Executive compensation now depends on the mandatory advisory vote, so it is more important than ever that shareholders are involved in the corporate landscape. With this in mind, companies are having a hard time determining when, how and whether or not corporate directors need to discuss executive compensation with the shareholders. In this article, Jeremy Goldstein lists the factors that companies may want to consider that will help them decide these issues.
In general, the main spokesperson needs to be the chief executive officer. If the primary architect of the company’s strategy is always the chief executive officer, the company will always have a persistent theme. The exception may be when the topic being discussed is executive pay.
The board approves compensation for the chief executive officer and other executives. Therefore, the best people to discuss payment for these individuals may be board members. Also, investors believe that chief executives are highly interested in their own compensation. If board members engage with shareholders on questions of compensation, they will demonstrate to investors that they are fulfilling their duty of overseeing company business as well as showing support for the company’s programs.
In all, for the reasons stated above, board members may be the most appropriate people to discuss matters of executive compensation. This, of course, will depend on the facts and circumstances of each individual corporation.
The following components will help people decide whether or not a board member is the appropriate person to discuss executive pay:
- A Board Member Knowledgeable about Pay Programs
The most critical concern is whether or not the board member knows the subject at hand intimately. Shareholders are expected to engage in operations so that the company is trustworthy. It also helps to maintain credibility. A company will ensure that these goals are attained by choosing a spokesperson who deeply understands the executive pay program and can explain the reasoning behind it.
- The Topic that Is to Be Addressed
The topic that needs to be addressed will help you determine who the best person is to broach it. The best choice to speak with investors about the pay of a chief executive officer or other matters may be a director. If the topic will be a general compensation policy, someone other than the director may be a better choice.
- The Shareholders’ Preferences
One shareholder may wish to speak with one representative, but another may wish to converse with someone entirely different. There may be someone who would like to talk to compensation committee members, but sometimes, people do not want to talk to board members at all. The best way to encourage shareholder engagement is for a representative to be aware of each investor’s preference and go out of his or her way to serve those needs.
- The Individual/Shareholder
In most cases, a member of the compensation committee or the lead director/independent chairman will speak for the board when executive pay is being discussed. The compensation committee approves executive pay, so it may seem as if it is correct for the compensation committee chair to discuss executive pay. The fact is that the company wants to ensure that a singular message is always being given by the same person. Therefore, a lead director needs to be the one who is engaging with the shareholders. The best choice in this regard would be someone who is a member of the compensation committee and a lead director/independent chairman.
In the event that a director will be the one to discuss executive pay, these discussions must be one part of a larger communications strategy. If a shareholder needs to communicate with the directors, some companies have a corporate secretary who will deliver shareholder inquiries to the directors. Companies that have a director of corporate governance use this person for the purpose of sending messages to the directors.
Management and the board must come to an agreement on what types of topics the board will agree to discuss. These topics should only include items that are on the agenda. Directors must lead the conversation and not allow shareholders to steer the group into a discussion about financial performance and corporate strategy unless both sides have agreed to discuss these things before the meeting gets started.
Management has to be certain of two things, and they are the following:
- Board engagement activities must be fully known.
- Directors have all of the information that is needed to answer all investor questions. The messages must always be consistent with other corporate literature.
The company must decide beforehand whether or not management members will be allowed to be present at the meeting with investors. When this occurs, management will be informed about everything that was discussed. The head of investor relations, human resources executives, director of corporate governance and the general counsel are the most necessary attendees at these meetings. The directors will have the responsibility of informing the management team of the investors’ feedback whether the afore-mentioned individuals attend the meeting or not. This will ensure that full disclosure has been attained.
In order to keep from breaking securities laws, directors need to be familiar with Regulation F-D so that they do not inadvertently disclose information to investors that has not been disclosed to other market participants if their duty is to communicate with shareholders.
About Jeremy Goldstein
Jeremy Goldstein was accepted at New York University School of Law where he received his Juris Doctor. He stayed close to this school after his graduation and is currently a member of the Professional Advisory Board for the NYU Journal of Law and Business.
Jeremy Goldstein was a partner in a major law firm with a focus on mergers and acquisitions early in his career. Some of the prominent cases he has been involved in include the acquisition of AT & T Corp. by SBC Communications, Inc. and the merger between Bank One Corporation and J.P. Morgan Chase & Company. He was also involved in Miller Brewing Company’s purchase of South African Breweries, PLC.
In 2014, Jeremy Goldstein founded Jeremy L. Goldstein and Associates, LLC. His practice focuses on executive pay as well as corporate governance issues. He counsels management groups, compensation committees and CEOs when they are in the process of undergoing corporate transitions and other difficult circumstances.
Jeremy Goldstein is a member of the American Bar Association Business Section. He is also the chair of the Mergers and Acquisitions Subcommittee. He supports mental health programs for people in his community as a member of the board of directors for The Fountain House.
Read our previous Jeremy Goldstein post here.