Companies Target Retail Investors for ‘Say-on-Pay’ Votes

Emily Chasan

Senior Editor

The little guy is a big shot this proxy season.

To reduce the risk of an embarrassing failure in shareholder advisory votes on executive compensation, more companies are reaching out to individual investors to coax them to cast their ballots.

While these so-called retail investors account for more than a third of U.S. stockholdings, they have remained elusive in corporate elections. Historically, less than a third of their shares have been voted at annual meetings, and just 29% since regulators let companies start sending out proxy materials over the Internet in 2007, according to Broadridge Financial Solutions Inc.

When retail investors do vote, however, they tend to back management.

Last year, 515 companies, up from 163 in 2011, sent mailings soliciting proxy votes to their biggest retail investors—typically those with 500 to 1,000 shares, said Chuck Callan, senior vice president of regulatory affairs at Broadridge, which processes most corporate proxy votes in the U.S.

This more than threefold increase, proxy experts say, has been driven largely by nonbinding “say on pay” votes, which let investors weigh in on a company’s executive-pay plans. * (See correction below.)

“Say-on-pay and institutional activism have resulted in higher dissident votes, so companies are eager to tap into the retail sector given their historical loyalty,” said Stephen Norman, president of advisory firm SPNorman & Co.

Companies have rarely focused much effort on retail investors, Mr. Norman said, deeming them more likely to sell their shares if they disagree with the company’s direction, rather than read long corporate proxy statements. But companies can’t afford to “be blasé,” he said.

An analysis of 2011 say-on-pay votes shows that 91% of the shares voted by retail shareholders were cast in favor of executive-pay plans, compared with 86% of votes cast by institutional investors, said Mr. Callan. “At a few companies that failed votes last year, had the retail participation been higher and at similar rates, those pay plans would have passed,” he said.

Only about 2% of say-on-pay votes have failed since companies have been required to hold them as part of the 2010 Dodd-Frank Act. But many companies fear failing—garnering less than 50% support.

Last year, influential proxy-advisory firms have recommended that shareholders vote against pay plans at about 14% of companies, and more than a quarter of companies got less than 90% shareholder support, according to executive-pay consulting firm Semler Brossy.

Failing a vote “has dire consequences,” said Manan Shah, an executive-compensation attorney at Jones Day. “You don’t ever want to repeat a say-on-pay failure, so you spend the entire next year focusing on that, rather than the operations of the business.”

Companies also have changed pay practices and stepped up their overtures to big institutional shareholders in response to such votes, often calling their top 100 or 200 investors to discuss executive-compensation issues ahead of annual meetings. Unlike retail investors, institutional investors like banks and pension funds must cast their votes to fulfill their fiduciary obligations to clients.

Some companies feel luring more retail votes could also help dilute the influence of big proxy-advisory firms like Institutional Shareholder Services and Glass Lewis & Co., said Scott Winter, managing director at proxy solicitor Innisfree M&A Inc. Companies generally expect negative recommendations from proxy advisory firms to sway at least 20% to 40% of their votes; retail investors often pay less attention to such recommendations.

As companies watch proxy votes come in, they can get increasingly anxious and spend hours, along with their proxy solicitors, phoning investors.

Blair Jones, managing principal at Semler Brossy, said she has seen chief executives or chairmen of board compensation committees personally call large retail shareholders or foreign investors who historically haven’t voted to say, “We really need your vote and need you to participate in this.”

Broadridge offers mobile and digital voting tools to make it easier for retail investors to cast votes, and industry groups are lobbying regulators to let those investors vote through the websites of the banks or brokerage firms that hold their investment accounts.

In another push, the New York Stock Exchange and industry groups formally asked the Securities and Exchange Commission last month to consider new rules that would make it cheaper and quicker to get the names of big retail shareholders from brokers.

Some of these ideas already have met obstacles. In December, Broadridge removed a “vote with management” button it had placed on digital proxies after the SEC raised concerns that the button would unfairly disadvantage proposals from investors.

*CORRECTION: Nonbinding “say-on-pay” votes allow shareholders to weigh in at set intervals on a company’s executive-compensation plans. The article above originally reported incorrectly that the votes are held annually. While that’s true at most companies, they can be as infrequent as once every three years, depending on the shareholders’ wishes.