Last week, for the first time in its 200-year history, Citigroup failed to have its executive compensation plan approved. Fifty-five percent of its shareholders voted against a pay plan that would have awarded its CEO with a $15 million salary.
As noted in a New York Times story, leading proxy advisory firm ISS recommended that shareholders vote against the pay proposal citing that it didn’t have “rigorous goals to incentivize improvement in shareholder value.” Comments from a number of shareholders in the same article underscore a lack of communications/understanding between Citigroup and its shareholders regarding the executive compensation plan.
If that was not bad enough, one of the unintended consequences of a losing on “say-for-pay” can also be shareholder lawsuits. In Citi’s case, the first lawsuit has already been filed.
This is just one example of the ground swell of discontent concerning executive compensation. More and more, institutional investors are taking advantage of the Dodd-Frank Reform Act to voice their say when they believe the proposed plan is not in line with an organization’s performance.
Companies must take note and proactively engage their shareholders, those who vote their shares, and the highly influential proxy advisory firms, especially if there is any hint of pushback. Establishing an open and ongoing dialogue early in the process can help to ensure a company’s compensation plan is given fair consideration and forestall a surprise vote. These conversations provide a forum for management to understand investors’ concerns and a thorough understanding of how proxy advisory firms determine their rankings. Most importantly, this outreach can help to confirm that management and its board of directors care about their shareholders’ opinions and value their input to make sure an executive pay plan is worth approving.
An example of how to engage proactively was highlighted in a recent article in National Investor Relations Institute’s IR Update magazine, featuring Curtiss-Wright Corporation’s actions in the wake of a failed vote in 2011. The story is a great example of how to rectify the situation while also getting closer to their shareholders. Other companies would do well to heed the Curtiss-Wright program before another Citi-like episode transpires.
Marilynn Meek is a Vice President at Financial Relations Board and brings over two decades of experience as an officer of Wall Street securities firms and IR agencies. She provides strategic communications programs that include IPOs, M&As, capital raising initiatives, shareholder and analyst communications, and financial crisis communications for micro-cap to Fortune 500 companies.