Some overseas news below, based on this new memo from Sullivan & Cromwell:
In the UK Pre-Budget Report delivered on in early December, the United Kingdom’s Chancellor of the Exchequer unveiled the heavily-trailed Bank Payroll Tax, a 50% tax on bonuses in excess of £25,000 paid to employees by certain financial institutions operating in the UK: see our client memo of 10 December. France has now indicated that it will enact a similar tax (see our client memorandum). The BPT is imposed upon the employer not the employee. It continues to prove highly controversial. In certain quarters, the BPT (along with other recent UK tax and regulatory changes) has raised questions about the continued competitiveness of the UK as a location for international financial services business.
Nonetheless, the Conservative Opposition has said that it will not oppose this measure. In principle, the BPT is a “one-off” levy which applies to awards of performance-related remuneration (i.e., “bonuses”) in excess of £25,000, between 9 December 2009 and 5 April 2010. However, the Government has indicated that it may be extended until such time as new UK regulatory legislation comes into force requiring financial institutions to maintain higher levels of regulatory capital. Draft legislation imposing the BPT has been published and is expected to be enacted in UK Finance Act 2010.
Since our original client memorandum, there have been ongoing submissions by interested parties to the UK tax authorities (“HMRC”) about the scope of the BPT. HMRC have in recent days made statements regarding the scope of the tax. This memorandum sets out the updated picture regarding the BPT.
Yesterday, Corp Fin issued five new Compliance and Disclosure Interpretations to deal with some of the transitional issues posed by the February 28th effective date of the new executive compensation and proxy disclosure enhancement rules adopted last week, thereby tackling the “big question” that I blogged about last week. Learn more in Mark Borges’ “Proxy Disclosure Blog.”
Our Practical Guidance to Help Implement the New Rules
As all memberships expire in a week, you need to renew for this site (and our other publications) now to obtain practical guidance on how to comply with the SEC’s new rules. We have two companion webcasts lined up for just after the new year begins – we pushed up our CompensationStandards.com webcast to January 7th – “The Latest Developments: Your Upcoming Compensation Disclosures – What You Need to Do Now!” – featuring Mark Borges, Alan Dye, Dave Lynn and Ron Mueller.
And to handle the other new SEC rules that don’t deal with compensation issues, we have a webcast on TheCorporateCounsel.net – “How to Implement the SEC’s New Rules for This Proxy Season” – featuring Marty Dunn, Amy Goodman, Ning Chiu, Howard Dicker and Dave Lynn to be held on January 6th. Renew for both sites now (or try a no-risk trial if you are not a member).
Sample D&O Questionnaire Items
In response to the SEC’s new rules, Dave Lynn and Mark Borges are drafting up the new items you will need now in your D&O questionnaire as part of the Winter issue of “Proxy Disclosure Updates,” which will be delivered just after the new year begins. This issue will not just rehash the new rules – it will provide practical implementation guidance.
Remember that “Proxy Disclosure Updates” is a quarterly publication that is part of Lynn, Borges & Romanek’s “Executive Compensation Service (which includes the just-completed 2010 Executive Compensation Disclosure Treatise in both hard-copy and online on CompensationDisclosure.com). Try a no-risk trial now to obtain this important issue hot off the press when it’s done…
We just mailed the November-December Issue of The Corporate Executive, which includes a comprehensive recap of important things said at our recent “6th Annual Executive Compensation Conference,” among other things:
– Treasury Speaks about Executive Pay
– Consultant Independence and Accountability
– Fixing Benchmarks and Internal Pay Equity
– Say-on-Pay and Plan Design
– Risk Assessment & Pay
– What Compensation Committees (and Consultants and Counsel) Should Now Be Doing
– Hold-Through-Retirement and Clawbacks
– How to Implement Say-on-Pay Successfully
– SEC Staff: No More “Free Passes” on Material Noncompliant Disclosure
– One Final Reprieve on Section 6039 Returns–And Our Guidance
– Trap for the Unwary: Grant Date Under Section 423
– Section 162(m): The Buck Stops Here
Act Now: As all subscriptions expire in two weeks, please renew now for 2010 – or try a no-risk trial if you are not yet a subscriber.
2. This one snuck by us (and most others since this McGuireWood’s memo is the first and only one I’ve seen on the topic) – on December 4th, Treasury released a set of correcting amendments to the TARP Regulations that address ambiguities in the original regulations.
Following up on my blog yesterday afternoon, the reason for the SEC’s hurry to get out an adopting release is simple – these new rules apply to the coming proxy season as they are effective February 28th. My guess is that the effective date is pushed out so far because a “major” rulemaking requires a 60-day waiting period before implementation – and perhaps the SEC has deemed this a “major” rulemaking (or the OMB forced that determination upon the SEC). The “major rule” determination comes out of SBREFA – the “Small Business Regulatory Enforcement Fairness Act.”
Unfortunately, the SEC barely addressed the issue of compliance dates during its open Commission meeting – and then continued to be opaque in the adopting release (the release says nothing about effective dates other than the February 28th date on the cover). During the course of yesterday, I easily received over 100 emails and calls on this topic and continue to do so. So I imagine Corp Fin is receiving many more.
We are assuming that the February 28th effective date applies to the filing of proxy statements, not the annual meeting dates. Since there is no transition discussion in the adopting release (as Mark Borges has blogged), I’m not sure how this effective date applies to preliminary vs. definitive proxy statements for those that straddle both sides of this date. Or what about companies that file their Form 10-Ks in early February who decide to include the Part III information when they file? If you decide to voluntarily comply beforehand, do you also need to comply with the old rules (only issue is whether to use new or old SCT rules)? I’ll update this blog as we find out more on this critical topic.
I know complying with these new rules is gonna be a real bear for those of you that need to revise D&O questionnaires – or send out supplemental ones – so we just pushed up our CompensationStandards.com webcast to January 7th – “The Latest Developments: Your Upcoming Proxy Disclosures – What You Need to Do Now!” – featuring Mark Borges, Alan Dye, Dave Lynn and Ron Mueller. And to handle the other new SEC rules that don’t deal with compensation issues, we just announced a companion webcast on TheCorporateCounsel.net – “How to Implement the SEC’s New Rules for This Proxy Season” – featuring Marty Dunn, Amy Goodman, Ning Chiu, Howard Dicker and Dave Lynn to be held on January 6th.
Not only did the SEC adopt new proxy enhancement rules today at its open Commission meeting, it actually just posted the adopting release (a same-day practice that the PCAOB often follows). The reason for the hurry is simple – these new rules apply to the coming proxy season as they are effective February 28th. Here is the SEC’s press release – and the SEC Chair’s opening statement. More to come…
Last Wednesday, the Financial Times’ Francesco Guerrera wrote a piece entitled “GE Chief Attacks Executive ‘Greed'” that is reproduced below:
Jeffrey Immelt, General Electric’s chief executive, said on Wednesday his generation of business leaders had succumbed to “meanness and greed” that had harmed the US economy and increased the gap between the rich and the poor. Mr Immelt’s attack on his fellow corporate chiefs – made in a speech at the West Point military academy – is one of the strongest criticisms by a top executive of the compensation and business practices that prevailed before the financial crisis.
“We are at the end of a difficult generation of business leadership … tough-mindedness, a good trait, was replaced by meanness and greed, both terrible traits,” said Mr Immelt, who succeeded Jack Welch, one of the toughest leaders of his generation, at the helm of the US conglomerate. “Rewards became perverted. The richest people made the most mistakes with the least accountability.” Several executives, especially in financial services, have apologised for their companies’ role in the crisis but Mr Immelt’s remarks went further, linking bad leadership to growing inequality.
“The bottom 25 per cent of the American population is poorer than they were 25 years ago. That is just wrong,” he said. “Ethically, leaders do share a common responsibility to narrow the gap between the weak and the strong.” GE wants to win a large slice of the infrastructure projects funded by governments around the world in an effort to kick-start their economies. Mr Immelt said business should welcome government as “a catalyst for leadership and change”.
Mr Immelt also issued a mea culpa over his inabilty to foresee the financial turmoil, which slashed GE’s profits and put its financial arm, GE Capital, under pressure, saying he should have been a better listener. “I felt like I should have done more to anticipate the radical changes that occurred,” he said. The GE chief now gathers GE’s top 25 executives to twice-monthly Saturday sessions to talk about the company and its future.
In the speech, Mr Immelt indicated GE would continue to shrink GE Capital, which accounted for around half of the company’s profits as recently as two years ago. He said it was wrong for the US economy to have “tilted toward the quicker profits of financial services” at the expense of the manufacturing industry and research and technology investments.
Interesting that Mr. Immelt made these comments about greed before the NY Times published today’s front-page article about Goldman’s almighty reach for profit…
As Mark Borges blogged, Goldman Sachs announced last Thursday that its board had decided to implement a say-on-pay advisory vote starting next year (the first U.S. banking institution to so so) and eliminate cash bonuses fro the top 30 executives (and use clawbacks on the shares given as bonuses, which must be held five years).
This announcement was made before yesterday’s stern warning from President Obama to the banking industry’s fat cats, some of whom couldn’t attend the meeting due to fog. This skeptical skit is pretty funny.
Below are some thoughts on Goldman’s pay plan from RiskMetrics’ Ted Allen:
After negotiations with investors, Goldman Sachs Group has agreed to hold an annual advisory vote on executive compensation in 2010 and adopt bonus-deferral provisions.
Under the new policies announced Dec. 10, the financial company’s 30-person management committee will receive all of their discretionary compensation in the form of “shares at risk” that may not be sold for five years. Those shares would be an “enhanced” clawback policy in the event that “an employee engaged in materially improper risk analysis or failed sufficiently to raise concerns about risks.” In a press release, the company said the new policy “is intended to ensure that our employees are accountable for the future impact of their decisions, to reinforce the importance of risk controls to the firm and to make clear that our compensation practices do not reward taking excessive risk.”
“The measures that we are announcing today reflect the compensation principles that we articulated at our shareholders’ meeting in May. We believe our compensation policies are the strongest in our industry and ensure that compensation accurately reflects the firm’s performance and incentivizes behavior that is in the public’s and our shareholders’ best interests,” CEO Lloyd C. Blankfein said in the press release. “In addition, by subjecting our compensation principles and executive compensation to a shareholder advisory vote, we are further strengthening our dialogue with shareholders on the important issue of compensation.”
In response to Goldman’s decision, Walden Asset Management and Connecticut’s state pension fund plan to withdraw the “say on pay” proposal they filed for the company’s 2010 meeting. In 2008, a Walden-Connecticut advisory vote proposal received 45.5 percent support at Goldman.
“As Congress considers whether to require all public companies to have an annual shareholder advisory vote on executive compensation, Goldman Sachs’ action today is a tremendous step that demonstrates its support of this important corporate governance reform,” Connecticut State Treasurer Denise Nappier said in a Dec. 10 press release.
The Goldman press release did not specify the frequency of the advisory vote after 2010. That issue may become moot; proponents expect that Congress will pass legislation soon that would require marketwide annual votes starting in 2011.
Goldman received 97.9 percent support for its pay practices this past May when it held an advisory vote that was required for all companies participating in the U.S. government’s Troubled Asset Relief Program (TARP). After exiting TARP, Goldman was criticized by investors over its plan to pay more than $20 billion in year-end bonuses. A coalition of religious investors filed a pay disparity proposal at the firm in October.
Goldman is the first U.S.-based banking company to agree to hold an advisory vote, and the firm appears to be the first to adopt a bonus-deferral policy. Swiss banks UBS and Credit Suisse previously adopted deferral provisions, and French bankers agreed in late August to do so. In late September, Britain’s five largest financial firms endorsed the Group of 20’s principles on compensation, which call for deferring at least 40 percent of variable pay and a deferral period of at least three years.
In addition to Goldman Sachs, at least 31 U.S. firms have agreed to conduct voluntary shareholder votes on compensation, according to RiskMetrics Group data.
On Friday, the House of Representatives – by a vote of 223-202 – passed the “Wall Street Reform and Consumer Protection Act of 2009” (it appears that this will be referred to as the “Wall Street Reform Bill”). As I’ve blogged, this bill consolidates and revises numerous reform bills that have been introduced in the House this Fall (eg. Title I contains what was the Financial Stability and Improvement Act of 2009). As of the start of last week, there were 238 amendments offered to this bill. As noted on page 2 of this House “highlights,” the bill includes a mandatory say-on-pay provision as well as a provision requiring a vote on golden parachutes.
I’m not convinced I’ve seen a final copy of the bill actually passed since so many amendments were at play. I believe its changed since this version that was floated heading into last week – but that old version is what is linked to from this press release announcing the passage of the bill. [I’ll blog if a newer version becomes available].
With all of the wild gyrations in the stock market lately, we couldn’t help but wonder what this might mean for the future of stock options. Options have already experienced a decline in popularity in recent years thanks to the onerous expensing issues of FAS 123(R), as well as their lack of “line-of-sight” motivational impact on company operational goals, but if you throw into the works the wrenches of white-hot executive pay scrutiny, significantly declined capital markets, as well as significant increases in volatility and Black-Scholes values, you have a potent witch’s brew indeed.
Not being able to let this unique executive pay situation go untouched, Veritas ran some quick calculations of volatility for the Dow 30 stocks – read about these calculations in this article.