(Actually, the potential for reputation risk may exist for all publicly traded companies with investment operations, but there may be different aspects to take into consideration for different industries.)
As has been widely reported, the SEC yesterday finalized its rule titled “Shareholder Approval of Executive Compensation and Golden Parachute Compensation,” better known as Say On Pay. The entire 152-page rule is available here, and the SEC’s summary and fact sheet here. Law firm WilmerHale has posted one of many available summaries here.
The rule affects companies in every industry; insurance companies aren’t treated any better, or any worse, although smaller reporting companies are exempt until 2013.
But there’s one interesting twist for companies that file 13-F reports with the SEC regarding the holdings in their investment portfolio. The Dodd-Frank Act required those 13-F filers — a classification that includes most insurance companies — to annually disclose how they voted on say-on-pay and golden parachute matters for holdings in the portfolio.
Although the final rule issued yesterday does not yet address this requirement, I encourage insurance companies to keep this in mind as proxies are voted by their investment operation. I have seen one report that the SEC indicated in their open meeting yesterday that they would address this topic in the coming month.
This rule could expose insurance companies to “reputation risk” if their investment team votes proxies for say on pay in a fashion out of line with the board and management’s stance on the company’s own corporate governance. I suspect the most likely disconnect would reflect a company:
- Recommending to its shareholders that say-on-pay voting occur every three years while
- Voting proxies for holdings in its portfolio for say-on-pay voting to occur every year, regardless of the recommendations made by the respective companies’ boards.
It’s akin to “do as I say, not as I do.” It will be interesting to see how the SEC shapes these reporting rules.