NEW YORK (The Deal) -- Many companies that had large protest votes by shareholders against their executive pay plans faced activism in 2015.
For example, in June 2014, Staples (SPLS) executives received only a 46% vote in support of their pay packages. Six months later, Starboard Value launched an insurgency that quickly drove the national office supply chain into a February deal to merge with Office Depot.
Similarly, semiconductor company Qualcomm (QCOM) narrowly passed its say-on-pay vote but faced a subsequent attack by dissident Jana Partners.
And just recently, after shareholders voiced unhappiness about Rovi's (ROVI) executive pay, Engaged Capital's Glenn Welling succeeded in getting himself and another dissident nominee elected to the digital entertainment company's board -- even as it made last-minute changes to director pay in an effort to keep him at bay.
Given the seeming correlation between activist investor interest and negative say-on-pay votes, The Deal asked our expert panel of advisers to weigh in on whether shareholder dissatisfaction with compensation packages presages and is, in fact, a predictor of activist involvement.
The Deal: Is dissatisfaction with executive pay packages enough to help an activist's case with institutional investors, or will dissidents need other performance problems to be able to highlight to get shareholders on board? Is there any level of compensation or any degree of shareholder outrage that would be enough, in itself, to draw an activist's attention?
M&A attorney: This whole thing on say on pay is way overblown. The whole key is how does the company perform. Most boards are cognizant of what's reasonable and what's not. But absent bad performance for a steady period of time it shouldn't be a big issue.
Institutional investor: It is important to remember that it is the intersection of pay and performance that matters. So it is possible that in instances where poor say-on-pay votes are being driven by declining performance -- rather than by increasing pay levels -- activists may find fertile ground. But in general, activists will need more than poor say on pay to convince investors that not only are board changes necessary -- which may indeed be warranted -- but that the activist's specific nominees are the best replacements. And for the activist, you would certainly expect some operational turnaround or strategic alternative to be critical to driving a profitable exit.
Consultant to activists and targets: This really depends on how out-of-line the compensation practices are and what the board has done to remedy the situation. Most activist investors are drawn to value, so governance practices and compensation arrangements are usually secondary to that. However, if there are hidden pockets of value to be built or extracted, an activist will certainly highlight poor compensation practices as emblematic of required change.
Investment banker: Dissident shareholders cannot simply lean on dissatisfaction with executive pay and hope that issue alone will be enough to achieve board representation. Taking issue with the executive compensation of a targeted company is, however, one of the most frequently used tools in contested elections, and can even be seen in situations where the targeted company has had decent say-on-pay results. The key for a dissident when criticizing executive compensation is to credibly assert that the poor compensation practices are symbolic of overall poor board oversight.