The Advisors' Blog

–Ted Allen, ISS’s Governance Institute

During the 2011 U.S. proxy season, executive compensation likely will be the primary focus of most institutional investors, although there will be fewer pay-related shareholder proposals on the ballot this season. As required by the Dodd-Frank Act, most large and mid-cap companies will hold their first advisory votes on compensation this year. For institutions with diverse holdings, this mandate has resulted in a significant increase in their proxy season workload given that more than 4,000 U.S. companies will hold pay votes this year.

Investor representatives have said they plan to take a principles-based, holistic approach to advisory votes and indicate they would not generally withhold support based one specific pay practice, such as the payment of tax gross-ups. Many investors have focused on pay for performance, although they are using different metrics to assess shareholder returns. Some investors, such as the Ohio State Employees Retirement System, have said they plan to send letters to companies that explain their reasons for voting against management.

After voting on “say on pay” and “say when,” investors will find few pay-related shareholder proposals on their ballots this season. ISS is tracking 59 such resolutions, as compared with 175 last year, when 77 shareholder “say on pay” resolutions were filed. Among this year’s filings are 13 resolutions submitted by labor investors and retail investors that seek minimum retention requirements (such as a five-year lockup) for equity grants to executives. So far, Allstate, General Electric, and four other companies have prevailed in no-action challenges at the Securities and Exchange Commission by arguing that the resolutions’ reference to “executive pay rights” was impermissibly vague.
The Laborers’ International Union of North America and other labor funds have filed a new proposal at nine companies in the energy or real estate sectors that ask them to link executive pay to sustainability metrics. This measure was inspired in part by the BP oil spill, the Massey Energy mine explosion, and other environmental disasters. That proposal has been withdrawn at MDU Resources, while two other resolutions face no-action requests.

Another new proposal to receive some attention is a resolution submitted by the CtW Investment Group at Bank of America. That proposal, which urges the company to no longer reimburse relocating executives for losses on home sales, was filed in response to a $553,500 home loss subsidy paid to the president of the firm’s Countrywide home mortgage division. BofA argued that the proposal could be excluded because it related to “ordinary business” operations, but the SEC staff did not agree.

The SEC also rejected BofA’s challenge to a proposal from the Service Employees International Union that seeks to amend the bank’s “clawback” policy to permit the recovery of incentive compensation over the past five years. Bank of America argued that it had substantially implemented the proposal because it would be subject to Section 954 of the Dodd-Frank Act, which requires public companies to adopt a three-year recoupment policy. The SEC has yet to propose rules to implement that provision.

The SEC staff also rejected Goldman Sachs’ request to omit a novel proposal filed by the Nathan Cummings Foundation and religious groups. This resolution seeks a review of whether the firm’s executive pay, bonuses, and perks are excessive; an exploration of how sizeable layoffs and the pay for lowest-paid employees impact senior executive pay; and an analysis of how revenue fluctuations impact shareholders and the pay of the company’s top 25 executives. The investment bank argued without success that the proposal was vague or misleading, and related to ordinary business because it addressed general employee compensation.

However, Moody’s did obtain permission from the SEC to omit a new proposal from American Federation of State, County, and Municipal Employees that asked the credit rating firm to establish a set of best practices for its 10b5-1 trading plan, which permit executives to sell company stock through pre-planned transactions while reducing their potential insider trading liability. Moody’s successfully argued that the proposal related to compliance, an ordinary business matter.

On a long-standing resolution topic, the New York City pension funds and labor investors filed nine proposals that seek shareholder votes on severance benefits. In a notable no-action ruling, the SEC reversed itself in January and allowed a Teamsters’ golden parachute proposal to appear on Navistar International’s ballot. The company argued that severance benefits would be covered by its mandated “say on pay” vote, but the proponent pointed out that it was seeking a vote on future severance benefits, which was not covered by the advisory vote. The SEC staff has made clear that companies may exclude proposals that address pay elements that are covered by advisory votes.

The Amalgamated Bank’s LongView fund filed proposals at Anadarko Petroleum, Sunoco, and EOG Resources that seek to prohibit the accelerated vesting of equity incentives after a change in control. Investors also submitted two resolutions that target “golden coffin” benefits for the heirs of deceased executives. This proposal was withdrawn at Hewlett-Packard after the board adopted a policy to seek shareholder approval for such benefits for executives.