Donnelley Financial Solutions, Inc. (DFIN) Earnings Call Transcript & Summary

Just simply, again, using this document or the entire 11 Edition to make the case. I think it's also quite table stakes today to put in that segment about the board evaluation that you have a process and that you did it. And here's -- and sort of the -- what you've learned from it in a way that you can present. This is usually a section of the proxy where sometimes you really need to fight the lawyers on this because, obviously, the evaluation process and what happened, there is a confidential document and talking about it and talking about the results is something, which you can have many lawyers who really, really pushed back on disclosing that voluntarily. But of course, you're not disclosing the full details, you're disclosing what you want to disclose and the way that you disclose it. And again, this is something we -- if you go back and do an archive and look at your first 5 additions, you're not going to see this. But it's so deeply, it points to being deeply important and as shareholders you really look at it to understand that there was a process and that you understand that the Board is sort of working through some of the issues that you may have brought up.

Thank you. So we mentioned earlier, risk oversight, critical board function, and it can be a very tedious, dense page and half of text or it can be more of an infographic that kind of, in a summary fashion shows what occurs at what level, full board committees, working groups. And as we mentioned, ESG and related oversight may well be built into here. That's certainly appropriate. Some companies are expanding upon that in a separate section as well. And as you can imagine, the [ oversight ] ties in again with the -- who are these committee members? What are their competencies. And so you want that story to hang together tightly. So there is...

My apologies. Before we leave the Board section, I just want to say one thing about pictures. Obviously, graphics tell a story, and they're deeply important but actual pictures of directors, and I'll give you -- and so when we think about who reads these things, let me just give this 1 point and then we can move on. A couple of years ago, we were running studies on diversity inside Fortune 100 -- Fortune 1000, excuse me, and outside organizations would look at the issue and then provide it to us. And one organization was looking -- literally looking through proxies and had hired MBA students to look through proxies of the Fortune 1000. And these are students who obviously, they were MBA students but they don't normally look through proxies. It's not what they read for school. It's not what they read for pleasure. And it was interesting to hear their feedback once I came on board, and I came board as a mentor and understanding what they were doing, and they said, Mr. Brown, I sort of curious when we sort of got out of a particular section as they went down the capital structure inside of the Fortune 1000, we began to see fewer and fewer pictures. And they were making their own judgments about what they thought of not seeing picture. So having pictures tell a story or they cannot tell a story or not having pictures tell a story, too. And when we looked at young fresh faces who were looking at proxies for the first time, they had a deep reaction to pictures. And I just wanted to mention that because I found that curious as a quasi-academic, talking to folks who are looking at proxies for the first time.

Well, Stephen, that's a great point and you saw pictures in the majority. Now, that was not a random sample. Yes, we were selecting those for ones that we felt were compelling and provided a lot of value content wise as well as layout wise. So you see it in the cover letters. You see it in most director nominees sections. Increasingly, we're seeing it photos of the NEOs in the beginning of the CD&A or all executive officers just before that, usually not both because the NEOs are subset of the executive officers. Even montages of photos in proxy summaries, Kelly's seen many of those. And we've even -- and we've seen some group photos, okay? Not much going on until 2 years ago, not a lot of group photos happened during COVID but we're seeing more group photos like you saw in the Hecla Mining cover letter and if you want to look at the committee description, take a look at Fifth Third Bank's proxy, which is in the committee section of the full guide, not here, where they've got a group photo of all the committee members. So all I say to companies that say, well, we're having a board meeting in October and November, and we're going to take some fresh photos. We've had some new people come on. I'd say, "Why don't take some room photos?" You've got them there. You don't know how you're going to use but at least you'll have them and show them some of these. So I just think the -- as you said, Stephen, the photos can really highlight certain elements of diversity, it could also highlight the fact of a lack thereof. So we know that that's a consideration also. So moving to compensation, and there's a lot of other governance-related sections in the guide. We only covered about half of them in the full guide. You'll see it when you go through the guidance. So compensation disclosures. So we'll start with the beginning of the CD&A and take a few sections. So CD&A executive summaries to use your term, Stephen, they are table stakes now for CD&A. Proxy summaries of the type Kelly showed early on are more optional. Not every company needs a proxy summary. That's a conversation we'll have with any client. Do you need one? If so, what type? If so, what content should go in it? So we can help with that conversation. But in a similar fashion, the CD&A executive summary and quite often, some of the elements are a mini CD&A table of contents or road map to help with the navigation of that. This section, little company overview performance highlights. This is a frequent landing place for that. NEO photos, which you'll see in a couple of cases here. And all of this is like setting the stage before you then explain how your pay program works and ask for people to support it because a major thing that investors are looking for that is not an SEC requirement, is please explain how your pay program supports the business strategy. So when you get to a couple of topics like performance metrics, explaining why they're selected but before you dive into the nitty gritty of the pay program, it makes a lot of sense to set the big picture. This is who we are, here's the people, who were paying, who we're focused on here, the NEOs, here's how to navigate this section, and take it from there. So I did mention elements of pay tables. So the most frequent graph in CD&As for almost ever has been the pay mix graph, which at the minimum is just meant to highlight that the majority of target pays at risk or performance-based, some go into a little more detail about some of the components of different elements. And then usually, you go straight to the full 10 page, 2 pages each of each element of pay. And that's the only place where you'll find out, "Oh, so these are the performance metrics. I wonder why they pick these?" Well, increasingly, companies are using a bridge between the pay mix, the least granular and the full explanation, the most granular and that could be in the form of an elements of pay table, which can have different elements or columns itself. But some of the most useful ones are, if you look at Hess, they have page references to where each such element is discussed that further length, both Bread Financials and NextEra Oilfield Services mentioned specific ESG metrics, typically in the short-term plan. And so these can provide a real shortcut for a lot of investors to get a big grasp on the key elements and function of the pay program. Then again, almost all of these companies will then go into greater depth about the metrics themselves. So we have a very robust section on performance metrics that ties in with the elements of pay table that will go even into greater detail of -- and more and more, we'll have that second column. This is the element why we chose it or how it supports our business strategy, very, very important. So those are increasingly elements of effective CD&As. and then Benchmarking our peer groups and how you use them, if you do provide benchmarking either for pay benchmarking or for performance measurement or both. And many companies have -- don't have pure industry peers or a major set, so they maybe use 2, 3 or 4 sub-peer groups. Now some of the most effective ones here, we think explain the use of peers, how they're used, how they're selected, key metrics, company size on those metrics relative to the peers. You don't have to be right at the median of all your peers in every metric. You just can't be in the bottom decile on all of them because that would open you to charges of aspirational peers in the negative sense that, well, you aspire to be big but you're paying big now by benchmark into bigger, more complex companies. And many of them that are providing the size context are doing so visually. So it's a very interesting section of the guide, really evolved a lot. I think Accenture is one of the first companies that really started providing this type of approach. And you can also explain additions and deletions from last year's peers in kind of Venn diagram setup. So very important, we feel that companies make the case for use of reliance on their peer group. Otherwise, investors easily could default to the ISS peers, which, for some reason, almost every company in the world seems to be compared to McDonald's. And Stephen, I'm sure you recall those days.

1 in 8 people have worked in McDonald's. So you can understand why. And I remember, you remember we'll have a certain age that there used to be 1 in 4 people work in a McDonald's here in America or had worked, it's something you did when you were in high school and then we moved on.

All good for -- with McDonald's, no problem there. The idea is companies would prefer that investors and others rely on their selected peer group more than third-party selected peers. And to do that, you have to make the case for them. And so we've been trying to show and this section shows a few way companies...

And Ron as you know, it is the leading issue for engagement, which is compensation, and it is the issue in which investors over time have become very specialized, they understand comp, just about every investor. I'd like to think every investor at this time, we've had more than a decade now of say-on-pay. They understand it. They're all comp consultants for the most part unless they are very new to stewardship. So it is the document in which when you have an engagement, you're going to refer back to. So spending a fair amount of time of how you present that information makes complete sense.

And the new element of the guide this year, the surprise -- August 28 surprise for many companies was the SEC finally, finalizing the -- I think it was 11-year-old Dodd-Frank holdover of pay versus performance disclosure and giving companies almost no ramp-up time. I mean calendar year-end companies had to be prepared to make a lot of decisions to a lot of calculations and put this in the proxy for their spring proxy as many companies. So this was also the first element of proxies requiring XBRL data tagging, something that we do for many other documents. It will not be the last because the SEC proposed climate disclosure, which we're going to touch on again in 2, 3 minutes, elements of that will require this tagging as well. Now just a note on that, and this happens any time there's something new like this. So the financial reporting people in your companies are well versed in this but many attorneys haven't necessarily been or IR people involved in this messaging. So it might have been a little new for them but it's not new for us. So we are the largest EDGAR filer. I just want to remind you that over 160,000 filings each year with the SEC. Now not too surprisingly but in September, following the first year's pay versus performance disclosures, the SEC issued what they call the overall Data Quality Alert on the data tagging of these filings, including the pay versus performance table. What we want you to know is that we are very versed in this. Tagging is not new to us. We are active participants, both at the SEC but also at a group called XBRL U.S., where we're on a member and holding share positions in some of their working groups, and they set some of the best practice standards for this type of disclosure. So we think it went quite smoothly overall, where we had to do this for the first time for about 1,000 companies. So this is now year 2 but we're happy to engage companies on this because this is kind of a process within the process. My concern, okay, which some of these will show, when I first heard about this rule besides how tough it's going to be to comply in a matter of months for our clients is, well, many companies have been telling their pay for performance story per year, the way they look at pay in their CD&A. And now you're going to have something similar sounding; thankfully, the SEC called it versus. So we stick to that. We call pay for performance, what you say in the CD&A. Pay versus performance is this new required disclosure, which primarily was put outside of the CD&A and in tables, either before or after the pay ratio. So my concern was you're going to have 2 similar looking sets of disclosure, and they may be -- may appear to be in conflict with each other. So you're telling this story in the CD&A, yet this new standardized, comparable XBRL file, therefore, it's comparable data may be like that. So we did see much like back in the director bios, some tweaks based on universal proxy, some of the ones we're highlighting here, if you can make out what we blew up and highlight in yellow, our company is essentially saying, "This is a new piece of disclosure we are providing it per the new rules." however, this -- I'm paraphrasing, "This is not how we look at the world in assessing our pay program, making pay decisions, rely on the CD&A for that." Now apparently, not a lot of investors put a lot of stock into this new disclosure. It was new. I think they looked, they wanted to see if it added value to their current processes and analyses, same with proxy advisers. We're only in early October, so it's not too early that there still may be some new proxy adviser or other modifications to procedures that might bring some of this data more into view. So let's all stay tuned on that. But -- that's how a few companies were both complying and also explaining, please like with the peers, rely on our peers. Please rely on our CD&A. That's how we look at the world.

These are great examples, by the way. I appreciate it, where many companies are looking at this was brand new, and they had to comply, so they did, but they also said go to this section and see how we think through these issues. And I thought they did that very nicely. It also -- because it's the first year, this is the section of the proxy -- the 11th Edition, that many practitioners are going to be looking at comparing how people handled this issue of pay versus performance from presenting on information. So I think you have a lot of folks who are practitioners, who are drafters who are looking at it now. And the final thing I'll say on this from a compensation standpoint is that when we think of pay versus performance. I put it in the same category because it's new of what we thought of say-on-pay when they originally came out here in the U.S. where we thought a pay ratio, a lot of hype, then it happened, you saw compliance and then you didn't that much that folks didn't think it was an issue. And I say the same thing here, which is that -- is yet to be seen. And it may take 5 years before you really get movement on this. Same thing with pay ratio. It matters when it matters, the same thing with say-on-pay. close to 98%, 97% of companies passed their say on pay. You just don't want to be in that 2% that failed, right? So these things matter when they matter. And you want to be able to have a document that if you have to go and do engagement that's really focused, that you have a document that you can really work with your investors to talk to. That's why these things are important from a presentation standpoint.

And Stephen, when I hear you say it matters when it matters, what may cause it to matter could be an activist raising their head after you filed your definitive proxy. So at that point, you could take the old approach, like, "Hey, well, now we're going to really explain our thoughts on this topic rather", the initial 14A could be your main bite at the apple, why are you waiting? Why are you not telling your best story now, which is something I always urge company...

And most of them, Ron, as you know, have a very decent graphics department, they come out with their own graph.

Absolutely. So now Kelly is going to lead us through some of the ESG and related sections. She and her group have worked closely with our ESG team, Frank Kelly leading that to create or adapt or import many of these highlights from website disclosure. So increasingly, we are seeing highlights our overview as well as the oversight of ESG, not telling the whole story in the proxy, but in a summary version. Kelly, you want to walk us through this section?

Sure. Yes, definitely. And -- so the 6 examples in the deck today are very uniquely different in the types of information we're disclosing but do just a great job of reinforcing the brand and messaging from their larger ESG communications, publications and initiatives. I think we've stated this through the years as ESG messaging has evolved that no matter what the goal should always be to stay consistent across all platforms, whether it be icons like benchmark here, which you've seen these reinforced year-over-year, color coding, pillars, infographics or even just down to terminology and tone, the proxy should echo other preexisting materials. I think in the example of NASDAQ, we're also including full color logos that then correspond to some of their key awards and recognitions and accolades, which is just a great creative way to kind of add visual interest to the Page 2. And in these sections, we've also seen full color photography brought in to feature images of community outreach, employee engagement and even down to other training events held throughout the year.

Thank you, Kelly. So climate impact is a topic. It's square in the center of the pending SEC rule but investors want to know about this for years and many companies have been reporting on their current climate impact, their chance, their plans to reduce that, whether it's future commitments or progress towards commitments in their main sustainability reporting and reports and at their website. But many have -- and many discussed a little bit of this in that overall ESG section that Kelly was walking you through but a number of companies where it's -- they feel it's a strong story for them primarily, are highlighting that in its own section within the greater ESG section. So here's a couple where Aptiv using the ESG being called a journey using the road image and in the call out showing where they plan to be by certain years based on their commitments. GM had done something similar a couple of years ago using the road map version very effectively in their section. Boston Properties with a lot of data and commitments, Hecla Mining, ONEOK. Now ONEOK is the very first company that we put in the guide when we created a brand new, we call it the CSR section, about 7 years ago because they had 6 pages in their proxy on their methane emissions story and progress. They're proud of it And they were talking about it. And so they were the reason we added a section, which now has become ESG, human capital, climate impact, deforestation, DE&I, employee health and safety, culture admissions and a couple of more. So we include some of these climate impact descriptions here because they may give you a little guidance once the SEC rule is finalized, a little starting point. You don't have to start completely from scratch. Some companies have been not focused so much necessarily in the SEC rule but on where they're at but maybe with a side eye on the SEC rule, have been doing that for a while. So we think it's a worthwhile section to take a look at.

Great. I'll take this one. And as we covered early in the beginning of the presentation, the presence of this culture values mission page is becoming far more common. Many of our clients are investing quite a bit of time, resources and energy into developing a stronger overarching company message to support their ESG initiatives and just to build a stronger company cultural statement. So the proxy is another great place to reinforce those messages in a very clear and compelling and on-brand visual format.

I do note that this is the section where we talked about earlier, who'll be drafting it for, you're drafting it for, obviously, shareholders but there are multiple audiences. This is a section where there's cultures, values or climate or deforestation. This is a section your employees turn to. They also turn to that page at list where the NEO executive, "Hey, we know that." But if they look at a proxy, they look at that and then they're looking at this section. So it's so deeply important. And a particular important is these days as, yes, we know we have a climate rule and we have climate rules in different jurisdictions now, whether it's in Europe or in the state of California. So we know how deeply important that is, but we also have [indiscernible] this is where the company wants to tell its story voluntarily around a number of human capital management and ESG issues. And if we looked in the last 2 years, where there may have been some broad statements made where that might be tailored back now. And so it's very important what's said here and what's said here matches whatever you say elsewhere in your public space, whether it's on the website or a separate ESG or CSR whatever you want to name it, document that you have that -- have out there in the public. So this is an extremely important section.

And reflecting that, Stephen, the location where this often is, many of these have no page number at the bottom. That's because we're in the inside front cover of many circulars. Talk about setting the tone right at the beginning. And as you said, Stephen, you must be consistent in your messaging but it's got to be real to employees. I mean, this must drive with what they experience day in, day out or you can't -- then you get into the greenwashing kind of thing. But our belief is that almost every company takes great care to be credible about these types of disclosures and not to over promise, maybe in the early days, there was some of that aspirational messaging, but I think everyone is a lot more savvy about that now.

All right. And last but definitely not least, DEI and this topic lends itself to far more visual and humanizing reader experience, and many of our clients are beginning to feature things like workforce diversity metrics, icons representing ERGs and employee resource groups, logos associated with key human capital management awards and accomplishments, time lines of their company's just overall DEI evolution of change. So whether it be just 1 page or several pages long, we definitely encourage our clients to build out this message with paired compelling visual elements to support the overall message.

So just a word on the guide itself. This is the end of the formal part. So here, you've seen us before but now you have our e-mail addresses there. We would encourage direct contact from anyone who has any questions about anything you heard here. There's also the link to the online version of the guide, you can reach out to your DFIN representative or me or Kelly, if you want any hard copies, which we do provide as well. I would say go to the table of contents in the guide, it's a lengthy document. You'll see 39 sections topics or features and click on that, go to the sections of interest to you, review those. In the online version, if you like an image or a page but you're interested in the context, what preceded and followed that, like what was the flow of the document, just click on the arrow at the top or even I think the whole image and the full document will open up immediately. You don't have to go look it up yourself. And we don't just throw the statue and, "Okay, hear, look at your peer companies, now look at some of these as well from our client base, and good luck." I mean, Kelly and I and several of our other colleagues have a couple of hundred one-on-one calls, one-on-one meaning more than 1 of us, but per company, where we will do a pretty thorough review of your last disclosure, your sustainability report, your website, your last proxy, the voting results, company performance, all these things and learn from you what your goals and objectives are for the next proxy and key messages that you want to highlight and then we cannot just say, "Oh, we'll go look at that section of the guide." We can show you several ways that you could accomplish that in the next proxy. So this is a tool, always look at your peer company proxies. They could be evolving around you and all of a sudden, you're no longer at the meeting of your peers if that's where you're trying to be, but the guide is meant to -- we're not anointing these are the best disclosures ever, okay? We're trying to show a range of different approaches companies can take that seem to resonate with investors for a range of different topics. That's our goal there.

And I think if we look in the chat, good question. So the use of the term ESG, I'm going to give mine. So you saw BlackRock is in our -- their company, too, okay? So they are in the guide in a number of sections. You see the Larry Fink letter every year, widely read. I mean if they're the large investor for majority of companies, yes, you want to see what their priorities are. I've been on many panels with BlackRock people. And for several years, they've said, look, let us explain ESG, which is a very broad topic to you and why it's important to us, it is a measure of operational financial risk, okay? So ESG disclosures are a way for us to strengthen our long-term risk mitigation about our portfolio companies. Now there is anti-ESG movement. And of course, those proposals get almost 0, single-digit voting support but there's some motivated people there. Understand this, it's not what I think or anything else, but investors, for the most part, are convinced that climate change is going on. Hard to avoid that conclusion. And that it presents operational and financial risk to their portfolio companies, which is what brings it squarely into their purview. Now some of them are back off investors and others from ESG, talking more about long-term sustainability and things like that. So great question, whoever submitted that. I don't think the topic is getting less attention, just how it's couched just to avoid the obvious and very surface backlash. Stephen?

I think you're right there. I'll echo what you've said. And if your company develops a better term, please let us see this in the 12th Edition when Ron and company puts that together. You're absolutely right. The information is not being backed off, what you call it may change, what you call it, and how you infuse it into different parts of your communication may change and that's the challenge today because we do know this thing with the 3-letter term of ESG means different things to different people and it's been interpreted in different ways. And now it's a struggle to really explain what you want. I tell folks you need great clarity on what you mean by the term and how you express that if you mean philanthropy, then put -- have a section that says philanthropy. If you're talking about climate impact, and you saw 1 example in our presentation about climate impact than say that. I think folks just need to be very clear about what they're talking about. And so that you were doing the interpretation. You have an entire document -- and this is the last thing I'll say, Ron, you have an entire document that is written from your point of view that satisfy SEC rules and also satisfy your needs to tell your story don't stop here when it gets to the section of ESG, which is truly with great clarity, tell your story so that you were telling it and not somebody else.

And Stephen, to that point, as in life generally with proxies if you don't tell your story, someone else is going to tell their version for you, be you proxy advisers or dissidents or other third parties. It is your document. You want to be credible but you want to tell it the way you want people to understand it. So they understand not just what you're doing but why you're doing what you're doing. And usually quite often when investors understand why you did what you did they may provide a little more forbearance, particularly something a upset a proxy adviser guideline, that kind of thing. So if our guide is an efficiency tool that helps you, we looked at 1,000 proxies so we could bring this book together. So you don't have to but always look at your peer companies as well, see what they're doing and we're happy to work with you one-on-one. So those are my closing thoughts. Kelly, Stephen, anything else you want to add?

You covered it from my standpoint.

Yes. I'm all set, too. And I do -- I just want to -- like you stated, reemphasis, the user experience from the digital perspective allows you to click out like you had mentioned. Also just kind of emphasizing the consideration of the digital version of your proxy itself. We've noticed many of our clients moving towards full photography, color, everything. We're able to utilize a lot more from a branding perspective in the digital version versus print without accruing too much cost in addition. So something else to think about too, just making sure that digital version is also considered.

So thank you to my fellow speakers. Thank you to our support team that helped us put this together. And most important, thank you to our audience for bearing with us, and we'd love to hear from you and to help you put some of this into action.