There has been a power shift in corporate America from management in the 90s to board members through the first decade of the 2000s to the newly empowered investors of today. Where ongoing communication between boards and their shareholders was the exception, today it is clearly becoming the norm. As Dodd-Frank regulations become common practice and we wait for the SEC to implement more rules, the ultimate question is not, what will the SEC require, but what do investors want from our executive compensation system and are we giving it to them?
Farient’s Point of View
Over the past 18 months, Farient Advisors has spent time researching what investors want from their portfolio companies. We have looked at the intent of the Dodd-Frank Act within the context of encouraging better communication between companies and investors. We know that investors have minds of their own and do not speak with one voice. But for the most part, some common themes among them are emerging:
- In general, investors are in agreement that they do not want to be in the board room. What they want is for board members to do their jobs by planning and making decisions that are in shareholders’ best interests. Then, they want these companies to clearly and proactively communicate their plans and decisions. These expectations pertain to executive compensation, as well as any other executive matters. The key message here is that investors want regular communications of decisions that they deem to be defensible
- Investors believe that executive compensation is a “window into the boardroom.” In other words, if the executive compensation program is transparent, reasonable, and sensitive to company performance, then investors feel as though other aspects of corporate governance will have integrity as well. The key takeaway here is that investors expect the executive compensation programs and decisions to have integrity, e.g. the program design is consistent with the business strategy and needs of the company, and the committee actions are consistent with the program design
How Farient can Help
At the end of the day, the objective of most companies is to align the interests of executives and shareholders.
To help companies evaluate their performance and pay alignment, Farient has created an assessment tool, called the Farient Performance Alignment Reports (PARs), which provides a clear illustration of whether a company’s top executive pay is reasonable for its size, industry (or peer set), and performance, and whether its pay is appropriately sensitive to performance. With the Farient Alignment Report, companies have a better way to:
- Disclose the relationship between pay and performance;
- Diagnose alignment problems; and
- Design better aligned compensation programs
The Farient Alignment Report provides a means to quantify and visually illustrate the degree to which a company’s executive compensation program is aligned with total shareholder return (TSR) over time.