The Art of Proxy Design
Fourth Quarter 2013
Corporate Board Member
by John R. Engen
The proxy statement might still be published on chiffon-thin paper and loaded with required legalese. But at a growing number of companies, it’s reading more like a high-gloss magazine—with board members as feature players.
Prudential Financial Inc., Johnson & Johnson, and Pepsico are among the growing list of large companies that have overhauled the document itself in recent years, with an eye toward making it more accessible to time-pressed investors.
The Coca-Cola co. redesigned its proxy in 2012. This year’s version is rich in color graphics and summaries that explain in plain English the correlation between Coke’s performance and executive compensation, good-governance practices, and director backgrounds.
“The old proxy was lovely. It did what it was supposed to do, but it looked old,” says Gloria Bowden, the Atlanta-based soft drink maker’s associate general counsel and secretary. “We thought, ‘This is our most important shareholder communication of the year. Why do we have this antiquated document that doesn’t match how our customers interact with us?’”
The budding emphasis on proxy design might look superficial, but it’s really a matter of necessity. New disclosure requirements are making statements longer, and large investors own stakes in too many companies to effectively analyze all of them at once.
A well-designed proxy can cut through the clutter and allows the company to tell its story on its own terms. It also can help counteract the effects of a negative recommendation from proxy advisers, such as institutional shareholder services. Indeed, some executive summaries mimic the form of an iss report, with checkboxes and the like.
“We’re seeing companies thinking of the proxy less as a compliance document and more as an opportunity to communicate with constituents,” says Holly Gregory, a partner with law firm Weil, Gotshal & Manges.
At Pepsico, chairman and CEO Indra Nooyi’s cover letter trumpets “structural and operational changes” expected to save $3 billion a year, the $6.5 billion in capital returned to shareholders via dividends and buybacks, and the company’s inclusion on a list of good corporate citizens.
A two-page summary just after Nooyi’s letter hits the high points of the 70-plus page document, including a brief overview of executive compensation and the board’s voting recommendations on proposals.
A separate summary at the beginning of the Compensation Discussion and Analysis (CD&A) portion of the document explains with words and charts how the company’s 2012 performance justifies Nooyi’s $15.8 million in short- and long-term incentive payments.
Directors are getting higher profiles in the new designs. Prudential’s 2013 filing begins with a letter from the entire board, highlighting its achievements of the past year, accompanied by signed photos of individual board members.
Shareholder demands for more detailed information on board member qualifications also are reflected in the new-look proxies. Pharmaceutical company Johnson & Johnson’s statement, for instance, includes not only a director’s job history and age, but also a statement of the “value” the person adds to the board.
Board member Mary Sue Coleman, president of the University of Michigan, brings “a unique point of view regarding organizational management and academic research vital to a company competing in science-based industries,” her bio explains.
Coca-Cola’s director-election section features circular charts that explain individual board members’ areas of expertise, as well as their independence and tenure. Individual committee chairmen also make defining statements about their committees.
“Our committee strives to stay attuned to the sentiments of our shareowners, … and has designed our compensation programs to align with shareowners’ long-term interests,” reads the statement of compensation committee chairman Maria Elena Lagomasino.
Diversity is another big issue, and many companies—and investors—subscribe to the axiom that a picture tells 1,000 words, in terms of gender, age, and race.
“We can always tell when a board doesn’t have much diversity, because they don’t put photos in the proxy,” says Anne Sheehan, director of corporate governance for the California State Teachers’ Retirement System.
In the battle for attention and clarity, a proxy’s design is becoming almost as important as its content.