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Compliance
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How To Write The Ideal Proxy Statement

by David F. Larcker and Brian Tayan

Institutional investors are dissatisfied with the annual proxy.

In a recent survey, we find they want public companies’ proxies to be shorter, more concise, more candid, and less legal.

More than half of investors think the typical proxy statement is too long, and nearly half believe it is too difficult to read and understand. On average, they say they are reading only about 32% of a typical proxy. (Their ideal length? About 25 pages.)

Overall, shareholders want corporations to explain information rather than disclose it.

Companies should take note. Inadequate disclosure hurts the voting process. Only 54% of survey respondents believe that the proxy allows them to make an informed decision regarding “say on pay.”

To write the perfect proxy, consider the following:

Context

Investors say today’s proxies lack context. In the words of one investor, “We’ve lost sight of what the proxy is for. It’s become a catchall for nonfinancial information.”

Help investors understand how the company’s governance choices are informed by its strategic goals, in particular its choices relating to board composition, shareholder rights, financial targets, performance measurement, and executive compensation. Don’t make them fill in the blanks. Avoid boilerplate, legal, and compliance-oriented language — use simple, direct language.

Page goal: one

Board Composition

Investors want to know why each director is on the board and how he or she contributes. This information could take the form of a skills matrix that maps director qualifications to the organization’s needs. That would allow shareholders to make decisions about board reelections based on the company’s performance in these areas.

The proxy should also share the process for committee assignments, director evaluation, and board succession planning. A simple table should explain director compensation and ownership levels.

Page goal: two

Compensation

Investors cite CEO compensation as one of their biggest grievances — they don’t understand how it gets set and against what metrics. A proxy could improve this through clear description of how compensation is tied to long-term strategy, financial metrics, and risk. One investor notes, “We want to see better disclosure, not more disclosure.”

Proxies should highlight the value of compensation granted and realized, comparable data among peers or industry averages, metrics and targets used to give performance-based awards, the company’s actual performance relative to targets, outstanding awards and the conditions under which they can be realized, justification for discretionary payments, and ownership guidelines and levels.

Page goal: four

Shareholder Rights

Investors want a concise summary of charter and bylaw provisions that spells out their rights to influence the corporation. They want plain-language statements of company opposition to shareholder-sponsored proposals and an explanation of the process the board will take in response to shareholder engagement.

Page goal: one, plus one per proposal

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