Engagement on pay at all-time high in US

New regulations on executive pay have driven the level of engagement between US companies and investors to an all-time high, according to a new study.

The survey of 82 institutional investors and 133 US-listed companies found that a new ‘say on pay’ requirement that requires US companies to seek shareholder approval on management compensation was cited by around half of the respondents as the main reason for increased levels of engagement.

The Investor Responsibility Research Center Institute, which commissioned the study, says the ‘say on pay’ measures, introduced by the 2010 Dodd Frank Act, have proved to be ‘a rare instance where regulatory reform is working as intended’, as they have encouraged increased communication between public companies and shareowners.

However, it also says there is a ‘broader shift in dialogue’ unconnected to the regulations, with more conversations on more issues as parties on both sides realise the benefits of better engagement.

Jon Lukomnik, executive director of the IRRCi, said many of those who began their engagements only on executive pay have now moved on to other things. ‘The conversations have expanded beyond one narrow issue, with issuers and investors now engaging more frequently on merger and acquisition activity, environmental and social issues, board structure, director qualifications, corporate strategy and financial results,’ he said.

The study found that 78% of companies and 81% investors had initiated some kind of engagement in the past year, up from 73% and 56% three years ago. The total number of initiated engagements was up too, from 33% of companies reporting more than ten engagements initiated three years ago to 47% now.

Companies also appear to be involving more senior people in engagements than before, with corporate directors found to be ‘more likely to take part in engagements’ than three years ago, though the report adds that ‘such participation is still the exception’.

The study found that most respondents, whether from companies or investment institutions, judged their engagements to be productive. However, companies were more likely to feel they had been successful than investors. Businesses reported that their engagements were ‘usually’ or ‘always’ successful 83% of the time, while the comparable figure for investors was 50%.

The institutional investors in the survey had aggregate assets under management of more than $17trillion, while the companies had an aggregate market capitalization of more than $2.3trillion.

In 2012, a group of PRI signatories developed guidance to support dialogue between shareholders and investee companies on how to identify appropriate ESG metrics, link them meaningfully to executive pay, and provide sufficient disclosure to investors. Investors are now engaging with companies in the utilities and extractives industries to develop a sector-specific approach to engagement activity. More information on this engagement can be found here.

 

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