Most small-cap boards prepare for proxy season by worrying about the wrong things. They rehearse the story behind a single large grant, then get flagged for something structural they never looked at — a peer group nobody documented, an equity plan running hotter than they realized, a committee section that reads like a template.
Proxy advisors are not reading your proxy the way your board reads it. They are running a standardized screen. The screen does not care that you are a $200 million company with a four-person finance department; it applies most of the same structural tests it applies to a company forty times your size. I am a sitting small-cap public-company CFO, and the single most useful thing I can tell another small-cap CFO is this: the screen is knowable in advance, and almost all of it is decided before the proxy is drafted.
What actually gets checked
Both ISS and Glass Lewis publish their policy frameworks and update them annually. The specifics move; the structure has been stable for years. In practice, four things drive small-cap outcomes.
- Peer group construction. Both firms build their own peer group for you — typically from industry classification and size — and then compare it to the one you disclosed. Divergence is not automatically a problem. Undisclosed or undefended divergence is.
- Pay-for-performance alignment. A quantitative screen comparing CEO pay against your own performance and against that peer group over multiple years. A single high-pay year rarely sinks a company. A multi-year pattern of pay rising while relative performance falls does.
- Problematic pay practices. A list of structural features that draw scrutiny largely irrespective of amounts: excise-tax gross-ups, single-trigger change-in-control vesting, repricing without shareholder approval, guaranteed multi-year bonuses, outsized perquisites.
- Equity plan cost and dilution. When you are asking shareholders to approve or refresh a plan, burn rate and overhang get modeled directly. At small caps this is the quietest killer, because a share count that looked modest at a $1 billion valuation looks very different at $150 million.
The disclosure-hygiene layer nobody audits
Before any of that, there is a more basic layer: does your proxy plainly say what it is supposed to say?
We recently pulled the most recent proxy statement for every U.S. public company under roughly $300 million in market capitalization — 977 companies — and read each one for a single fact: who chairs the compensation committee.
We could identify a named chair at 834 of them. Of the remaining 143: forty-six had no proxy statement on file at all, and roughly thirty-five were funds, trusts and controlled companies with no compensation committee, which is entirely legitimate. But about forty operating companies listed their compensation committee members and never designated a chair anywhere in the document — roughly one in twenty of the companies that have both a committee and a current proxy.
That is not a governance failure. It is a drafting failure. It is also exactly the kind of thing that makes a reader — a proxy advisor analyst, an activist, an institutional stewardship team working through hundreds of proxies in a season — slow down and start looking harder at everything else. You do not want to be the document that raises a question on page four.
The checklist
Work through this before the proxy goes to the printer, not after.
- Is your peer group disclosed, with its selection criteria? Not just a list of names — the screen you used. Industry, size range, and the reason for any judgment calls.
- Is it size-appropriate? Peers dramatically larger than you are the most common and most correctable small-cap finding.
- Did the group change from last year? If so, say why, in one sentence. Silent turnover reads as shopping for a favorable comparison.
- Can you state your CEO’s positioning? “Base at the 45th percentile, total direct compensation at the 60th” is an answer. “Competitive with market” is not.
- Do you know your three-year burn rate and current overhang? If you are asking for shares this year, these numbers will be modeled whether or not you disclose them.
- Are the structural flags clean? Gross-ups, single-trigger vesting, repricing history, guaranteed bonuses.
- Does the committee section name its chair, its members, its meeting count, and its independent adviser? Basic, and frequently wrong.
- If your last say-on-pay result was weak, does the proxy describe what you did about it? Engagement described in specifics — how many holders, what percentage of shares, what you heard, what changed — is materially better than a paragraph saying you value shareholder input.
What they do not check
Honestly: quite a lot. Proxy advisors do not ask who prepared your compensation analysis. There is no credential requirement and no approved-vendor list. A screen does not know whether a nationally known consulting firm or your own committee assembled the peer group. It knows whether the peers are size-appropriate, whether the criteria are disclosed, and whether the positioning is explained.
They also do not reward effort. A six-week engagement and a one-day benchmark produce the same outcome if they produce the same documented, defensible peer group — and the same outcome if neither one gets disclosed properly.
The point of doing this early
Every item on that checklist is decided months before proxy season. The peer group is chosen when you set pay, not when you disclose it. The share request is shaped by grants you already made. The say-on-pay narrative is built by engagement you either did or did not do last fall.
Which is why the useful moment to run this is now — in the ordinary course, when nothing is contested — rather than in February when the document is already drafted and every change is expensive.
RepCor builds the underlying analysis from SEC filings: a screened, size-appropriate peer group, percentile placement for base, bonus and total direct compensation, pay mix, dilution and governance flags, with every figure cited to the accession number of the filing it came from. One business day. $1,500 for the Core report, $2,500 for the Production tier, which adds overhang and pay-versus-performance.
Robert Steele is the CEO of RepCor and a sitting small-cap public-company CFO. Nothing here is legal advice; proxy advisor policies are updated annually and you should read the current versions alongside your counsel.