Not Your Run of the Mill Proxy Season

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Spring is just around the corner and Wall Street is in for a bit of Spring Cleaning. It's the all important proxy season. This year it will have an added dash of flare with the introduction of Dodd-Frank. How will financial regulation influence this year's proxies?

I asked Clarke Murphy , Global Leader of Russell Reynolds Associates' CEO and Board Services.

LL: This proxy season will be the first one with the introduction of Dodd-Frank. What changes do you anticipate this year?

CM: 2011 is showing signs of becoming the Year of the Empowered Shareholder. With Dodd-Frank coming into effect, we’re seeing activism extend from institutional groups to individuals, especially with the “Say on Pay” provision.

As we’ve seen to date with Apple , Monsanto and Jacobs Engineering , shareholders and advisory services are rejecting triennial schedules on compensation review and are adopting annual timetables.

The lasting effects from this trend have yet to be seen, but boards will have to consider what this means in terms of attracting and retaining top talent for the C-suite. Companies with triennial schedules may have an advantage over those with annual reviews.

The best CEOs may prefer an atmosphere that allows them to focus on creating shareholder equity rather than pausing every year to discuss compensation. This may also become a board issue since a director’s time is already a precious commodity. Adding an annual review on compensation may detract from other issues related to growth.

Overall, signs of empowered shareholders speak to a broader demand for transparency, not just with compensation but for succession planning as well. Steve Jobs’ health issues have brought the need for succession planning to the forefront.

When faced with the prospect of replacing an iconic CEO whose personality and drive defines a company’s vision, shareholders are now seeing increased value in succession plans that have depth and are open to public scrutiny.

LL: "Say on Pay" will also be a big theme this proxy season. Besides Aflac, which companies do you see doing a good job on this?

CM: Aflac has done a great job creating wealth in recent years, and that has led to very positive support from shareholders since they went to an annual schedule for “Say on Pay” in 2007. Like Aflac, companies that will face the least resistance on “Say on Pay” are most likely to be ones that embrace transparency and focus on generating growth.

LL: Which companies do you see a "Say on Pay" battle?

CM: Compensation will continue to be an issue for industries most affected by the recent financial crisis. Financial services companies in particular will be a focal point for “Say on Pay” as there is a large public perception that Wall Street compensation remains high despite a lagging recovery and residual blame from the housing crisis.

“Say on Pay” will also be in discussion in the retail sector, which has continued to be hard hit by the recession, and the energy sector, which will receive increased attention due to high gas prices.

“Say on Pay” will also become a rallying cry for investors that are frustrated with companies that, because of market uncertainty, are sitting on large cash reserves. “Say on Pay” may be used as a tool to leverage compensation as a way to release these funds and reinvest in growth operations.

LL: Succession planning is one issue that plagues some companies. Apple has been asked by major institutional shareholders to adopt a written CEO succession planning policy which it has rejected. What are companies afraid of?

CM: Fear is not the driving factor in the reluctance of some boards to adopt a transparent succession plan. Rather, it is more of an issue of education and awareness since about two thirds of companies do not presently have a written CEO succession plan.

It’s critical to realize that, whether a succession is planned or not, a smooth transition is essential to maintaining the confidence of investors, business partners, customers and employees. A properly designed and executed succession plan provides the incoming CEO with a solid platform to move the company forward.

What’s important to note about the demands of Apple shareholders for a transparent succession plan is that, by the time a succession plan is needed, it’s far too late to start building one. Today’s empowered shareholder rightfully deserves solid planning in place to maintain effective CEO leadership - and that this leadership is backed up by a strong bench.

LL: Besides Apple, which other companies do you foresee such shareholder activism take hold?

CM: Activism will continue to be present at companies that underperform the market. In addition to the retail sector, I would also place the automotive sector and REITs in this same category. As the recovery gains momentum, shareholders will demand tangible returns from lagging companies as well as increased transparency on compensation and succession planning.

On the other side of the spectrum, the market will also see an increase in shareholder activism among companies that are sitting on large cash reserves. While CEOs are still somewhat leery about the recovery, corporations’ cash reserves have increased dramatically given the economic uncertainty as well as concerns regarding the implementation of the healthcare reform.

Activist hedge fund managers and shareholders alike will want to see that money put to work or distributed to shareholders in some other way (e.g., share repurchases or increased dividends).

LL: Which companies have gotten it right when it comes so succession plans?

CM: Over the years, there have been companies that have executed the transition properly, including General Electric , Microsoft and McDonalds . The succession of Jack Welch to Jeffrey Immelt provides a solid example of what to do when faced with the prospect of replacing a true icon. Immelt has never tried to replace Welch so much as carry out his own vision while building on past success.

Just this week, Warren Buffett discussed the issue of succession and the company’s future in his 2010 annual letter to the SEC. Berkshire has identified four current Berkshire subsidiary managers who are capable of stepping into the CEO position. While the issue of public versus private succession plans continues, Mr. Buffett’s transparency and forethought has been welcomed with a 52-week high share price this past Monday. Berkshire Hathaway is leading by example on this issue, proving that a transparent succession plan that specifies a depth of executive talent is essential to maintaining shareholder confidence and equity.

A Senior Talent Producer at CNBC, and author of "Thriving in the New Economy:Lessons from Today's Top Business Minds."

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