As Susan Wolf mentioned would happen during her podcast regarding Schering-Plough’s experiment of surveying its shareholders about its pay practices ahead of its annual meeting last year, the company issued a report yesterday regarding the survey responses it received. We have posted a copy of this report in our “Say-on-Pay” Practice Area.
As an aside, note that Pfizer is the second company to go “biennial” by announcing yesterday it will start putting say-on-pay on its ballot next year.
RiskMetrics Opens Its Policy Comment Period: Earlier this week, RiskMetrics opened its policy comment period, providing an opportunity for a range of industry constituents to provide feedback on updates to its proxy voting policies in markets worldwide. Topics covered include takeover defenses in the U.S.; board and director independence in Japan, the U.S., and Europe; compensation and slate ballots in Canada; and equity and share purchase authorities in Europe. The comment period runs through November 11th.
As could be expected given the nebulous wording in Section 304 of Sarbanes-Oxley, former CEO of CSK Auto Corp. has filed a motion to dismiss in the clawback case that the SEC brought against him a few months ago (I also recommend John Kelsh’s article in “The Business Lawyer” cited in the brief). Here is the SEC’s complaint.
As I blogged back then, this is one of the first times the SEC has used Section 304 – and it’s the first one where the “clawee” isn’t alleged to have violated the securities laws. The motion to dismiss asserts that the SEC’s complaint fails to allege any causal connection between CSK’s accounting restatements and the bonus payments and stock proceeds the SEC seeks to have forfeited – and that the SEC’s interpretation of Section 304 has constitutional defects.
Dave Lynn, Mark Borges & I just finished the new ’10 version of Lynn, Borges & Romanek’s “Executive Compensation Disclosure Treatise and Reporting Guide” – it is now posted on CompensationDisclosure.com and the hard copy is at the printers (delivery expected in mid-November). To obtain both the online and hard copy versions of this Treatise, you need to try a no-risk trial to the Lynn, Borges & Romanek’s “Executive Compensation Service” now.
Without access to this New Treatise – as well as the “Proxy Disclosure Updates” quarterly newsletters that you will get if you renew as a Service subscriber – you will miss our critical guidance that you need to prepare your proxy disclosures during this upcoming proxy season including this:
Proxy Disclosure Updates – Full Walkaway Model CD&A: Dave is putting the final touches on a key, new model CD&A disclosure which will need to be addressed in this year’s proxy statements. The upcoming Fall issue of “Proxy Disclosure Updates” will focus on this important new full walkaway disclosure, providing not only new model disclosure – but also invaluable guidance on what to cover and why and how. To receive this model disclosure as soon as it’s out, you need to try a no-risk trial now.
Deeply concerned about the current state of executive compensation, more than 100 independent directors have been meeting in small groups to address the problem. These meetings have given rise to a growing effort known as the Independent Directors’ Executive Compensation Project (IDEC).
Some of those involved in the project held a meeting in September at Kellogg School of Management where they reached consensus that there is a dire need for a set of principles to guide boards. They agreed that it is imperative for corporate boards to voluntarily embrace and abide by a set of principles that would serve as a lodestone of responsibility for setting executive compensation. Several major companies have already indicated interest in adopting these principles as a basis for good governance and effective disclosure.
The goal would be to create a contagion of better and better practices – of companies voluntarily abiding by the principles and other companies following suit, lest they be left out of the positive limelight and look bad by comparison. Hence, positive compensation practices would edge out negative practices. And, as extensive research shows, effective compensation practices can translate into enhanced shareholder value as surely as negative practices can destroy it.
The need for principles-based compensation has become apparent. Repeated instances of high pay without performance have been eroding the faith of shareholders and engendering a call for public action. Adding insult to injury, Americans who have been hurt by the global economic crisis have ended up seeing their tax dollars spent on bailing out some of the same companies they hold responsible. Legislators, regulators and shareholder groups are lining up to propose a variety of rules intended to limit perceived and real excesses. Unfortunately, government efforts to limit the excesses of executive pay also limit the effectiveness of executive pay.
The idea behind IDEC is to help boards improve accountability and thereby restore the faith of the investing public and preclude emerging government intervention. At a recent meeting – and all prior meetings of these independent directors – there was agreement that:
– There are serious problems with executive compensation at publicly traded companies.
– Independent directors should a take leadership role to do something about the problems.
– An ongoing effort should be undertaken to continuously define, research, develop and communicate principles and best practices.
– Those principles and best practices should ensue primarily from a series of meetings of independent directors.
Thus far, five key principles have emerged from our discussions:
These principles were discussed at length at the IDEC Project conference at Kellogg. The directors, academics and consultants gathered at that meeting suggested an initial set of illustrative factors for each principle. Here are the draft principles developed by those attending the meeting. Independent directors who have attended these meetings have expressed interest in fostering a voluntary peer-led process that would establish and expand these principles and encourage boards to incorporate them into their practices and proxy statements.
Something akin to this has been accomplished in Germany, where the corporate governance community took a direct approach. The German Corporate Governance Code (adopted in June, 2006) has three levels of guidelines: requirements that must be followed, recommendations that “should” be followed, and suggestions that “could” be followed. Companies that adopt the code agree to disclose the reasons behind any failures to follow recommendations or suggestions. This initiative has been successful as it has resulted in considerable peer pressure among companies to adopt and abide by the code while ensuring needed flexibility in applying it.
Corporate directors who attended the meeting concluded that the widespread adoption of key compensation principles would be an important step toward restoring public faith. They plan to hold conversations with their colleagues as well as with organizations which are working on developing principles such as the Conference Board and the Center on Executive Compensation. Independent directors who have joined the conversations over the past year express a sense of urgency that it is important that corporate boards take the lead in developing and implementing principles of compensation before those who little understand the power of compensation as an effective tool do it for them. The effect is to enable independent directors to employ compensation as the positive tool it can be to shape responsible corporate behavior that rewards both management and shareholders and builds a strong national economy.
Recently, the Office of the Special Inspector General of TARP issued an audit report on the troubled arrangements with AIG. I say “troubled” because Ken Feinberg and others were finding little legal authority to rein in bonus payments to AIG’s Financial Product Unit, as noted in this recent NY Times article – I wonder if the Special Master’s efforts last Thursday will come under legal challenge. The audit report addresses:
– What was the extent of knowledge and oversight by Federal Reserve and Treasury officials over AIG compensation programs and, specifically, retention payments to the AIG Financial Products Unit?
– To what extent were AIG Financial Products Unit retention payments governed by executive compensation restrictions or pre-existing contractual obligations?
– What are the outstanding AIG compensation issues requiring resolution, and what Federal Government actions are needed to address these issues?
From Cleary Gottlieb: Yesterday, the Federal Reserve released for comment proposed guidance on incentive compensation applicable to all banking organizations under its supervision. The proposal includes two supervisory initiatives. The first, applicable to 28 “large, complex banking organizations,” will involve a review each organization’s policies and practices to determine their consistency with the guidance described below. The organization-specific policies will be assessed by supervisors in a special coordinated “horizontal review.”
The press release issued with the proposed guidance states that “[t]he policies and implementing practices adopted by these firms in response to the final supervisory principles will become a part of the supervisory expectations for each firm and will be monitored for compliance.” The second initiative will involve a review of compensation practices at regional, community, and other banking organizations not classified as large and complex, as part of the regular, risk-focused examination process. These reviews will be tailored to take account of the size, complexity, and other characteristics of the banking organization.
The guidance is designed to apply to the compensation of: (1) senior executives and others responsible for oversight of an organization’s firm-wide activities or material business lines; (2) individual employees, including non-executive employees, whose activities may expose the organization to material amounts of risk; and (3) groups of employees who are subject to the same or similar incentive compensation arrangements and who, in the aggregate, may expose the organization to material amounts of risk.
Alongside the proposed guidance, the Fed released six Q&As. The Q&As state that the Fed has issued the proposed guidance under its authority to monitor the “safety and soundness” of institutions subject to its oversight. The Q&As also note that the proposed guidance is “consistent with” the Financial Stability Board’s Implementation Standards for its Principles for Sound Compensation Practices, which were released last month in conjunction with the G-20 Summit in Pittsburgh.
The FSB was organized at the direction of the G-20 in order to address vulnerabilities and develop and implement strong regulatory policies in the interest of financial stability. The United States is the first G-20 nation to issue detailed guidance on compensation practices since the FSB’s Implementation Standards were released. The Q&As provide that comments on the proposed guidance will be accepted for 30 days.
In his “Proxy Disclosure Blog” last night, Mark Borges blogged his analysis of the plan from Special Master Feinberg that was posted late yesterday. He also analyzes the separate “determination” letter sent to Banc of America.
Yesterday, Special Master Kenneth Feinberg revealed the details of the long and contentious negotiations over the pay levels for the top 25 paid executives at five financial institutions and two automakers that received TARP money. Although Feinberg’s plan itself hasn’t yet been made public (but will be later today or within the next day or so), the details of the plan are fully reported in numerous articles in the papers today.
It appears that the key components of this pay reform include:
– About a 50% overall compensation cut
– Salary cuts of about 90%
– Some of the reduced salaries replaced with restricted stock, vesting immediately but paid out in one-third per year installments after a two-year waiting period
– Limits on perks, with anyone receiving more than $25k having to seek special permission
Here are articles from today’s newspapers describing this story:
The discussion about the value of holding an advisory say-on-pay vote has grown enormously since the seeds were first planted in the United States through a small number of AFSCME sponsored shareholder resolutions several years ago. Investor support rapidly escalated with 2009 resolutions urging this reform averaging 46-47% and 22 receiving over 50% votes to date. In addition to the over 300 companies receiving TARP funds that are required to hold an advisory vote, 27 companies have stepped forward and agreed to implement the vote themselves, in their 2009 or 2010 proxies. Other companies, especially those with high votes are deliberating when they will institute SOP.
And Congress has been actively pursuing SOP with the strong support of the Treasury, SEC and the President, leaving most observers to expect that legislation will empower the SEC to adopt rules resulting in all large cap companies being required to have annual Advisory Votes by their 2011 proxies. Thus, it is curious to see, in this 11th hour, the alternative of having an Advisory Vote every three years emerging. This variation on the theme surfaced when the Carpenters Union, led by Ed Durkin, filed 20 or so resolutions seeking both a triennial vote and expanded communications between investors and management and the Board.
This last point urging expanded investor communications is a welcome echo of the appeals of proponents for SOP. Indeed a vote without communications to help interpret the message sent has very real limits. It is wise and timely to stress that the two go together. However, it is curious that the Carpenters now emerge as a supporter of any form at all of advisory voting since during the last 3 years they are frequently quoted criticizing the idea. Now, as it seems to be on the verge of being institutionalized, they propose a variation on the theme. And unfortunately they seem interested in enlisting allies among corporate secretaries to water down any SOP legislation before Congress.
However, this testing of the triennial waters has real drawbacks that make it a mistake to consider as a public policy alternative. First companies with pay for “non-performance,” questionable perks such as Golden Coffins or Gross-ups, spiraling pay or a host of other compensation problems would love to avoid annual accountability and only face their shareowners every three years. Perhaps we could call this a proposal for “occasional accountability.” Yet with the problems with pay still front and center and covered daily in the media, it seems like this is not the time to propose weaker measures.
On a parallel issue a majority of investors vote regularly for annual elections of directors and not staggered boards with elections every three years. And likewise, they wish to vote annually to ratify the auditors. Accountability on these issues should be an annual exercise they reason.
Recently, Microsoft announced that they would implement a management sponsored advisory vote for their upcoming annual meeting. They made a number of supportive comments about the utility of the vote twinned with expanded investor communication. The Calvert Group and Walden Asset Management had sponsored the resolution on this topic and were pleased to withdraw our resolution in response. Microsoft in its blog announcing the decision stated its preference for a triennial vote. As investors we reasoned that the Senate would act to institute an annual vote thus rendering the triennial approach moot so gladly accepted this vote of confidence in shareowners being able to send a message on compensation via SOP.
One argument raised supporting the triennial vote is that is protects investors from a deluge of work every year when voting their proxies. Indeed an additional annual vote does add a new voting discipline. However many institutional investors have voted for exactly this reform providing a clear mandate for action. They acted similarly over the last years supporting majority votes for directors, a reform launched by the Carpenters Union. This helped spark rapid market reform as companies moved with dispatch to adopt majority voting policies.
And investors generally feel comfortable with processing an annual vote. Of course, extra work is involved – but intelligent investors will set up a system whereby urgent comp issues are put on the top of the pile for review and action just as we look at election of board members selectively when we vote. They will get priority attention as needed. And of course many votes on comp will be routine just as voting on directors and auditors or option plans often may be run of the mill.
Thus, a proposal for a triennial vote on pay is not necessary to protect investors and certainly is a step backwards in corporate accountability on compensation.
As I recently blogged, as the S&P 500 index tumbled more than 37% in 2008, CEO compensation barely fell, according to our recent report co-authored by Greg Ruel and myself. Median total annual compensation for the companies included in the study declined by 0.08% in 2008, suggesting that the link between CEO pay and firm performance remains very weak. The report includes data from more than 2,700 public companies, more than any other CEO pay study released so far this year.
Other key findings from the report include:
– The median decrease in total realized compensation was 6.38%, which is still well out of line with the economic downturn. (Total realized compensation includes the value realized on vesting of shares, option value realized, pension/non-qualified deferred compensation earnings and pension pay in the last year.)
– Approximately 75% of CEOs included in the study received a base salary increase in 2008, up from 73% in 2007.
– More CEOs saw declines in realized compensation in 2008 than in 2007 (just over 56% and 40%, respectively).
– Oracle CEO Lawrence Ellison is the only CEO to appear in The Corporate Library’s list of the top ten highest paid CEOs in both 2007 and 2008, having earned approximately $750 million in realized compensation over the period.
While these findings are historic, in that we have never seen a decline in CEO compensation since we began this series of surveys in 2002, if there were ever an argument that pay is fatally divorced from performance then this is surely it. The pay study was previewed in a webinar – “Big Pay, Poor Performance” – which is still available as a free download; it includes an analysis (not available in the report) of the CEO pay packages of five companies where the pay/performance link was most starkly broken in 2008.
Last Thursday, Goldman Sachs reported that it was putting aside $23 billion from this year’s bonus pool. And the anger was palpable. Here is Paul Hodgson’s take from “The Corporate Library” Blog. And here are some scathing thoughts from Rob Shapiro, as posted on the Huffington Post. This NY Times article explains Goldman’s public relations bind – and this Washington Post article notes how Obama Administration officials bashed banker pay over the weekend.
None of these responses are surprising. What is surprising is the speed by which a shareholder proposal was submitted to Goldman. Within hours of the news breaking on Thursday, this “pay disparity” proposal was submitted by the co-sponsors of Benedictine Sisters of Mt. Angel and The Nathan Cummings Foundation (here is the related press release). I think we can expect continued anger over executive pay throughout this upcoming proxy season. I think it’s an issue that’s not going to fade away as it has in the past…