Yesterday, I blogged about the progress of the House-Senate conference committee deliberations and the release of the “Conference Base Text.” Later on, Rep. Barney Frank issued this press release stating that debate over the investor protection and executive compensation provisions will begin at 11 am today.
The press release contains a long list of changes to the base text that the House Democrats seek. As noted in the ISS Blog, among other changes sought by these House Democrats are these:
– Require separate shareholder votes on “golden parachute” retirement payouts when companies seek approval for mergers, consolidations, or other transactions. This provision was in the House bill, but not the Senate measure.
– Add a House provision on enhanced compensation oversight for the financial industry. The House members seek to require “all federal financial regulators to issue and enforce joint compensation rules specifically applicable to all financial institutions with a federal regulator.”
– Add a House provision that SEC apply independence standards to compensation committee consultants that are competitively neutral and treat large and small consultants equally.
– Add a House provision to direct the SEC to require large institutional investment managers (i.e., those subject to Section 13(f) requirements) to disclose their proxy voting on advisory votes and golden parachute matters.
This Washington Post article describes how the rare “made-for-TV” reconciliation process feels like…
Several companies recently have received a comment from the SEC’s Corp Fin Staff asking them, under Item 402(s) of Regulation S-K, to describe the “process” undertaken to conclude that the “risks arising from the registrant’s compensation policies and practices . . . are reasonably likely to have a material adverse effect on the registrant . . . .” It is a good reminder that no disclosure is required unless the “reasonably likely” threshold is exceeded. See the SEC’s adopting release No. 33-9089 at 12.
Moreover, “the final rule does not require a company to make an affirmative statement that it has determined that the risks from its compensation policies and practices are not reasonably likely to have a material adverse effect on the Company.” Id. at 17. Voluntarily including a compensation committee’s conclusions on the risk-compensation relationship does not trigger disclosure of the underlying process, unless under a Rule 10b-5 theory that disclosure is necessary in order for a reader to understand the conclusions (which given the straight-forward nature of the conclusions is difficult to imagine).
Also, since there is no widely accepted analytical approach correlating compensation and risk, the considerations of a board are by necessity going to be subjective, which does not make informative disclosure.
Overall, support for shareholder “say on pay” proposals seeking annual advisory votes has remained robust this season, but has declined slightly from last year. As of May 26, pay vote proposals were averaging 44.5 percent support (based on votes “for” and “against”) at 32 companies, according to ISS data. At this time last year, support averaged 47.2 percent at 55 companies. There have been nine majority votes this year, including 50.3 percent support at Halliburton and a 52.7 percent vote at Williams Companies.
Pay vote proponents offer several explanations for this year’s results. One factor is the smaller pool of companies with significant pay concerns that haven’t already agreed to conduct pay votes. Since last July, the number of firms that have voluntarily agreed to hold pay votes has nearly tripled to 70. Most of the issuers acted in response to majority-supported shareholder resolutions. Among them were Tupperware Brands, Lexmark International, CVS Caremark, Hain Celestial, Valero, and Prudential Financial, which all saw more than 60 percent support for “say on pay” proposals in 2009.
Tim Smith, a senior vice president with Walden Asset Management, said there hasn’t been a meaningful decrease in investor support for advisory votes. “2010 demonstrates continuing strong voting support by investors, growth in the number of adopting companies, and many companies [argued] that they were waiting on final legislative guidance before they move to establish their own ‘say on pay’ policies,” Smith told ISS. “In addition, we saw dramatic votes at Occidental and Motorola where investors utilized the SOP vote to vote no [on compensation].”
John Keenan, a strategic analyst with the American Federation of State, County, and Municipal Employees, points out that the average support increased by 0.2 percentage points at companies where the issue was on the ballot last year and this season. The largest jumps in support occurred at WellPoint (15.7 percentage points), Allstate (12.4) and Walt Disney (9.1). Meanwhile, support fell by 10.9 percentage points at Dow Chemical and by 6 points at Waddell & Reed, which both had special solicitations this year against the proposals.
This year’s average also includes results at three companies (Edison International, Wells Fargo, and Bank of America) that agreed to hold advisory votes, and thus one would expect to see less investor support, Keenan said.
On Wednesday, the NY Times ran an article – “Fed Finding Status Quo in Bank Pay” – which previews the upcoming report from the Federal Reserve about how the 28 largest financial companies are faring in tying pay to risk-taking. Based on the article, it appears that the Fed’s six-month review has not turned up much favorable information in this area so far. The Fed’s official report is not expected until sometime next year (I know they are short-staffed but this length of a wait is bordering on silly) – but its final set of pay guidelines should be out in a few weeks.
We have posted the Summer Issue of our Compensation Standards print newsletter, which provides some examples of CEOs who have taken a stand on executive pay including their guidelines and motivations.
To date, there have been 637 Say on Pay proposals brought forth by management, which is almost a 20% increase from 2009 when there were 518 as of this time last year. These figures include firms that participated in the TARP program and were required to place SOP management proposals in the proxy and a number of companies who chose, in response to resolutions from activist institutional investors, to adopt SOP for submission to stock owners.
The majority of firms submitting SOP proposals to their shareholders this year have, thus far, experienced high ratification votes with overwhelming support in the high 90 percentiles. A serious caveat that boards and senior managers need to keep in mind is that the SOP proposal is presently a routine item under NYSE rules, allowing brokers to vote uninstructed client’s shares in favor of the SOP resolutions. A provision in the bill approved by the Senate would make SOP proposals a non-routine item and as is now the case with director elections – brokers would not be able to vote clients’ shares for management SOP proposals.
As we see it, under a mandatory SOP regime – without the safety net provided by the broker vote – companies will have a much more difficult time getting a high percentage approval vote from shareholders for executive compensation advisory votes. According to impact analyses we conducted on the effects of NYSE Rule 452 on companies with a significant retail shareholder base (20% to 60%), they could expect a drop off in the range of 10% to 44% in voting for directors.
Putting this into the Say on Pay context, issuers should expect to see a similar and sizable decrease in the percentage of support for these management proposals in 2011. Issuers would be strongly advised to also consider the results of the KeyCorp, Motorola and Occidental SOP votes (which failed to achieve majority support) when thinking about the exclusion of broker votes effect upon SOP proposals going forward.
As noted in this press release, the International Corporate Governance Network recently issued a set of guidelines for setting non-executive director pay. The guidelines are intended to be of general application around the world, irrespective of legislative background or listing rules.
Key aspects of the guidelines include:
– The policy places an emphasis on non-executive director alignment of interest with long-term owners.
– The policy draws a distinction to differences to executive remuneration, particularly related to performance-based remuneration. The policy opposes the use of performance-based remuneration for non-executive directors.
– The policy examines the tools of remuneration, and favors solely cash retainer and equity, with a preference against the use of options.
– The policy provides flexibility for companies to implement the principles in ways consistent with their unique circumstances.
– The policy calls for clear disclosure including the philosophy of the non-executive director programme.
– The policy calls for equity to be vested immediately but subject to holding periods.
– The policy suggests companies establish ownership guidelines for non-executive directors.
– The policy states non-executive directors should not be eligible for retirement benefits.
Last Wednesday, the SEC announced it had charged Diebold and three former finance officers for engaging in a fraudulent accounting scheme to inflate the company’s earnings. The SEC separately settled an enforcement action (here’s the litigation release – and here’s the complaint) against Diebold’s former CEO Walden O’Dell, obtaining reimbursement of certain financial benefits that he received while Diebold was committing the accounting fraud. The SEC used the clawback provision under Section 304 of Sarbanes-Oxley to get the former CEO to agree to reimburse the company $470,016 in cash bonuses, 30,000 shares of Diebold stock and stock options for 85,000 shares of Diebold stock.
Notably, the SEC didn’t allege that the former CEO engaged in the fraud (or any other violation of the securities laws) – something the SEC did last year in an action against the former CEO of CSK Auto Corp. (ie. Maynard Jenkins), who pushed back in a motion to dismiss last September as I noted in this blog. Jenkins’ motion has not yet been ruled upon (oral arguments were heard on April 30th; here’s the transcript from that hearing posted in the “Clawback Policies” Practice Area) – but a ruling is expected soon…
In this 11-minute podcast, Ning Chiu of Davis Polk does a great job of boiling down the corporate governance and executive compensation provisions that apply to all US public listed companies in the recently passed Senate reform bill, the “Restoring American Financial Stability Act of 2010.”
Not only does Ning compare the differences between the Senate and House bills, but she identifies which provisions aren’t all that clear – and she notes which provisions are more likely to sail through and which may be altered before Congress reconciles the two bills. Finally, Ning notes the practical consequences for companies of these provisions.