Monday, August 29, 2011

Two Firms Defy Investor Views on Pay Vote Frequency (???)

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Two Firms Defy Investor Views on Pay Vote Frequency

By Ted Allen on July 8, 2011 3:56 PM

While most U.S. companies have accepted shareholders’ views on the frequency of future “say on pay” votes, there are at least two exceptions. Annaly Capital Management, a New York-based real estate investment trust, and American Reprographics, a California-based document-management firm, both have said they will hold triennial votes, even though investors gave majority support for annual votes.

Under the Dodd-Frank Act, shareholder votes on pay vote frequency--like the advisory votes themselves--are non-binding, but most boards have quickly acceded to investors’ wishes on this issue, even at companies where management strongly preferred less frequent votes.

“It’s a bad precedent to ignore a majority of shareholders,” noted Lisa Lindsley of the American Federation of State, County, and Municipal Employees, a long-time advocate of annual pay votes. “Companies that choose to ignore their shareowners are inviting additional scrutiny of their board and pay practices.


Tim Smith of Walden Asset Management, another proponent of annual “say on pay” votes, expressed a similar view. “Clearly, companies disregarding shareholder input without an extensive and extraordinary explanation risk real push back from share owners,” he said. 

The vote wasn’t close at either firm. There was 70 percent support at both Annaly and American Reprographics for an annual frequency. So far, 608 companies made recommendations for triennial or biennial votes that were not followed by their investors, according to ISS data.

Annaly justified its decision by citing the non-binding nature of the frequency vote.

“The Board has considered the appropriate frequency of future non-binding advisory votes regarding compensation awarded to its named executive officers. Among other factors, the Board considered the voting results at the Company’s 2011 Annual Meeting with respect to the non-binding advisory vote regarding the frequency of non-binding advisory votes regarding compensation awarded to its named executive officers. The Board has determined that future non-binding advisory votes regarding compensation awarded to its named executive officers will be submitted to shareholders of the Company every three years. The Board will continue to evaluate this decision annually,” the company said in a May 20 filing. 

American Reprographics argued that a triennial frequency was appropriate given the three-year employment contracts that it recently reached with its named executive officers.

“The Company believes that any attempt to modify the terms of those contracts prior to expiration could pose an executive retention risk to the Company. In addition, the Company has not historically engaged in problematic pay practices. Rather, compensation paid to the Company’s named executive officers in prior years reveals a practice of curtailing executive compensation in response to a challenging economic environment. A three-year frequency cycle will also allow stockholders to continue to evaluate the effectiveness of the Company’s executive compensation program on long-term performance of the Company. For these reasons, and those set forth in the Company’s 2011 proxy statement, the Company has decided to conduct future stockholder advisory votes on executive compensation every three years until the next required advisory vote on frequency of stockholder advisory votes on executive compensation,” American Reprographics said in a May 3 filing.

While companies are required to hold frequency votes just once every six years, Annaly and American Reprographics could face shareholder proposals on this matter in 2012. Under the final SEC’s “say on pay” rules, companies may omit shareholder proposals that seek a different frequency if they adopt a frequency that is supported by a majority shareholder vote. 

It remains to be seen whether investors will oppose these firms’ directors in the absence of a pay vote. Annaly received 75.1 percent support for its pay practices this year, while American Reprographics earned 99 percent approval.

A hat tip to the Davis Polk corporate governance blog for pointing out these filings.

Joel’s comment:

In my humble opinion, compensation paid to ARC’s officers is quite reasonable, considering the size of the company and considering, or should I said, comparing, compensation paid by other “printing industry” companies to their officers. There are larger printing companies than ARC who are paying a lot more to their officers than ARC is. Cenveo is a good example.

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