Urge clients to read proxy statements, vote

Late winter, early spring is the time of year when investors begin to find their mailboxes filled with proxy statements from the companies in which they own shares.

Financial planners and investment advisers can help investors and, in turn, corporate governance in the United States by urging their clients to read those proxy statements and to vote those proxies. They can go further and offer to help clients understand the issues discussed and to fill out the documents and mail them back before the deadlines.

One area to which planners, advisers and investors should pay particular attention is executive compensation. Shareholders can help rein in excessive executive compensation by voting yea or nay on the directors’ recommended compensation for senior corporate executives.

Because the Dodd-Frank financial reform law required companies to offer shareholders a nonbinding vote on executive compensation, shareholders ought to respond by actively engaging in those votes. After all, they are the owners.

Although the votes aren’t binding, corporate management and directors do pay attention. This is shown by the additional attention that the companies are paying this year to getting individual shareholders to vote on the issue.

INSTITUTIONAL INVESTORS

Institutional investors, guided by proxy advisory firms, so far have been more likely to vote their proxies on the compensation plans, and far more likely to vote against them, than individual shareholders.

If individual shareholders pay attention to corporate governance and vote their proxies — as they should — management practices in general, and executive compensation practices in particular, likely will improve. It may take some time, but that’s OK. Signs are starting to emerge already that once-insular boards are beginning to hear the sound of shareholders calling them to account for compensation policies.

Citigroup recently detailed plans to link the chief executive’s compensation to stock performance and return on assets.

In addition, advisers should pay attention to the votes. Companies where a majority of shareholders, or a large minority of them, reject the compensation plans might be eliminated from portfolios, or future consideration, until management attitudes change.