Five Predictions for the Proxy of 2020
What will the proxy look like in four years? Earlier this month, I got together with Dan Laddin and Thomas Welk to answer that very question. The occasion was the WorldatWork Total Rewards Conference, and we were in San Diego.
Here’s what we discussed.
It Will Be Massive
Absent intervention, the proxy is on track to become completely unwieldy. Companies are trying to address institutional investors, proxy advisors, activists, plaintiff litigators, and the media all in the same document. On top of that, new CEO pay ratio and pay vs. performance rules will probably tempt companies to add even more supplemental disclosures. Before we know it, a proxy might hit 200 pages…with confusing cross-references throughout.
It Will Tread Carefully
Among disclosures, there’s a big difference between one that’s filed with the SEC and one that’s simply furnished. Filed items are held to a higher standard under the 1933 and 1934 Securities Acts. They make it easier for investors to show that they made decisions on the basis of those items. Since the CEO pay ratio and forthcoming pay vs. performance disclosures must be filed, the proxy will certainly be prepared with an elevated risk of litigation in mind.
It Will Act Like a Dashboard
To compensate for all the complexity, and hopefully to reduce the sheer size, proxies will make greater use of section abstracts and executive summaries. They’ll also have visuals that provide answers at a glance. Electronic versions might let readers explore charts and graphs in greater detail. Once investors get used to this, they’ll expect even more transparency. Plan on technological innovation that changes how the proxy is delivered.
TSR Will Be the Most Common Award Type
Compensation committees and executive compensation professionals pay a lot of attention to the proxy. Award designs tend to reflect that. For instance, the forthcoming pay vs. performance disclosure uses total shareholder return (TSR) as the universal performance measure, which for some companies will create an incentive to adopt TSR awards. Companies that don’t will end up devoting more energy to supplemental disclosures where they explain their rationale for not swimming with the tide.
We debated the merits of altering your award designs to fall in line with where proxy disclosures are headed or to use your disclosures to justify unique award designs. Different companies will arrive at different answers. On the margin, we expect to see more TSR granting, but we also expect to see more disclosures defending the use of an alternative instrument and means of evaluating company performance.
Supplemental Disclosures Will Become More Important
Already, about 16% of the Fortune 500 disclose realizable and/or realized pay as supplemental disclosures to the Summary Compensation Table. This number will grow as companies decide to explain their pay programs and how they support the business strategy. Each story will be unique, the best of them supported by solid statistics. The trick will be to keep the supplemental disclosures from overshadowing the required ones—and, at the same time, keep them from getting buried in the document.
So here’s my own take on the likelihood of these predictions. Bigger? Yes. Denser? Maybe. There’s a good chance companies will step up their communications game. High tech? No doubt. In fact, I wouldn’t be surprised to see companies issue their proxies as a mobile app. As for the broader adoption of TSR, I’m inclined to believe it. With apologies to Churchill, companies might well conclude that TSR is the worst kind of award—except for all the others.