As companies prepare their communication strategies for the 2013 proxy season, new concerns are cropping up that will have a significant influence on what companies communicate to shareholders.

Among those issues is a trend that is affecting nearly all public companies: Equities are falling out of favor with institutional investors, who are instead gravitating to bonds and passive funds, including the rapidly growing category of exchange traded funds.

According to a recent report by the Financial Times, pension fund allocation to equities fell from 61 percent to 41 percent from 1999 to 2011. Meanwhile, bond allocations rose from 30 percent to 37 percent over the same period.

This trend towards bonds and passively managed funds is perhaps the most significant factor in developing a communications strategy for the spring proxy season. Why? Because the number of actively managed funds that provide an audience for the corporate message is shrinking. That means companies must develop a more effective targeting strategy to identify investors who will listen to reasons for supporting significant proxy issues.

As with the last several proxy seasons, executive compensation continues to be the top proxy issue facing most public companies, although there are a few new twists to consider for the 2013 proxy season, chiefly that companies are fighting back against compensation criticism when they believe it is unfounded. According to Francis Byrd of Laurel Hill Advisory Group, public companies are “finding their voices and speaking out against longtime nemeses—proxy advisory firms—by responding publicly, in no uncertain terms, to negative vote recommendations from the likes of ISS and Glass Lewis.”

At the end of May 2012, 52 companies had filed supplemental proxy materials responding to ISS statements about compensation practices, double the number that did so in 2011. According to Brad Robinson of Eagle Rock Proxy Advisory Services, companies that don't take their case directly to shareholders do so at their own peril. “In the day and age of greater responsibility to shareholders and greater consequences when shareholders are unhappy, it is just a natural extension of the current environment,” he said. “There are more avenues for investors to hold boards accountable and the consequences can be quite serious.”

Robinson advises companies to tell their story and make it resonate with shareholders. Moreover, he notes, that, “Companies are increasingly concerned about how they are perceived in the media and also by investors.”

As with the last several proxy seasons, executive compensation continues to be the top proxy issue facing most public companies, although there are a few new twists to consider for the 2013 proxy season, chiefly that companies are fighting back against compensation criticism when they believe it is unfounded.

More companies are taking issue, for example, with how ISS has selected their peer group for comparative compensation purposes, including J.C. Penny and Marriott Corp. They believe the peer groups ISS is using are inaccurate, misleading, or lacking in context.

Another development is the growing number of companies that are producing alternative measures of their top executives' compensation. Several companies are reporting their top executives' compensation in the proxy as “realized pay” versus “realizable pay,” in an attempt to provide a better picture of the amount of money executives actually accrued over the given time period. Realized pay often excludes items such as stock that has yet to be cashed in or the value of options that haven't been exercised.

Realizable compensation may include old stock or option grants that have vested but have not been cashed in. According to analysis by the Wall Street Journal, at least 228 companies mentioned “realizable” or “realized pay” in their proxies or proxy supplements in 2012 compared with 119 in 2011 and 83 in 2010. Compensation experts expect more companies to adopt these new measures in 2013. They are voluntary, so companies may change them from year to year or not produce them at all.

In its Corporate Governance Policy Updates and Process Executive Summary for U.S. public companies, ISS says pay for performance evaluation, including peer group and realizable pay, is the number one priority. Second on its list is board responsiveness to majority-supported shareholder proposals. Another ISS priority is defining peer groups for comparative pay and company performance as those that are “reasonably similar in terms of industry profile, size, and market capitalization.”

Say-on-Pay Pushback

So, the question remains: Did the outrage over executive compensation during the 2008 economic crisis that led to shareholders gaining a non-binding vote on executive compensation accomplish what the legislation intended? Some would contend that it has had little effect on what boards of directors decide to pay their top executives.

Fabrizio Ferri, assistant professor at Columbia Business School, says say-on-pay “is just a tool that is supposed to work as a threat” to management when high pay is tied to poor company performance. While this has caused corporate boards to tie compensation to performance, say-on-pay has “opened up other conversations with the board and allows shareholders to interact with a company's directors.” (When we say “shareholders” in the communication context, we're referring to institutional investors, since less than 10 percent of individual investors vote on proxy issues.)

Allan McCall, who is currently researching corporate governance at the Stanford Graduate School of Business, says, “In reality, what we've seen is, since this vote was not demanded by shareholders, there's been a movement to outsource the decision-making” to proxy advisers such as ISS and Glass Lewis. However, a recent Conference Board report said that of 1,856 companies that provided detailed say-on-pay vote results through June 30. 2012, only 49 executive compensation plans failed to receive a majority vote from shareholders, including a scattering of high-profile cases such as Citigroup, Pitney Bowes, and American Eagle Outfitters. These results suggest that companies that are pro-active in meeting with their major investors prior to the proxy vote are having great success on effecting this key proxy issue.

The Harvard Law School Forum on Corporate Governance and Financial Regulation reported in November that Marc Weingarten, partner at Schulte Roth & Zabel, said that a 78 percent majority of respondents to their interviews with corporate executives and shareholder activists expect an increase in shareholder activism in the spring proxy season, focusing primarily on financial services, followed by industrials, chemicals, technology, and energy. “Communication between shareholders and management remains the most effective method for activists to achieve their goals,” he said. According to another shareholder activist, “Dialogue can produce the changes desired by investors. Not only can it be less confrontational, but continuous dialogue helps in building relationships between management and shareholders in the future.”

As I have suggested over the past two years, a systematic effort—involving corporate counsel, the corporate secretary, and the head investor relations officer—to identify and meet with institutional investors who are not totally wedded to the proxy advisers' voting recommendations and who actually vote their proxies is an important step in the communication process between management and investors. And, while the number of actively managed funds that may be voting their proxies may be declining, investment in equities is by no means dead. Those that remain may be well worth the implementation of an effective communication strategy.