The Advisors' Blog

– Broc Romanek, CompensationStandards.com

Recently, the SEIU Master Trust – the pension funds managed on behalf of the SEIU – sent letters to the boards at 29 major financial services companies, demanding that they investigate more than $5 billion in compensation to their NEOs that may have been tied to derivatives and other instruments that are now worthless. The SEIU argues that if the payments – including cash and equity – are shown to be based on false economic metrics, they may be subject to clawbacks. They further demand that the boards overhaul their executive compensation practices so that the NEOs don’t reap bonuses and other incentivized pay regardless of corporate performance. A list of the 29 companies is at the bottom of this press release.

We can expect litigation over executive pay practices to continue. Recently, Kevin LaCroix provided an excellent overview of the latest developments in executive compensation litigation in the “D & O Diary Blog.” Among other recently filed lawsuits involving executive compensation is the derivative complaint filed on April 1st in California (Los Angeles County) Superior Court against AIG CEO Edward Liddy and several other AIG directors and officers. The complaint alleges that ‘there was no rational business purpose or justification for these lucrative additional payments, particularly given AIG’s deteriorating financial condition and dismal financial performance,’ and describes Liddy’s explanation of the bonus payments as ‘outrageous on its face’ and ‘absurd.’ The complaint seeks to recover damages for corporate waste, breach of fiduciary duty, abuse of control and unjust enrichment.

The bonuses paid to Merrill Lynch employees at year-end just prior to the consummation of the company’s merger with Bank of America also features prominently in the shareholders’ litigation filed against Bank of America earlier this year, following the revelation of Merrill’s massive and previously unreported losses. The D&O Diary Blog also notes the outcome in the recent Citigroup case in Delaware involving Charles Prince’s $68 million exit package, discussed in my blog on the topic from last month.

SEC’s Enforcement to Ramp Up Exec Pay Investigations?

Dave Lynn notes: While shareholder-initiated litigation is taking off in the current anger-fueled environment, it seems that now may be the time when we will also see more focus on executive compensation by the SEC’s Enforcement Division. The “honeymoon” with the 2006 compensation rules is long over, and thus now may be the time when we will start to see Enforcement bring some high profile cases to demonstrate attention to the issue.

A couple of roadblocks that could stand in the Enforcement Division’s way in bringing these sorts of cases is that the principles-based aspects of the rules might make it more difficult, in some circumstances, to bring fraud or reporting violation cases, given that the lack of bright lines gives companies a significant degree of latitude in deciding what is and is not material. Further, the heightened sensitivity to compensation issues, more engagement by compensation committees, and the voluminous disclosure that is now required may reduce the ability to hide or mischaracterize compensation that could give rise to Enforcement’s interest. Unlike shareholders, the SEC is limited to disclosure violations and can’t pursue claims such as corporate waste.