March 23, 2022

From Best to Worst: ‘Madam Chair’ CEO Alicia Syrett and Farient CEO Robin Ferracone Talk Comp Committee Landscape

In the following interview, I dialogue with esteemed investor and experienced public company board chair Alicia Syrett. She is the CEO of the early-stage investment vehicle Pantegrion Capital (its name is a combination of passion and integrity). She is also the founder of Madam Chair, a collaborative group of 70+ female chairs of publicly traded companies across industries and market capitalizations. The group shares recommendations and connects its members with one another to support their respective leadership activities, and many members also serve as compensation committee chair in addition to their roles as board chair. In 2021, Alicia was named independent chair of Digimarc, a publicly traded technology company (Nasdaq: DMRC). In this Q&A, we discuss a variety of topics that boards in general and compensation committees in particular should consider amid rapid changes in corporate governance spurred by expanding stakeholder expectations for board oversight. Here are excerpts from our conversation. 

Alicia Syrett (Alicia): Given the current governance landscape, how have the roles of the board and compensation committee changed?   

Robin Ferracone (Robin): The corporate governance landscape is much broader today because of investor-driven demands. Historically, the proxy would disclose pay philosophy and programs pertaining only to executive compensation. Now, the proxy includes the CEO, and the top five Named Executive Officers (NEOs), which is a statutory approach, other executives more generally, and the broader employee population. When I see only NEOs in the proxy, I think, “The lawyers wrote this.” In today’s climate, compensation committees need to address compensation for the CEO and the CEO’s direct reports because these direct reports are essentially the succession plan. This gets into much broader topics around talent management, succession, strategy, and how these elements are all integrated and how they align with the broader workforce, which is why we now have human capital management disclosure in the 10K. Investors want to know, “How are you managing your workforce? Is the workforce sustainable? Are there problems brewing? What does the overarching talent picture look like?” The whole landscape has changed and serving on the compensation committee is now a more interesting role because it’s more holistic and really impacts the work of the entire board.  

In addition, boards need to oversee how the company is “showing up” with regard to the workforce and all stakeholder issues. They have to consider how the responsibilities should be divided up among the board and its committees and determine who is going to do what to ensure there is no duplication of effort and nothing falls through the cracks. We just went through an exercise with one of our committees where we set up a matrix and said, “Here are the things one has to look out for, and here are all the structures we have in place to handle it.” When the matrix was marked up and all the “x”s went into a box, it wasn’t surprising there were some overlaps. Around diversity, for example, the nom/gov committee took on the question, “Do we have a diverse board?” The compensation committee took on, “Do we have a diverse workforce?” I think the work has become a lot more interesting. 

Alicia: Two questions: What is expected of the compensation committee chair these days given what you have said about the broader landscape? And how should the chair interact with the committee, management, including the CHRO, consultants, and their other committee chairs? 

Robin: I wrote a piece for Forbes.com titled, Help Wanted: Comp Committee Chair. The piece opens as follows:  

The successful candidate will bring at least three years of board experience, have a good working knowledge and understanding of executive compensation, be skilled in psychological jujitsu, and have enough political savvy to win a U.S. presidential election. The position will be up for reelection on a yearly basis, and committee decisions may result in a failed Say on Pay vote and/or the loss of your board seat. Only able-bodied men and women with strong backbones need apply. 

I think that completely sums up what compensation committees do these days. It’s about relationships, and we all spend a lot of time building relationships with our fellow board members and with management, and it is so important that we see this as a fundamental part of our role. These interactions provide an understanding of motivations and what keeps everyone working toward a common goal. When I thought about the role of the comp chair, what I really like to see is that we are all working for the shareholders. If we keep that in mind, it’s galvanizing.  

I also like it when the committee owns the process—they own the way it works and they own the governance. The chair in particular owns the agendas. Now, when we prep with the chairs, I am seeing the chair take a very active role in what the agenda is going to look like, the timing, and the order in which things are discussed. Owning the agenda is important because then you own the process and obviously the decisions. One of the key things that is at the doorstep of the comp chair is bringing the pay decisions to the CEO or head of HR—and saying, “Here is what we decided.” It’s important that the committee chair own the decision, instead of becoming defensive and saying “our hands are tied” because of a possible negative reaction from ISS or Glass Lewis. Every decision needs a business case and the comp chair must be capable of explaining why a decision was made.   

I thought back to an experience with one of the chairs I worked with. She had a very tough situation. Before she got into that role, the committee allowed some egregious things to happen with management, and they had their hands slapped big time by not only the proxy advisors but by the shareholders with a failed Say on Pay vote. A failed Say on Pay vote is one thing, but if it happens repeatedly, the shareholders are going to vote the compensation chair off the board. They are going to say, “This director is not doing the job.” The vote may not be under 50 percent, but it is going to “take a hit” and none of us want this. I spoke with her and said, “Let’s think about how to strategize around how we manage this.” We basically said: “(1) we need to have tough performance goals and stop the pay that is out of line, and (2), we need to make sure that to earn the incentives, the executives need to step up to tough performance goals.” That orientation turned around the vote.  

Alicia: Robin, you had mentioned more specifics on the compensation committee agendas and processes. Can you dig into that and talk about how some of those specifics are changing? We hear about topical items such as ESG, DE&I, talent development, and succession planning, and the broader workforce coming into it. How do you see those specifics changing?  

Robin: The board’s agenda and committee charters are changing. The chair’s role is also undergoing significant change. I’ll share an example from a client who I think is handling this quite well. They renamed the committee to Talent Management and Compensation Committee to recognize the broader charter and recognize their responsibilities around DE&I, ESG, succession, and the broader issues. This particular chair decided that “we know a lot about compensation as a committee, but we don’t know a lot about the whole diversity equation. As a result, we better educate ourselves.” First, they changed the composition of the committee with respect to who was on it to bring in skills around diversity. Second, they changed the resourcing of the committee, and now, not only do the comp professionals come to the meetings, but the talent and development people participate as well. That is important. Third, the chair did an immersive, educational session at the beginning of the meeting to understand the company’s current situation, diagnose the problems to get to the root causes of any issues, and better understand where they were starting from. We had one meeting where a lot of the compensation items were pro forma and the chair said, “I am adding these as informational items.” She used the entire meeting to focus on diversity, which was not pro forma. These are far reaching changes. It is becoming the chair’s role to organize all the moving parts, so the charter is carried out. The broadening of committee responsibilities is happening quickly, and the changes are a lot more than we would have expected.  

Alicia: The whole topic of shareholder engagement is important (to this group). What do you see as the responsibilities of the board chair and the compensation committee chair for communicating with shareholders about compensation?  

Robin: Until recently, I was the compensation committee chair at Trupanion, a publicly traded company, and have been in your shoes. Engagement is important. My experience is that when it comes down to it, proxy advisors and shareholders really want to hear from compensation committee chairs or someone else on the committee. They want to hear from someone who is on the board and particularly in a leadership role. Why is that? They don’t want to hear from the CEO because the presumption is that the CEO will be biased. They don’t want to hear from the consultants because they know we know the pay programs inside and out if we are doing our jobs well, and they know we will be able to answer all the questions. Shareholders want to know whether the chair of the compensation committee understands the pay programs, and if they can speak to the programs, and if they can speak to the rationale as to why the decisions were made. That’s what the shareholders are looking for. There is no one else to fill the committee’s shoes in this regard. I think engagement is critically important and the expectations are much clearer than they have ever been before. 

Alicia: Are there any shareholder horror stories we should know about? What is the worst-case scenario with things going horribly awry? 

Robin: What I think goes awry is when the board doesn’t talk to the shareholders and the committee gets blindsided. The worst is when you hear a board member say, “I didn’t see that coming.” The reality is that you would have seen it coming had you engaged with shareholders. If you are going to make changes, it is perfectly legitimate to go out and speak with shareholders without running afoul of Reg FD. If you go in and say, “We are thinking of these things and would like your opinion,” and then just listen, there is value in that. If you go in and try to defend your position, shareholders view it as a public relations mission and consider the committee representative to be tone deaf to the original concerns. I recommend a preventive approach of reaching out versus a defensive approach of “wait and see.” 

Alicia: How should committees think about the sometimes competing interests of shareholders and management with respect to pay quantums, special retention awards, and adjustments to incentive awards? How should we think about that balance as chairs? 

Robin: This can be thorny. I don’t know if you are experiencing the Great Resignation. Right now, we are experiencing a highly competitive labor market in technology and certain other sectors. In addition, diverse talent is getting bid up. We know that proxy advisors and shareholders in general don’t like special awards, outsized awards, and one-off awards—those things can seriously impact the Say on Pay vote. Sometimes it becomes a real necessity to make sure the shareholder interests are protected. What we try to do is advise clients to be judicious about it. If you really must target certain people, do you instead target everyone? The answer is “you do not.” You can pick and choose. The CEO is in the hot seat on this one. “Do we need to include the CEO, or can we take care of the CEO in a different way over time?” If we are going to do a special retention award, don’t include the CEO. “Can we make the awards performance based? Can we have the awards look a little different than the normal awards?” One of the questions shareholders will ask is, “Why do you need something special? Why can’t this be done within the normal pay program?” And, if you are going to have this award called out and if you can say, “here is its character, here is the role it is playing, here is the rationale,” then that is going to make a much stronger case with shareholders.  

Here is an example. We had a client come to us with a succession plan. They said, “We love the CEO, but the CEO wants to retire in the next 18 months. We have two great candidates we want to lock in. One is a diverse candidate, and both are strategic and important.” We think that a $2 million retention bonus on top of everything else would be a great idea. They said, “No. It is not enough. We want to do $4 million.” We said, “Okay but just realize this is probably going to get the attention of shareholders and proxy advisors.” Even though we’ve all heard of bigger awards, these executives were not CEOs and $4 million apiece for two people who are in the top five adds up. Sure enough, it got the attention of the proxy advisors. The client had a bit of an uphill battle. Is it fatal? No. Could it have been managed more aggressively to avoid scrutiny? Yes. I feel more upfront shareholder engagement would have helped. The client did the engagement, explained the rationale, and ended up in a good place. Boards need to be judicious and understand where the guardrails are and where there might be issues. As long as eyes are wide open and it is a business decision, you may take a hit on your Say on Pay in that year, and then recover quickly the next. 

Alicia: What are some of the best practices for CEO performance evaluations specifically related to non-financial measures? Who is involved? Have you seen 360-degree reviews? If so, are board members involved in giving feedback? What are your thoughts on best practices? 

Robin: Best practice is to include an evaluation for the CEO before the compensation decisions are made and then link the two. What I see most commonly is a questionnaire sent to board members. It will contain quantitative topics typically on a scale of 1-5 with such factors as how well the CEO articulated a compelling strategy and provides room for qualitative input. Very often there may be a full-board discussion around all the feedback. Then, that review goes to the compensation committee so they can take everything into account when making pay decisions. That is what I am typically seeing. What is interesting is your question about the 360-degree evaluation. Usually, a member of management, typically the CHRO, may collect management feedback about the CEO as well. 

Alicia: What regulatory changes should compensation committees be tracking—for example, pay for performance disclosures, clawbacks, standardization and reporting of ESG metrics, human capital management disclosures, Say on Climate—any others?  

Robin: We target three groups in particular for information to stay current on what is trending: First, the government, which includes the SEC for coverage of the regulatory environment in which we live; second, the proxy advisors, as they frequently issue policy updates and have their finger on the pulse of what is happening; and third, investors. Farient often obtains a global perspective on trends because many times other regions are ahead of the U.S. in terms of what is happening around regulations, compliance, and best practices. The hottest topic today among investors and proxy advisors is ESG, specifically, climate and DE&I. We also keep apprised of SEC updates around finishing the implementation of Dodd-Frank. We are laser-focused on all aspects of ESG. We just published a report titled 2022 and Beyond: Global Trends in Stakeholder Incentives, which is part of our Global Trends in Corporate Governance series. Last year, we published 2021 and Beyond: Global Trends in Stakeholder Incentives. On our website, we have data tracking tools specifically around Say on Pay results and changes in CEO pay. These are tools directors can use to compare their situations and can be sliced and diced by company, industry, or revenue. At Farient, we constantly challenge ourselves to create products and services to help boards and their chairs make better-informed and defensible governance decisions.

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