There is, however, a better way. Every year, more and more companies are making their proxy statements more effective as communications and advocacy documents. They are attracting positive attention from institutional and retail investors alike for making their disclosures clear, crisp and readable. And they are resulting in more support for the board's positions and in fewer broker non-votes, which can often make the difference between victory and defeat on shareholder proposals and other "non-routine" matters.
This trend started a few years ago, when a few companies — generally, those who could afford to and some that could not afford not to (due to low levels of voting support on say-on-pay and other matters) — began to rethink their proxy statement disclosures, using their considerable strengths in consumer branding and other areas to support their positions on board- and shareholder-sponsored voting proposals alike. What's the secret sauce? Here are some of the ingredients.
There are many examples of how companies misuse the valuable "real estate" of their proxy statements. For example, consider the section, usually titled "Questions and Answers About the Meeting and Voting," that takes up many of the early pages of the proxy statement — the most valuable proxy statement real estate. Its information includes such topics as how to change a vote, and the differences between beneficial and record ownership of stock. While some of the information is required by SEC rules, much of it is not, and the rules generally do not specify where the required information must be situated. And yet, this valuable real estate goes to waste.
It may have made sense to provide this information up front when retail investors owned most of a company's shares. However, institutional investors currently own upwards of 70% of many public companies' shares, and this information is of no use to them. Some companies have realized this and have moved this information to the "back of the book" — it's there for retail investors who may want it and to comply with SEC rules, but moving it frees up valuable real estate for more meaningful information, such as a proxy summary (more on that below).
There are many other examples of how proxy statements might be restructured to use prime real estate more effectively. such as:
Many companies put these disclosures front and center. However, for companies whose stock is widely held, with no significant ownership on the part of the board and/or management and a few significant positions owned by the "usual suspects" in the institutional community, this information is not very important. The same is true of required disclosures on compliance with Section 16 (relating to insider stock ownership reports). Yet this, too, is often prominently provided. Move it back!
Many companies put all the voting items in one part of the proxy statement, with supporting information elsewhere in the document. If you're voting on the election of directors, do you really want to have to flip to some other section to find out whether directors' attendance was good? Wouldn't it make more sense to keep the pertinent information in close proximity to the voting item?
Instead, the valuable real estate should be used to focus investors on the key facts they need to see, and to put the company's best foot forward — consistent, of course, with the letter and the spirit of full and fair disclosure requirements. For example, if a company has good governance practices, or tough performance metrics, why not get that information out there? By taking advantage of the proxy statement real estate, companies can, in effect, say "Read this — it's important!"
As discussed below, institutional investors want to get a real sense of your board and what it does. One way to achieve this is to provide a letter or other communication from board leadership — a non- executive chair, a lead or presiding director or one or more committee chairs. Investors may not spend much time reading proxy statements — certainly not as much time as companies might wish — but they do read these director communications.
Many companies have introduced proxy summaries in recent years; in fact, most of them have included two summaries — a general one at the beginning and an "executive" summary of compensation information preceding the CD&A and "say on pay" sections.
The proxy summary can be used to "accentuate the positive" — i.e., a company's governance and compensation strengths — in a way more likely to ensure that institutional and retail investors alike will actually see it and pay attention. Some of the key elements of the summary are:
Throughout these and other elements of the proxy summary, companies should make use of infographics to bring home key points at a glance without forcing shareholders to read paragraphs or even sentences.
So many companies repeat information that doesn't need to be repeated. The best example that comes to mind is the meeting agenda - the list of matters to be voted upon at the meeting. This information is frequently contained in a letter to shareholders, in the notice of meeting, in the proxy summary, and in the table of contents — and that may not be an exhaustive list.
Of course, there are exceptions to every rule. Sometimes repetition can be helpful, for example, reminding shareholders (and proxy advisory firms) about a robust shareholder outreach program that has validated the board's decisions on certain matters — but that is not true of the meeting agenda, where once really is enough.
Understandably, shareholders want to get a real sense of your board and what it does. Investors cannot (and really don't want to) have access to the boardroom, so the proxy statement must suffice for this purpose. However, many companies limit their proxy statement disclosure to what is required and no more. Instead, discuss relevant topics in which investors are legitimately interested, such as the board's oversight role in:
You don't have to disclose confidential or potentially anti-competitive information, and you don't have to make promises that you may not be able to keep (for example, that you're fully equipped to handle a cyber-breach). However, these and other topics are top-of-mind to investors, and merit disclosure.
A similar opportunity exists with respect to board committees. The SEC rules in this area are stultifying. They require you to disclose matters such as whether the committee operates under a board-approved charter and how many meetings it held during the prior year. Exciting stuff, no? No! As a public company audit committee chair once told me, the proxy statement tells what the committee is, but not what it does. And most audit committees (and other committees, too) do a great deal. Why not talk about each committee's major projects during the year? Achievements? Plans for the next year? The SEC has acknowledged that disclosures in these areas can be improved. For example, in a 2015 "concept release" (https://www.sec.gov/rules/concept/2016/33-10064.pdf), the Commission pointed out a number of areas in which disclosures about audit committees could be enhanced. In a 2015 speech, Keith Higgins, Director of the SEC's Division of Corporation Finance, raised similar issues with respect to compensation committees (https://www.sec.gov/news/speech/executive-compensation-beyond-dodd-frank.html).
Unfortunately, many companies are reluctant to do anything other than what they've done before; and some are terrified. Whenever the above or other changes are suggested to those companies, the first reaction is "who else has done this?" And unless you can produce a list of companies (not just one or two) that have done "this," most companies won't go there.
Lawyers bring a lot to the table when it comes to proxy statements and other disclosures. However, they also pose some problems when it comes to improving the quality of proxy statements. Here are a few lawyerly traits that might best be left at the door of the drafting room.
Fear of being assertive: Many lawyers, especially securities lawyers, are reluctant to draft straightforward, declarative sentences. Instead, clear statements are surrounded by cautionary and conditional language that weakens the disclosure. It is possible to draft assertive disclosures without risking liability.
Building to a conclusion: Lawyers (even non-litigators) like to build to a conclusion, marshalling their arguments so that their conclusions are inevitable. That may be great for a brief, where the reader is likely to devote the time and attention that the prose deserves. However, institutional investors — if they read the proxy statement at all — are unlikely to give it more than 20 minutes of their time, at most. If you wait to the end of a section to pound home your points, you may be pounding in vain because the reader may never get there.
Use a well-written newspaper article as a model: The key takeaways are usually in the first sentence or two, and the rest of the story builds the case for what's already been asserted.
Drowning the reader with facts: A related point is that lawyers often feel they must provide each and every fact supporting a position.
While it's possible that the 89th fact may win over someone who's not been persuaded by the first 88, in the context of a proxy statement, the chances are that that someone won't get past the first few or facts — much less to the 89th.
Slowly but surely, companies are beginning to think outside the box when it comes to their proxy statements. At a minimum, companies are realizing that there are ways to make the proxy statement more user-friendly, engaging and meaningful while remaining in full compliance with disclosure requirements. We've already made some suggestions, but here are few more.
Humanize your directors: Most director bios and skill set disclosures are, well, boring and don't convey any sense of what the director brings to the board. In 2016, one company posted a video of its lead independent director on its website, and it really provided a sense of what made the director tick. If a video is too costly or unconventional, consider having a personal statement from each director as to his/her goals as a board member, personal areas of interest in the company's business, etc. This is a leading practice outside the U.S. and merits consideration here.
Use infographics wherever possible: So many proxy statements consist of long paragraph after long paragraph, when a tabular or graphic presentation would get the same points across more quickly and effectively. For example, why give a narrative description of stock ownership guidelines when a table could show the guidelines and demonstrate that the board members are in compliance?
Use captions to tell the story: Don't force your shareholders to read a full paragraph when a caption can tell the story. If you encourage your board members to engage with shareholders, consider a paragraph where the caption, in boldface, says "our directors engage with shareholders" or something like that. If a reader wants to get the details in the paragraph, she can read the full text; on the other hand, you may have given that reader all she needs with a comprehensive but succinct caption.
Use call-outs: Call-outs take actual text from a paragraph and highlight it in a box or some other graphic in the margins. It's a great way to emphasize certain things without — again — forcing the reader to get all the details.
Use color and fonts to highlight important items: You can call attention to disclosures that you want your shareholders to read by putting them in a different color or font (or both), or shading the paragraphs you want them to read. This can be useful when presenting opposition statements to shareholder proposals and can be done in online versions only to save money on printed copies.
Consider how you deliver your proxy materials: The Internet has opened up new and innovative ways to make your proxy materials more impactful. For example, consider an annual meeting website that has convenient links to your proxy materials and provides for voting. These and other devices make it more likely that your materials will be read and that your owners will vote their shares, reducing broker non- votes and generating higher levels of support for your board's position on voting items.
Draft carefully: All of the above and other devices to make your proxy statement user-friendly may come to naught if you keep using last year's text without bothering to edit it and make it read better. Many suggest that you should draft from scratch rather than marking up last year's document, but that's never going to happen. Instead, give it a critical, close read; you'll be surprised at what pops up. Use short, simple sentences, active rather than passive voice, and consider a variety of techniques that your high school English teacher tried to drill into you.
The devices outlined above will not outweigh poor
performance, weak governance or excessive compensation; the old saying about
turning sow's ears into silk purses remains true. However, it is possible to
make the most of what you have by making your proxy statement into a
user-friendly, effective communication and advocacy document.
Bob Lamm is an advisory director of Argyle. This article originally appeared in, and appears here with the permission of, The Corporate Counselor.