We just posted the Spring 2011 issue of the Compensation Standards newsletter, in which Dave Lynn has drafted model say-on-pay disclosures to help you prepare your upcoming proxy statement. It includes a model executive summary, say-on-pay resolution and say-on-frequency resolution. We have also posted a Word version of the newsletter so that you can cut and paste as a starting point for your proxy disclosures.
Last week, we saw “Say on Pay”/”Say on When” votes at four companies – Air Products, Monsanto, Woodward and Jacobs Engineering – where board recommendations for triennial Say on Pay were defeated by shareholders supported by ISS’ recommendation for an annual advisory vote on compensation. While the pushback from shareholders for an annual vote on executive compensation was expected there remains a certain amount of shock amongst governance experts, the business media and issuers about what looks like a developing trend toward annual SOP votes. The real story here however, may be the low level of support for Monsanto’s SOP request and the defeat of the Jacobs’ SOP vote.
A vote of 65% of the share voted in favor of a company’s SOP request is worrying, but it is still quite different from a losing vote. With that said, let’s examine the Jacobs results (according to the company’s recent 8K filing and making some assumptions) and do some Monday morning quarterbacking in line with what we (and other advisors) have been recommending to our clients.
ISS Influence among the Top Holders
We begin by taking a quick look at Jacobs’ top twenty-five institutions – we noticed that 18.9% of the shares outstanding appear to be strongly influenced by ISS and would be encouraged to vote in accordance with their recommendation. If that is indeed the case, the company would need to garner voting support for its SOP among its other investors. Had this issue been flagged as a serious challenge to the company’s SOP vote strategy?
Had the company made a determination, by indentifying and engaging with its shareholders, that it had the votes needed for passage? The company had engaged with ISS (according to the ISS’ published analysis) and had not been able to persuade the proxy advisor on pay for performance and/or compensation committee discretion in the award of a non-performance grant of restricted shares. Clearly 54% of the company’s investor base agreed, but could Jacobs have taken any action that would have spared them a defeat?
Going It Alone – Not A Viable Option
In reviewing the firm’s previous proxy statements, going back as far as 2007, it appeared that Jacobs has not used a proxy solicitor. The lack of a proxy solicitor is usually not critical to the success of a routine annual meeting, however 2011, the first year of mandatory Say on Pay, is not a routine year. In reviewing the company’s 8K filing and making some educated assumptions, we identified some key factors that might have made a difference in both the strategies that could have been employed and the ultimate outcome of the advisory compensation vote.
For example:
– We estimate the ISS influence level at approximately 18.9% of the outstanding.
– 36. 2 million shares were not voted – according to the 8K filing 16.2 million shares were held by brokers in street name accounts; and the remaining 20 million shares were likely held by a combination of registered holders, insiders and employees.
– Brokers are no longer allowed to vote shares, per the amendments to NYSE Rule 452, in 2009 by the SEC and further amendments resulting from passage of Dodd-Frank.
– Of the 36.2 million shares unvoted some portion of those shareholders would have been NOBOs and could have been reached via a calling campaign aimed at both registered owners and at brokerage clients (asking them to contact their broker and instructing them to vote for management).
– The lack of an annual-NOBO, a suggestion made to the SEC and included in their concept release, but not acted upon, might have allowed the company an opportunity to reach a greater number of shareholders.
– 10 million additional shares in support of management would likely have made a difference in the outcome of the SOP vote (less than 1/3 of the unvoted shares) – this is where a retail shareholder outreach campaign could have made a difference as well.
– The ability of a quality solicitor/governance advisor to reach out and contact the staff responsible for proxy voting at many institutions might have made some difference in turning around a negative vote.
Could a proxy solicitor/corporate governance advisor made a difference in this instance? It is, in our opinion, hard for experienced proxy hands to look at the numbers and conclude otherwise. While no firm, neither us nor our competitors, could offer a guarantee of a victory, the retention of a top-flight solicitor/governance advisor might have brought the company closer or helped tip the balance in management’s favor.
The lesson here is not about ISS’ influence or governance advocates or the margin of defeat of management’s frequency proposal. It is about the now limited range of options for a compensation committee, board and senior management that will be absolutely needed to “win” next year’s SOP vote or face the prospect of negative recommendations from the proxy advisory firms and potential Vote-No campaigns from public pension and union funds. In the new normal of the post-Dodd-Frank world, issuers need to create their own luck and develop scenarios for winning their SOP vote if even by razor thin margins – so as to provide their directors with the time and flexibility to deal with shareholders displeased with their executive compensation programs – and hiring quality proxy/governance advisors is a key way to do it.
Broc’s note: After I posted this, I realized that according to Jacobs Engineering’s SEC filings, they did hire Innisfree to conduct some type of solicitation for them, as referenced in their subsequent filings.
Yesterday, Beazer Homes USA filed this Item 5.07 Form 8-K which revealed that it has become the second company to fail to receive majority support for its say-on-pay, with 54% voting “against.” As I blogged before, Jacobs Engineering became the first last week. That’s two failed votes out of roughly 30 SOPs voted upon so far – nearly a 7% rate.
In my poll last week – in which folks guessed how many failed votes there would be this year – zero picked 1-2 failures; 4% predicted 3-4 failures; 18% predicted 5-10 failures and 75% predicted more than 10 failures (5% said “what me worry?”). At the current 7% rate of failure, it looks like the smart money will have pegged it.
I’ve been amused by some who have recently reported that only 1 out of 20 have failed so far – as if a 5% failure rate was a good thing – and that’s not even counting the companies who have garnered a significant “against” vote like Monsanto and Johnson Controls. If you apply that failure rate to the number of companies that will hold SOP votes soon enough, the image is scary.
As Paul Hodgson blogged last year, 500 nays-on-pay would be the result extrapolating from the 3 failures last year out of the 60 companies that voluntarily had say-on-pay on their ballot. And as Paul noted, “Can you imagine what might happen if shareholders got organized? [FX: Long, slow, whistle on descending note….]”
Interestingly, a member brought three smaller companies to my attention that filed proxy materials after the effective date of Dodd-Frank’s SOP provision – but before the SEC postponed the applicability of SOP to smaller reporting companies. Given that the SEC hadn’t signaled the postponement beforehand, they certainly got lucky! Of course, given that they didn’t even know that SOP had applied to them, they likely don’t even know they are lucky…
As perhaps can be expected given it’s a new ballot item for most companies, the first batch of companies reporting voting results regarding say-when-on-pay have led many members to send questions about how to properly count votes. As an example of the confusion, Steve Quinlivan notes a voting ambiguity at the end of this blog. And in his “California Corporate & Securities Law” Blog, Keith Bishop also blogs about the confusion of counting say-on-frequency votes – here is Keith’s follow-up blog too.
The bottom line is that whether a majority preferred a triennial vote depends on how “abstentions” are treated – which means that the same numbers could wind up with entirely different results for two different companies. Personally, I don’t see how abstentions wouldn’t be counted, but it seems like a matter of state law – not my area of strength. But I do note that the SEC’s adopting release in discussing the Rule 14a-8 exclusion states at footnote 151:
“Specifically, as adopted, the note to Rule 14a-8(i)(10) will permit exclusion of such a shareholder proposal if, in the most recent shareholder vote on frequency of say-on-pay votes, a single frequency (i.e., one, two or three years) received the support of a majority of the votes cast and the issuer has adopted a policy on the frequency of say-on-pay votes that is consistent with that choice. FN151
Footnote 151 – For purposes of this analysis, an abstention would not count as a vote cast. We are prescribing this voting standard solely for purposes of determining the scope of the exclusion under the note to Rule 14a-8(i)(10), and not for the purpose of determining whether a particular voting frequency should be considered to have been adopted or approved by shareholder vote as a matter of state law.”
One might ask whether the difference matters. There are some consequences. One is determining whether a specific frequency preference received a “majority of the votes cast” for purposes of the Rule 14(a)-8(i)(10) exclusion – so it matters for purposes of the shareholder proposal rule (I guess it also could have an impact on which preference received a plurality of the votes cast, but this situation isn’t likely to come up too often – and doesn’t seem have any legal consequences). Perhaps the biggest factor to consider is one that isn’t driven by regulation: the optics of how you report your voting results. In other words, how will it be received by shareholders and the media in general.
I expect that companies will want to disclose the potential voting implications “right” at the outset in their proxy materials – it doesn’t look good to file a corrective disclosure. So it’s something to figure out now and not when it comes time to report the voting results in a Form 8-K…
In his “Proxy Disclosure Blog,” Mark Borges gives us the latest say-when-on-pay stats: with 218 companies filing their proxies, 58% triennial; 6% biennial; 30% annual; and 6% no recommendation.
Recently, the CSA (Canadian securities administrators) proposed changes to executive compensation disclosure that would not take effect until the 2012 proxy season. Check out this Torys’ memo for more.
In addition, here is something from ISS’s Debra Sisti about how Ontario regulators are seeking input on “say-on-pay” and majority voting:
In keeping with its 2010-2011 Statement of Priorities, the Ontario Securities Commission recently issued a notice, in which the OSC indicated that it was considering future regulations on slate voting and majority voting in uncontested director elections, as well as “say on pay” advisory votes on executive compensation.
Following a comprehensive look at proxy voting mechanics in Canada, the law firm of Davies Ward Phillips and Vineberg released a paper by senior partner Carol Hansell, entitled, “The Quality of the Shareholder Vote in Canada,” which makes a number of recommendations for improvement beginning with a regulatory review of the proxy voting system. The OSC has included a review of the effectiveness of the proxy voting system in Canada as the third item on its “shareholder democracy” agenda for this year. Institutional investors in Canada have pushed back on slate voting, which provides a bundled director ballot and prohibits shareholders from registering individual votes for director nominees. From 2009 to 2010, the percentage of TSX companies with slate director elections fell from 46 percent to 28 percent, and declined from 28 percent to 17 percent at S&P/TSX Composite Index companies, according to ISS data.
Majority voting in the form of a director resignation policy had been voluntarily adopted by 146 companies by end of the 2010 proxy season; 130 of those are Composite Index companies and accounted for 53 percent of the index as of Dec. 31. As a result of shareholder engagement and letter-writing campaigns, a handful of other companies have publicly committed to adopt majority voting in the coming year.
Much like majority voting, “say on pay” has been voluntarily adopted by some of Canada’s largest companies in response to shareholder engagement and shareholder proposals. As of June 30, 2010, ISS had identified 28 issuers with management “say on pay” resolutions on their proxy ballots. And another 10 companies have announced they will follow suit this year.
While the tenor of shareholder engagement in Canada to date has been quietly conservative and has garnered substantial results, there has been some indication from larger shareholder coalitions that if engagement activity is not sufficient to make further gains on these issues, they will file shareholder proposals to prod unresponsive boards. The results of these efforts and the investor support for these proposals will be closely watched by regulators in contemplation of future regulation. In the interim, the OSC is asking stakeholders to submit their comments on the appropriateness of such regulation by March 31.
Hat tip to Ed Hauder and his blog: ISS recently released its 2011 Burn Rate Caps (see page 5). Ed analyzes the new burn caps in this presentation (here is a PDF of it):
First, I note that the effective date of the SEC’s final say-on-pay rules has been set as April 4th (it’s tied to the rules being published in the Federal Register). The compliance date is also April 4th.
Second, here is analysis of a common query we are receiving: When Dave Lynn opened our popular webcast last week on say-on-pay and drafting disclosures, he noted that the SEC’s new say-on-pay rules would probably need a few interpretations from the SEC Staff like most major rulemakings. Based on the number of questions in our Q&A Forums (on this site and TheCorporateCounsel.net), that certainly seems the case. Here is one question that Dave answered yesterday regarding the smaller company exemption:
Member Question: Per Rule 12b-2 and Reg. S-K Item 10(f)(2), a calendar year issuer that exceeded $75 million in public float for the first time as of June 30, 2010 (i.e., the last day of its most recently completed second fiscal quarter) would not report the change of its smaller reporting company status until the filing of its Form 10-Q for the first quarter of 2011 and would remain eligible to use the scaled disclosure of a smaller reporting company for its Form 10-K and proxy statement filed prior to such Form 10-Q. Is this issuer required to include say-on-pay and say-on-frequency votes in its definitive proxy statement to be mailed prior to the filing of the first quarter Form 10-Q but pertaining to an annual meeting to be held thereafter?
Dave’s Answer: There appears to be some potential arguments that the issuer would not have to comply with the Say-on-Pay/Say-on-Frequency requirements when you consider the following Compliance and Disclosure Interpretation:
Question 104.13
Question: An issuer files its 2008 Form 10-K using the disclosure permitted for smaller reporting companies under Regulation S-K. The cover page of the Form 10-K indicates that the issuer will no longer qualify to use the smaller reporting company disclosure for 2009 because its public float exceeded $75 million at the end of its second fiscal quarter in 2008. The issuer proposes to rely on General Instruction G(3) to incorporate by reference executive compensation and other disclosure required by Part III of Form 10-K into the 2008 Form 10-K from its definitive proxy statement to be filed not later than 120 days after its 2008 fiscal year end. May the issuer use smaller reporting company disclosure in this proxy statement, even though it does not qualify to use smaller reporting company disclosure for 2009?
Answer: Yes, because the issuer could have used the smaller reporting company disclosure for Part III of its 2008 Form 10-K if it had not used General Instruction G(3) to incorporate that information by reference from the definitive proxy statement. [September 30, 2008]
I note, however, that the CDI is dealing with a unique issue from a disclosure perspective and I don’t think it was asked and answered with Say-on-Pay in mind. I get concerned here when the issuer knows that it is about to not be a smaller reporting company but still utilizes the exception nonetheless on what some might see as a technicality. I think it would be very useful to have the Staff’s input on this specific question.
In this podcast, Kurt Schacht of the CFA Institute’s Centre for Financial Market Integrity talks about a CD&A Template put together by the joint efforts of a group of issuers and investors, including:
– Why was the template put together?
– What was the process for drafting it?
– How do you envision companies using it? How about investors?
– How does mandatory say-on-pay impact its use?
On the heels of the first group of annual meetings experiencing a surprising number of majority (not even a plurality) votes for annual frequency – even though the companies had recommended triennial – a group of 39 institutional investors (with combined assets under management of $830 billion) issued this press release yesterday urging companies to recommend an annual frequency. This may add to the pressure for companies to go the annual route…
Webcast Transcript: “The Latest Developments: Your Upcoming Proxy Disclosures – What You Need to Do Now!”
We have posted the transcript for our popular webcast: “The Latest Developments: Your Upcoming Proxy Disclosures – What You Need to Do Now!”