Magni votes company proxies on behalf of clients and is guided in its votes by applying corporate governance best practices as described in Magni’s Sustainable Value Creation principles.
When Magni is voting a proxy, it means that one or more Magni clients have the associated security in an account. These accounts use a Magni Corporate Governance strategy so that the resulting portfolio contains the best governed companies, according to Magni research. Hence, the companies are already well run, and Magni is inclined to vote for proforma proposals. Each Magni vote on a company proxy is documented in a post published on Magni’s proxy blog.
No company is perfect, and all companies have opportunities for improvement. If the improvement areas overlap with a proposal, then Magni may vote against the board recommendation.
Company proxies for securities listed on U.S. exchanges have proforma proposals regarding:
This document identifies how Magni will vote for the “say-on-pay” proposal. Two basic conditions need to be met for Magni to support the proposal: (1) transparency of compensation practices along with the associated processes and (2) active engagement with shareholders.
Transparent practices and process
Executive compensation is complicated. Highly compensated consultants design many of the compensation plans used in large companies. The resulting plans have many components with conditional payouts (e.g., change of control) and lengthy legal provisions (e.g., rights upon termination). As a result, one of the biggest sections of a proxy contains information about the compensation plans. Some of this content is required by law and/or regulation.
It is difficult for shareholders to form a perspective on the issues of effectiveness and/or appropriateness of most compensation plans; however, assessing the quality of the process can provide insight into these issues.
Often, the target levels for compensation are set based on a benchmarking against other companies. These companies are called a peer group or a comparator. Sometime a company uses more than one peer group. The associated disclosures regarding the peer group(s) is/are not standardized by laws and regulations. As such, these materials are good surrogates for transparency.
Magni seeks disclosure of the:
Shareholders can read this information to determine the extent to which the criteria are clear and objective. They can also understand which companies are used for setting target compensation levels. The benchmarking helps shareholders understand the relevancy of the peer group(s). For example, if all companies in the peer group are much larger than the company, the peer group may provide an upward bias on compensation levels.
Some company leaders consider the required annual “say-on-pay” vote to be the only source of shareholder feedback that they need. However, having good relationships with shareholders involves more than the vote and should include conversations on a variety of topics, including compensation. Companies with strong shareholder engagement programs are more likely to be better governed. These companies are also more likely to have effective and appropriate executive compensation packages. The disclosures related to shareholder engagement are not standardized so this another way to assess transparency.
Magni seeks disclosure of the:
Shareholders can read this information to determine the extent to which a company is serious about receiving feedback from shareholders. They can also have a degree of confidence that egregious elements of a program would arise in these discussions.
If the peer group materials are clear, then the practices and process are more likely to be transparent. If the shareholder engagement is disclosed thoroughly, then the company likely gets good feedback about compensation. In those situations, Magni votes for the “say-on-pay” proposal.