Corporate Governance

Shearman & Sterling Executive Compensation and Activists | 35 Boards should conduct an activist readiness "boot camp" on a regular basis, running through their response plan in the event that the company is targeted by an activist. Compensation committee readiness should be part of any such program. A rigorous and unbiased preparedness review can help identify weaknesses in compensation and performance alignment. Regular shareholder engagement is essential to ensuring that shareholders understand the company's programs and imparting to shareholders that the committee and the board are open to dialogue on any shareholder concerns. Many compensation committee chairs are already part of the regular shareholder outreach conducted by companies on compensation matters. Feedback from this process is important in developing an activism readiness plan. Furthermore, if institutional investors have the ability to question decisions and raise concerns in a thoughtful manner with a board member on a regular basis, they may be less inclined to side with an activist in the event of a challenge. Compensation committees should know the company's key shareholders and their positions and voting policies on compensation and related governance matters. More and more major institutional investors have published their own voting guidelines; others follow the recommendations of proxy advisors such as Glass-Lewis and ISS. For those investors where outreach may have an impact, it is important to open discussions in advance – preferably outside of the regular proxy season – and to engage on their views of the company's compensation program. To the extent that there are negative results in company performance, those should be addressed head-on with investors and addressed proactively. The compensation committee should be prepared to address shareholder concerns and should be aware of the impact that the negative results will have under the compensation programs. 8 9 10 11

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