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Watching the Watchers, A Cautionary Tale Regarding Negative Say on Pay Vote Recommendations

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When it comes to say on pay vote recommendations from the two main proxy advisory firms, ISS and Glass Lewis, caution is in order. Why? Both have somewhat disclosed some of their evaluation methodologies for determining their vote recommendations on such votes. However, many of the details that can make or break such vote recommendations rely on ‘black box’ methodologies that can be hard to replicate.

This past week I learned of an interesting situation in which a company was able to call out ISS’s vote recommendations for its Say on Pay proposal as being based on incorrect data, which was no mean feat as it specifically pointed to ISS’s Financial Performance Assessment (FPA) using ISS’ very own EVA-influenced metrics. The more amazing part? ISS agreed with the letter, re-ran the analysis and switched its vote recommendation to support the company’s Say on Pay proposal!

JPMorgan Chase & Co. was the company and it discovered that ISS used old compensation data in running its FPA analysis (See JPM letter to ISS filed as additional proxy solicitation material at: https://www.sec.gov/Archives/edgar/data/19617/000001961723000353/proxysupplementalmaterials.htm). Perhaps JPM had access to the ISS pay-for-performance model through a subscription to it from ISS Corporate Solutions. Or perhaps they looked closely at the multiple of median shown on the ISS proxy report and put the pieces together. I don’t know for sure how they discovered the ISS report used older compensation data for its analysis, but it did so.

This case has some important implications for companies. When reviewing a negative say on pay vote recommendation from either ISS or Glass Lewis, it will be important to follow some simple steps to ensure the recommendation is based on solid data:

  • Review your company’s compensation data used in the report to ensure it is accurate.
  • Pull the compensation data for the proxy advisor’s peer group to see if it conforms to the data presented in the report.
  • Have your staff or your compensation consultant analyze whether the compensation data used is the latest that should be used according to the proxy advisor policies.

This should now be a standard approach for companies facing a negative proxy advisor say on pay vote recommendation to help ensure that the advisory firm is following its own policies.

The Roman poet Juvenal asked in Satires, “Quis custodiet ipsos custodes?” (Which translates literally as Who will guard the guards? And also Who watches the watchers?). The answer is that we all need to be vigilant to ensure that proxy advisors are following their policies and practices when they release negative say on pay vote recommendations.