The Advisors' Blog

Emily blogged last week about the resurgence this proxy season of shareholder proposals relating to severance arrangements. I’m pleased to follow up with more detail via this guest post from Orrick’s J.T. Ho and Bobby Bee (and join us at our “19th Annual Executive Compensation Conference” for more on this topic…):

The 2022 proxy season has seen a spike in a recurring 14a-8 proposal that requests issuers implement policies limiting executive severance amounts. As of publication, at least fifteen issuers have been required to include this proposal in their 2022 proxy statements.

The proposal at issue dates back, essentially unchanged, to as early as 2003, and has been submitted by well-known shareholder activists (such as John Chevedden, Kenneth Steiner, James McRitchie, and Myra K. Young). In each case, the proposal requests that boards seek shareholder approval of any executive pay packages providing for severance or termination payments exceeding 2.99 times the sum of base salary plus bonus. The activists include as severance or termination payments not only cash payments but also, notably, the cash value of most other severance or termination compensation, including outstanding equity awards that accelerate upon a separation event. Acceleration of equity is common upon termination of top executives, however, and the value sometimes dwarfs cash payments. How should issuers prepare for the possibility of such a proposal, or respond if they receive one?

Despite proxy advisors’ general support of such proposals, most issuers faced with these proposals have been able to secure a shareholder vote rejecting it. In justifying their “no” vote recommendations, issuers have pointed to existing practices or policies limiting cash severance benefits. Some have also succeeded by pointing to limits newly adopted in response to the proposal. Of note, however, many issuers have obtained a “no” vote even while specifically excluding from their limitations the cash value of accelerated vesting of outstanding equity awards, justifying that exclusion by the need to offer competitive compensation packages to top executives. Consider Verizon’s experience – and the success of other companies that have been able to point to existing policies that cap cash severance:

In 2003, Verizon’s shareholders approved a proposal brought by Jack Cohen through the Association of BellTel Retirees. In response, in 2004, Version adopted a cash severance policy that requires Verizon’s board to seek shareholder ratification of any senior executive severance agreement providing for total cash value severance exceeding 2.99 times the sum of base salary plus bonus. The 2004 limitation did not apply to equity vesting policies. Verizon has been subject to the same proposal no less than nine times since, and each time the proposal has failed to obtain majority vote.

Many other companies have found similar success without limiting outstanding equity awards. Eight of the fifteen issuers identified as of the date of this publication for the 2022 proxy season received “no” votes on this proposal by pointing to existing policies or practices capping only cash severance payments and not equity, including: Allegiant Travel Company, UnitedHealth Group Incorporated, XPO Logistics, Inc., Lincoln National Corporation, Southwest Airlines Co., Verizon Communications Inc., General Electric Company, and The AES Corporation.

Even policies enacted between receipt of the proposal and the issuer’s annual meeting have been effective. For example, the Colgate Palmolive Company adopted an “Executive Officer Cash Severance Policy” on April 11, 2022, just one month prior to its 2022 annual meeting. As a result, and despite the adopted policy excluding accelerated equity vesting from its limitations, 56% of shareholders voted against the proposal. Similarly, NCR Corporation adjourned its 2022 annual meeting solely with respect to this proposal to allow additional time to engage with stockholders regarding a proposed Cash Severance Policy (which also excluded accelerated equity vesting) prior to voting. 61% of NCR Corporation shareholders ultimately voted against the proposal.

Our research shows activist proposals for this issue are on the rise and there is limited opportunity for excluding it under Rule 14a-8(i)(7) “ordinary business” grounds, as the SEC has historically rejected attempts to do so. Accordingly, issuers without existing severance limitation policies should consider, and may benefit from adopting and publicizing, a formal severance policy that limits cash severance payments to 2.99 times the sum of base salary plus bonus (with latitude granted to the issuers in determining whether such policy limitations will include or exclude the cash value of accelerated vesting of outstanding equity awards). Such action may put issuers in a better position to avoid receiving such a proposal, or to address it without needing to hastily adopt a policy in advance of the annual meeting.