot of What Investors Want in the Age of Dodd-Frank
By Robin A. Ferracone
This article originally appeared on Robin A. Ferracone’s “Executive Pay Watch” blog on Forbes.com.
The Dodd-Frank Act has engendered a great deal of discussion over the past year about what the SEC will require of corporate boards. Board and compensation committee members have invested significant amounts of time determining what the Act means to their company, and specifically, how the new executive compensation provisions will impact their current and future executive compensation arrangements. In executive compensation, Dodd-Frank covers four primary areas: (1) non-binding vote on Say on Pay; (2) clawbacks; (3) increased disclosure around the relationship between executive pay and performance, and pay equity; and (4) rules around compensation committee member independence and compensation consultant independence.
While we can spend our time wondering what rules the SEC will come up with, it seems equally if not more important that we keep our eye on the basic intent of Dodd-Frank, which is to encourage better communication between companies and investors. After all, the role of the SEC is to ensure that investors receive the information they need in order to make the most informed investment decisions, not to opine on the quality of the executive pay programs. This role suggests that investors, not the SEC, should be on center stage. The ultimate question is not, “What will the SEC require?”, but “What do investors want from our executive compensation system, and are we giving it to them?”
I am spending more time with investors these days to find out the answers to these questions. Make no mistake, investors have minds of their own and do not speak with one voice. But for the most part, some common themes among them are emerging:
- In general, investors are in agreement that they do not want to be in the boardroom. What they want is for board members to do their jobs by planning and making decisions that are in their best interests. Then, they want these companies to clearly and proactively communicate their plans and decisions. These expectations pertain to executive compensation, as well as any other executive matters. The key message here is that investors want regular communications of decisions that they deem to be defensible
- Investors believe that executive compensation is a “window into the boardroom.” In other words, if the executive compensation programs are transparent, reasonable, and sensitive to company performance, then investors feel as though other aspects of corporate governance will have integrity as well. The key takeaway here is that investors expect the executive compensation programs and decisions to have integrity, e.g., the program design is consistent with the business strategy and needs of the company; and the committee actions are consistent with the program design
- Investors, especially those who are in it for the long run, strongly want executives to rise and fall with the long-term fortunes of the business, meaning that they expect executives to realize generous pay days only when long-term gains in performance can be sustained. This desire has become even more pronounced following the fall-out from the recent financial crisis. As a result, investors have the most enthusiasm for incentive plans that measure performance over multi-year periods, strike the right balance between risks and rewards, and encourage a real ownership stake
- Finally, investors want to understand how all of the pieces of compensation, as well as pay actions, work together to create the right result. They don’t want compensation that is hidden or comes from a dozen places. This is how Supplemental Executive Retirement Plans (SERPs), for instance, got a black eye. They constituted a significant component of compensation that was not very transparent. The key message here is to add it all up all for investors – both on a target and actual (i.e., performance-adjusted) basis, and both now and over time
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At the end of the day, it’s really the relationships between investors and their companies that matter. While the SEC plays a valuable role in requiring accurate, complete, and easy-to-understand disclosures, the spotlight for companies should remain on the investors themselves.
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Robin A. Ferracone is the Executive Chair of Farient Advisors, LLC, an independent executive compensation and performance advisory firm which helps clients make performance-enhancing, defensible decisions that are in the best interests of their shareholders. Robin Ferracone is the author of a recently published book entitled Fair Pay, Fair Play: Aligning Executive Performance and Pay, which explores how companies can achieve better performance and pay alignment. Robin can be contacted at robin.ferracone@farient.com.
