As I blogged on Tuesday, the SEC’s first batch of “say-on-pay” guidance wasn’t very clear. Yesterday, Corp Fin issued these updated CD&Is, which adds two new CD&Is to the ones issued on Tuesday. The new CD&Is now make it clear that the SEC is following the timeline outlined in Senator Dodd’s letter – and therefore all TARP companies will be required to conduct a “say-on-pay” advisory vote if they didn’t file their preliminary proxy materials before February 18th.
This is huge. Over 400 companies will now be doing “say-on-pay” this year! For TARP companies that have filed preliminary (and definitive) proxy materials since February 17th, I imagine they are freaking out. Shoot, I imagine all TARP companies are freaking out even if they haven’t filed yet – since their proxy materials must be close to final. Back to the drawing board. Chaos reigns supreme…how will ISS suddenly come up with 400 recommendations they didn’t expect? Their say-on-pay determinations are case-by-case and fairly complicated. We’re posting memos on this new development in our “Say-on-Pay” Practice Area.
Wednesday Webcast: “Say-on-Pay: A Primer for TARP Companies”
To say there still are a number of open issues in how to frame say-on-pay in proxy materials this year is an understatement. But our experts will do their best to help you during this newly scheduled webcast to be held on Wednesday: “Say-on-Pay: A Primer for TARP Companies.”
On the Fast Track! NYSE’s Rule 452 Amendment to Eliminate Broker Non-Votes
Yes, the Schapiro SEC is a “new” SEC. Yesterday, the NYSE filed a third amendment to its Rule 452 proposal – regarding the elimination of broker nonvotes in director elections – after the last amendment languished for nearly two years.
The 3rd amendment states the proposed effective date would be one that applies to shareholder meetings held after January 1st, 2010. It has a contingency that if the NYSE’s proposal is not approved by the SEC by September 1st, the effective date is then delayed for at least four months after the SEC’s approval – but it would not fall within the first six months of a calendar year. And it’s my feeling that the SEC is ready to approve the NYSE’s proposal, based on recent comments from a number of Commissioners.
This means that companies would not have the benefit of broker nonvotes for next year’s (ie. 2010) proxy season. This is even a bigger development than the item above! A “sleeper” in the sea of regulatory reform as this could be the “last straw” that alters the power struggle between shareholders and boards. However, note this recent NY Times article that brokers may be voting broker nonvotes against management this year! We’ll be posting memos on the NYSE’s proposal in TheCorporateCounsel.net’s “Broker Non-Vote” Practice Area.
Going to college in the early ’80s in Michigan meant I had to be a “Prince” fan. The guy had 8 of the top ten spots in the charts when “Purple Rain” came out in ’84. Anyways, looks like the House Democrats are not that happy that Northern Trust sponsored a PGA golf tourney and held parties at the event. So they want the taxpayers’ money back. House Financial Services Committee Chair Barney Frank, along with 17 Democrats on the committee, sent a letter on Tuesday to that effect.
I understand the arguments about pre-existing contracts and the need to keep marketing. But the public doesn’t understand all that and we’ve been done this path for six months (think AIG), so it’s hard for me to fathom how companies still haven’t figured out the lay of the land here – public perception really matters, particularly when you receive TARP funds. Were companies this dim during the Great Depression? So sing along with me:
I was dreamin’ when I wrote this
Forgive me if it goes astray
But when I woke up this mornin’
Coulda sworn it was judgment day
The sky was all purple
There were people runnin’ everywhere
Tryin’ 2 run from the destruction
U know I didn’t even care
‘Cuz they say two thousand zero zero party over
Oops out of time
So tonight I’m gonna party like it’s 1999
I was dreamin’ when I wrote this
So sue me if I go 2 fast
But life is just a party
And parties weren’t meant 2 last
War is all around us
My mind says prepare 2 fight
So if I gotta die
I’m gonna listen 2 my body tonight
Yeah, they say two thousand zero zero party over
Oops out of time
So tonight I’m gonna party like it’s 1999
Yeah
Lemme tell ya somethin’
If U didn’t come 2 party
Don’t bother knockin’ on my door
I got a lion in my pocket
And baby he’s ready 2 roar
Yeah, everybody’s got a bomb
We could all die any day
But before I’ll let that happen
I’ll dance my life away
They say two thousand zero zero party over
Oops out of time
We’re runnin’ outta time
So tonight we gonna, we gonna (Tonight I’m gonna party like it’s 1999)
Say it 1 more time
Two thousand zero zero party over
Oops out of time
No, no
So tonight we gonna, we gonna (Tonight I’m gonna party like it’s 1999)
Alright, it’s 1999
You say it, 1999
1999
1999 don’t stop, don’t stop, say it 1 more time
Two thousand zero zero party over
Oops out of time
Yeah, Yeah
So tonight we gonna, we gonna (Tonight I’m gonna party like it’s 1999)
Yeah, 1999
Don’tcha wanna go
Don’tcha wanna go
We could all die any day
I don’t wanna die
I’d rather dance
Late yesterday, Corp Fin issued this set of “American Recovery and Reinvestment Act of 2009″ CD&Is, which contain three Q&As regarding how to implement the “say-on-pay” provision of ARRA. Unfortunately, these Compliance and Disclosure Interpretations don’t answer many of the questions we have been hearing. The three Q&As boil down to:
– Say-on-pay only applies to shareholder meetings at which directors are to be elected
– Addresses how the rules apply to smaller reporting companies that are not subject to CD&A disclosure requirements
– Notes that “a company that determines to comply” must file a preliminary proxy statement – and you should contact the Assistant Director of your industry group if that causes timing problems (for me, this begs the question – how can a company determine not to comply?)
As for the effective date of Section 7001 of ARRA (which amends Section 111 of EESA), the CD&Is are semi-silent; they just note Senator Dodd’s letter that I blogged about recently, which states his views about the effective date. I’m not sure how much precedential weight to put on a letter from a Senator. Does it get bolstered by a mention from the Staff? Do they teach this stuff in law school now-a-days (e.g. a Senator letter is bigger than a bread basket, but smaller than a Conference Report; yes, I’m feeling cheeky today)?
The third Q&A suggests that there is some other way to comply with Section 111(e)(1) – could a company possibly just include a shareholder proposal that asks a company to adopt say-on-pay? Probably not. There are lots of open issues and we may have to wait until the SEC conducts its required rulemaking under Section 7001 until we have firm answers.
For the academics out there, it could be interpreted that Section 7001(h) allows Treasury to adopt say-on-pay regulations to fill in the gap before the SEC adopts rules under Section 7001(f)(3)(under which the SEC has one year to adopt rules). Unlikely, but anything is possible…
Due to popular demand, we also have calendared this webcast – “Compensation Arrangements in a Down Market” – for March 24th. This topic likely will have staying power unfortunately…
By the way, did you see the WSJ article last week questioning how the “Next Top 20 compensated” are supposed to be counted? It was surprising that the press actually understood the issue.
Section 7001 of Title VII of Division B of the “American Recovery and Reinvestment Act” – which amends 111 of EESA – requires TARP recipients to permit a non-binding say-on-pay vote. It also requires the SEC to issue rules to govern this requirement within one year. We have received many questions from members seeking input into how this should be accomplished during this proxy season in the absence of SEC guidance.
Well, we might get guidance from the SEC soon enough. On Friday, Senator Dodd sent this letter to the SEC sharing his views on the intent and application of the say-on-pay provisions in ARRA and asking the Staff to provide guidance “as soon as practicable.” Senator Dodd stated that:
– “Say-on-pay” voting applies to preliminary and definitive proxy statements filed after February 17th except for definitive proxy statements regarding preliminary proxy statements filed on or before February 17th
– CEO/CFO certification requirement is not effective until Treasury releases its upcoming guidance the FSP’s executive compensation restrictions
Here are a few of the issues that the SEC hopefully will address in their guidance:
– Does the requirement to “permit” a say-on-pay vote mean the company must affirmatively provide for a vote, or that it must provide for a vote only if it receives a request from a shareholder?
– Are companies with say-on-pay on the ballot required to file a preliminary proxy statement or is it exempt under Rule 14a-6(a)(4)?
– Are companies that have already adopted say-on-pay “grandfathered” so that they could continue to frame the vote the way they have done so before?
– Does management or the board have to actually “support” the proposal or can they can make no statement (this query involves state law)?
– Under NYSE rules, for broker non-vote purposes, is say-on-pay a “routine” item or non-discretionary?
Voluntary “Say-on-Pay”: Gathering Momentum?
As noted in this recent press release, “say-on-pay” proposals have been filed at more than 100 U.S. companies so far this season. Not really a surprise, given that this equals the about the same number as last year and includes the same network of 70 institutional and individual investors. The end of the press release identifies the ’09 proponents; in comparison here is a ’08 list of targeted companies and proponents.
This followed new SEC Chair Mary Schapiro’s responses to Senator Carl Levin, in which she said she favored advisory votes on executive compensation. SEC Commissioner Walter also seemed to favor say-on-pay in this recent speech.
This pressure will likely wind up with more companies agreeing to place pay on ballots. For example, Hewlett-Packard recently joined the list; H-P issued this press release saying that its board had decided to allow for say-on-pay, with a vote starting in 2011. [For those companies considering allowing say-on-pay, here is a list of how companies have announced they will do it as examples.]
And following in the footsteps of recent majority votes in support of “say-on-pay” proposals (eg. Sun Microsystems) is the news that a United Kingdom company – Bellway – recently received a 59% vote against its remuneration package. If you recall, all companies in the UK must put their pay packages to a vote and very few companies had received a vote against before this (in fact, I think GlaxoSmithKline might have been the only, and that was way back in 2003). It’s sure to be a wild proxy season…
Based on the first annual meetings that included the AFL-CIO’s shareholder proposal regarding golden coffins on the agenda, it looks like this new type of proposal will be very popular among shareholders. According to this Businessweek article (scroll down), the proposal got a 67% “for” vote at the Shaw Group.
The same proposal received only a 42% vote at Johnson Controls, but that still is a significant level of support for a first-time type of proposal (and this proposal has been “negotiated out” at one other company so far – often a sign that the proponent succeeded in obtaining its goal). Labor funds have submitted about 15 of these proposals this proxy season.
Nell Minow on Outrageous CEO Pay—and Who’s to Blame
For this BusinessWeek article, Maria Bartiromo recently conducted this interview with Nell Minow of The Corporate Library:
Anger over enormous executive compensation has been rising for years. Are we at a watershed moment?
Yes, I think so. All the scandals I have lived through going back to the savings and loan crisis, insider trading, Enron, and WorldCom seemed very localized—they were about something that everyone could understand. There were people who behaved unethically, and we got to see some very satisfying perp walks. But in this case, because the problem seems so systemic and there has been no indication that anyone has done anything illegal, that has fueled a level of rage I have never seen before.
I used to compare some of these executives to Marie Antoinette, but a better comparison is Nero. When the stories came out about [former Merrill CEO John] Thain and his $1,400 wastebasket and the corporate jets and the bonuses, that makes people feel that not only did the business community create this problem, but they don’t care how bad it gets. I will tell you that the biggest disappointment I’ve had in this mess has been the absolute vacuum of leadership on the part of the business community.
The public may be angry, but don’t stockholders have to get angry, too, for there to be any dramatic changes?
I’m so glad that you brought that up because all the reforms going back to Enron and before always focus on what they call the supply side of corporate governance, which is what the boards must do, what the corporations must do, what the accountants and lawyers must do.
And we have completely failed to address the demand side of corporate governance, which is what shareholders must do. Shareholders have reelected these directors, have approved these pay plans, and have been enablers for the addictive behavior of the corporate community.
The stimulus bill reins in compensation for executives of banks or companies receiving bailout money. Is that fair?
I think there are two important points to make about it. The most important is that this is not the government regulating CEO pay. This is capitalism. This is the provider of capital insisting on some improvement in CEO pay. And whether you are a distressed company that goes to a private equity firm for help or to your Uncle Max for help, those people are going to insist on some kind of a giveback with regard to pay. So this is a business partner negotiating.
Caps don’t really have much of an impact, but they send a powerful message. To me, the interesting part is the restricted stock. The fact that there’s no limit on the restricted stock means that you can earn a zillion dollars under this program as long as you earn it. And the fact that it cannot vest until the government gets [paid back] is very, very good. It really does the best job possible of aligning the interests of the managers with the interests of investors and taxpayers.
Can you explain how compensation contributed to the mess we are in now?
Certainly. With regard to the subprime mess, compensation was structured so that people were paid based on the number of transactions rather than the quality of transaction. And it doesn’t take a rocket scientist to figure out that that is going to lead to disaster.
How has executive pay ratcheted up to such a level?
In part, the answer is that the last time the government tried to fix [outsized executive compensation], there was no limit on stock options. At the time you didn’t have to expense stock options, and they just mushroomed. So we want to have some humility going forward about efforts to correct this problem we helped to create the last time we tried to correct it. And there was a cultural element that led to this as well. I always say that investment bankers are the geishas of the financial world because they sit next to the CEO and laugh at his jokes and talk about what a big strong man he is and wouldn’t it be fun to buy something together.
And so CEOs looked at the investment bankers and said to themselves, “This guy’s making more than I am. I am a titan. I’m the CEO of a great big company. I’m responsible for all these employees and customers, and all this guy does is move numbers around. I should be paid as much as he is.” And then we have what we call the virus directors—directors who move from company to company and bring bad pay plans with them. So you have people like [Home Depot (HD) founder] Ken Langone, and you find him on the compensation committees of GE (GE), approving Jack Welch’s retirement plan, Dick Grasso’s at the NYSE (NYX), and [Bob] Nardelli’s at Home Depot (HD). He personally was involved in three of these outrageous plans.
So compensation committees are at fault?
Yes. I absolutely blame them 100%. I’ve given up on any other reform other than the ability to replace directors who do a bad job. Without that, as long as you still have this very cozy interlocked system of having CEOs control who is on their boards, you’re going to have no incentive for directors to say no to bad pay.
I mean, when Warren Buffett says that he has knowingly voted for excessive compensation because collegiality trumps independence, you know that there’s something really wrong with the system.
Companies are facing unprecedented negative publicity these days with respect to corporate aircraft. In this podcast, Terry Kelley, CEO of corporate aviation consulting firm GoldJets, discusses recent challenges for companies owning aircraft, including:
– What steps are companies taking to counter the current “image” problem with their aircraft?
– How are companies changing their corporate aviation policies To deal with this?
– What pitfalls should the company be aware of in revising their aircraft policies?
– What is 91Plus and how can it help companies with their corporate aviation needs?
Recently, I blogged about a new survey we were conducting regarding long-term incentive practices. We have collected responses and posted this summary of the responses.
In a nutshell, it looks like 2009 LTI grant values will decline in total by more than 10%. Of those companies changing their values, the median decrease (at the time of the survey) was 20%, but a number of companies have not yet gotten Compensation Committee/Board approval, and those companies are contemplating cuts of 30% at median.
It will be interesting to see how companies respond if the 2009 LTI grant data shows such decreases. If they stick to trying to deliver a market competitive value, one would expect that 2010 LTI grant values would erode further. However, if companies respond to all of this by rejecting a value-based approach to LTI grants (which many companies appear to be doing in 2009), then they would be likely to stick with a set number of shares for their grants, and the value would change then only as a result of stock price movement.
Late Friday, Congress finished its conferencing and passed the “American Recovery and Reinvestment Act” – and law firms went to work drafting their memos analyzing this stimulus package (we’ll be posting all these memos in our “Rolling Back Compensation” Practice Area). The final text of the legislation is posted on the White House’s site in five parts, along with the ability for anybody to post comments!
The most relevant part of the legislation for our members is the tax provisions in Division B, which includes the controversial executive compensation restrictions among others (eg. see this Hodak Value commentary) – even President Obama is not happy (as noted in this article) with what Senator Dodd inserted as the final exec comp language. Oddly, the stimulus legislation went from no new executive compensation restrictions on Friday morning to more restrictive than previously contemplated by the end of the day. More coverage to come…
Populism Over Bankers’ Pay
I thought this piece from the Financial Times’ Blog by Martin Wolf made good reading:
Populism is breaking out, not surprisingly, over bankers’ pay. When an industry has played a huge role in creating what may well be the first depression since the 1930s, that is hardly surprising. Even Lloyd Blankfein, chairman of Goldman Sachs, has admitted the industry screwed up comprehensively. That is pretty obvious now.
The response to the pay curbs is that the high pay is needed to obtain and reward talent. I think that’s nonsense. Do we really want to reward the “talent” that has just brought down the world economy?
So what makes sense here? I suggest there are four questions.
First, does the government have an interest in how bankers are paid?
Answer: yes, of course. Since the government is, on behalf of the taxpayer, the ultimate risk-bearer in banking, it has a profound interest in the structure of pay or, as Lex puts it more precisely, incentives. We have seen the impact of incentives to destroy the bank. Do we really want to go there again?
There are obvious collective action problems in all corporate payment systems. But in the case of banking the consequences are very severe. In any case, if governments are shareholders, they must have a role in setting pay, as owners.
Second, Is banking an exceptionally difficult job or one that demands exceptional talent not required by brain surgery, fighting in Afghanistan etc?
Answer: of course not. It is a gross misallocation of resources to pull the most talented people into a business whose true value added is modest and many of whose activities are zero sum. For the UK it has surely been a catastrophe.
The more energetic and “talented” bankers are, the bigger the risks they will take. I no more want bankers to have such characteristics than I want those who run the electricity grid to have these characteristics.
The reason even junior bankers make so much money is that they sit on the money flow, which is the result of the licence given by the state to create money. We should not give any support to the ridiculous idea that bankers really do deserve their pay in some objective sense. Even Hayek would not have supported that idea.
Special talent really isn’t needed in commercial banking. What is needed is trustworthiness, caution, scrupulousness and organisational ability. Everybody knew this until a couple of decades ago. They were right. Investment banking may be different (I doubt it), but then they can’t rely on government money.
Third: what sort of pay structures should the government seek?
Answer: I agree that a simple pay cap is distorting. It is well-known that this leads to all sorts of ways of disguising incomes, as happened when we had pay policies. So the intervention has to be more subtle. It needs to focus on the structure of incentives and particularly whether there is any tendency to increase risk-taking.
Finally, are current circumstances exceptional?
Answer: yes. If taxpayers are putting trillions of dollars into these ghastly institutions, do they really have no right to decide how their employees are paid? Do we not accept that they have a right to decide how the doctors they employ are paid?
Until banks are free of the need for massive government subventions, they have to accept such interventions. This is the price of failure. I would certainly agree that 500,000 dollars is too low, though it is at least double what Ben Bernanke is paid and he is at least as intelligent as – and doing a far more important job than – any banker I have ever met.
Unfortunately, there’s plenty of examples of CEOs that “just don’t get it.” However, Wells Fargo took this concept a step further by purchasing full-page ads in several national papers this past Sunday to defend its poor decision to continue a Vegas junket for employees.
In this press release, the company defends itself. And CEO John Stumpf further defends the decision because the money for the recognition event came from profits, not the $25 billion in TARP money the bank received. Here is what my mailman told me: “If so, why don’t you just take some of those profits and pay the taxpayers back now?”
Or as I like to put it: “okay, we get it Wells Fargo – you’re just not into us taxpayers.”
Right now, it’s clear that optics matter. And there is no difference between a business trip and a junket in the minds of many. I wonder how long it’s gonna take until these CEOs “get it.” For some, I imagine they won’t until their mansions are surrounded by people with pitchforks.
It’s still too soon to tell if the executive compensation restrictions stimulus bill died in conference as the reports have been mixed so far on that. Even if they were cut from the stimulus bill, Jesse’s piece about key fixes to the new Treasury guidelines still is timely and his points were recently picked up by Joe Nocera in the NY Times’ “Executive Suite Blog.”
We encourage you to forward Nocera’s blog to key members of Congress and Treasury and other decisionmakers. We each have a responsibility to help the government “get it right.”