Each year proxy statement best practices evolve based on the heightened focus of new regulations created by the U.S. Securities and Exchange Commission (SEC). 2015 marks the ninth year under the SEC’s executive compensation disclosure rules and the fifth year of the ‘Say on Pay’ vote. Along with these changes in regulation, companies are also using the proxy statement as an opportunity to communicate directly to their shareholders, by telling their unique story in an interesting fashion.
Preparing the proxy statement is not an easy task; every year various departmental teams (finance, legal or investor relations) collaborate to create a compliant, easy to read, informative document. Proxy best practices are comprised of two important elements: the content and the visual.
Concise communications: Using plain English
Proxies have historically been filled with dense, wordy text and legalese, making them difficult for the reader to comprehend. The SEC now mandates statements should be written in plain English. What is plain English? The SEC defines plain English as “analysing and deciding what information investors need to make informed decisions, before words, sentences or paragraphs are considered”. A plain English document uses words economically and at a level the audience can understand. Its sentence structure is tight, a plain English document is easy to read and looks like it’s meant to be read.
Companies should use plain English in their disclosure, as well as other methods to give the document structure, ensure flow and communicate information meaningfully. An excellent example is a Chairman/CEO letter. Letter inclusion in proxy statements has nearly doubled over the past two seasons. This letter should also be written in plain English and placed at the beginning of the document as an easy way to introduce the reported year and communicate specific topics that engage shareholders from the beginning.
Before the first word of the proxy statement is written, the document should be organised in a systematic style, constructing the document in a manner that logically flows, allowing information to build upon itself. Grouping related information also helps readers better understand the overall message and helps reduce redundancies in the document. Whenever possible, the reader should be able to understand a single idea without having to reference another section of the statement for supporting information.
Avoid jargon that can confuse the message. If it is necessary to use industry terms or technical information, define and explain the words clearly. If several industry terms are used in your disclosure, consider adding an index of terms at the end of your document.
Lastly, employ the same method advertising agencies use when writing copy. After the proxy statement has been written, wait 24 hours and edit it again. That time span will allow you to read the document from a fresh perspective and help you make your statement more concise and readable.
Using graphics: the great communicator
Today, adding visual elements to proxy statements is considered a best practice. Effective disclosures provide summary overviews of each major section while others utilise call-out boxes to draw readers’ attention to main ideas.A common graphic enhancement is the design improvement focusing on each member of the board of directors. Companies have adopted a clearer approach, moving away from the dense narrative text that is seen as legacy disclosure. Highlighting tenure, age and committee memberships are only a few of the improvements in the updated layout of directors. One best practice includes using a photo of each director – this humanises the document and helps strengthen the company-shareholder relationship. Highlighting key skills and qualifications the company has defined as relevant is also an important message to tie in to each director. The Coca-Cola Company, a pioneer in disclosure, focuses on the interest of the readers when preparing its proxy statement. The example (below) shows the top skills and qualifications for this particular director, as well as the evidence to support the claims. The attributes should reinforce that each member is selected carefully, ensuring a well-balanced board.
Strict European requirements regarding director tenure, gender and independence confirm that companies should do more to explain why director skills and qualifications are relevant and how the board works as a team.
The incorporation of graphical elements has also been successfully leveraged in the Compensation Discussion and Analysis (CD&A) section of statements. The CD&A is the most highly read and scrutinised section of a proxy. The challenge is to explain compensation in a way that is informative and accessible while respecting regulatory requirements, which require that disclosure be filled with detail. By leveraging the communicative power of graphics, clear levels of hierarchy, improved presentation and colour, it is possible to clearly present the information investors want without obliging them to wade through dense narrative sections.
The annual benchmark study conducted by Labrador revealed that 80 per cent of Fortune 250 proxy statements utilise an executive summary of the CD&A. In essence, this section should cover all of the high-level messages and key elements as to how the compensation program aligns pay and performance.
To enhance shareholder understanding of these decisions, companies have opted to clarify their compensation policies by providing alternative pay charts and graphs. According to the same benchmark study, 79 per cent of companies have added a graphic to breakdown the pay mix. Pay mix graphics have become a relatively common practice in the CD&A, and specifically in the executive summary.
These graphs serve to illustrate the architecture of the company’s executive compensation programme, outlining the compensation elements and disclosing additional information, such as the size of each compensation plan relative to the overall programme. In its 2014 proxy statement, Walmart visually explains the pay mix in the graphic illustrated below, clearly outlining what parts of compensation are performance-based.
Whether it is a comprehensive Coca-Cola-style director biography, or a Walmart-style pie chart of the company’s pay mix, adoption of these enhancements has a proven return on investment. Finding ways to engage readers has evolved from a trend to a best practice.
About The Author:
Molly Doran has been with Labrador since its entry into the US market, and she uses her content and design expertise to focus her attention on the disclosure needs of our clients. A young professional with international market exposure, Doran’s core focus is on helping clients tell their governance story.