Small Public Company Forum

This posting results from a series of posts and responses in the blogosphere regarding what a board should recommend when it comes to the “frequency vote” (the say-on-pay shareholder advisory vote) this proxy season.  Some context for this blogospheric brouhaha is in order:

First, Mark Borges and Broc Romanek, both of whom are greatly respected and tireless contributors to (among other fabulous resources) the Proxy Disclosure Blog and Advisors Blog, respectively, contained on the CompensationStandards.com subscription website, took the position that by and large, given the results of frequency votes thus far, there is no reason to make a triennial vote recommendation.  Broc went so far as to write:  “I’m not sure why companies continue to recommend triennial now that the early meeting results bear out that shareholders will often reject that frequency . . . . It’s a reminder of what shareholder engagement is all about – listen to your shareholders and act on what they say.  Clearly, many companies are choosing to operate in a bubble.”

Next, certain bloggers broke ranks with Borges and Broc—among them, my colleague Marty Rosenbaum (www.onsecurities.com)—writing that:

“The board should make recommendations based on its judgment about what is in the best interests of the company and its shareholders, after considering all relevant factors. For a company with stable management, sound pay practices and a long-term perspective on compensation, the board may legitimately believe that a triennial vote is the best option. And some large shareholders, notably the United Brotherhood of Carpenters, BlackRock Institutional Trust Company and Wellington Management Company, agree with this approach and will generally favor a triennial vote. Should the board ignore their viewpoints, especially if they are large shareholders?“

I largely echo the sentiments expressed by Marty Rosenbaum. I believe it is a mistake for the board to make frequency suggestions based entirely, or even significantly, on the likely outcome of the vote.  Instead, and like any other act of the board, the board’s decision to make a frequency recommendation should be made in light of the directors’ fiduciary responsibilities and duties.  In this regard, it is worth remembering that Delaware and most other state law provides that a director’s duty is owed to the corporation itself—not to the shareholders (See, e.g., Del. Stat. §145; Minn. Stat. §302A.251; Nev. Rev. Stat. §78.138).  As business lawyers know from our days in law school, a corporation is composed of many constituents of which the shareholders are just one—an important one to be sure, but again, just one constituent.  Furthermore, nothing in the SEC’s frequency-vote rules appears to change the standard upon which directors should make their frequency-vote recommendation.  In sum, the relevant standard is not “what is in the best interests of the shareholders?”

Therefore, it appears wrong for the board to approach this decision and recommendation any differently than any other decision it makes.  The board must seek the answer to the question: “what is in the best interest of the corporation?”  In this regard, the board, and the board alone, is in the best position to evaluate this complicated question and express its considered business judgment.  The board, for example, has access to information (and higher quality information) that none of the other corporate constituents have.  The frequency vote is, after all, an advisory vote for this very reason.  Input from the shareholders is helpful and informative; it is not, however, a directive.

As Marty rightly points out, there may be situations in which a triennal recommendation would be difficult to justify (e.g., after or with impending management changes or other kinds of corporate instability).  Furthermore, if a board has done its homework and is cognizant of the prevailing winds, a shareholder advisory vote for annual say-on-pay frequency, made in the face of a triennial board recommendation, should be no reason for panic:  the SEC’s final advisory-vote rules give public companies 150 days after the annual meeting to report a final decision on frequency.

In upcoming posts, I plan to offer a matrix of considerations for a board when determining what frequency to recommend and, in light of 10-Ks being due for calendar year reporting companies, a brief revisit of the SEC’s guidance on MD&A liquidity disclosures from last fall.

Submitted by:  Paul Chestovich, Maslon Edelman Borman & Brand, LLP