You should be aware of an effort by GovernanceMetrics who is providing its investor clients with analysis on executive compensation that can utilized in deciding to support a company’s advisory vote on executive compensation (Say on Pay – SOP). This effort represents a first for GovernanceMetrics International (the firm is a recent combination of The Corporate Library, Audit Integrity and GovernanceMetrics) which has not heretofore been involved in making direct recommendations on issues appearing in proxy statements.
The analysis does not make recommendations on a company’s SOP disclosures or CD&A, but instead reviews compensation disclosures to determine if a company generates a number of redflags on issues seen by GovernanceMetrics International as determinative of receiving “high”, “moderate” or “low” concern with respect to company’s compensation practices. No recommendation is attendant to these determination, so it is up to the investor to make their own decision as to how to interpret GovernanceMetrics’ concerns and their impact on the investor’s SOP vote.
Over the course of many governance-related events speakers from all sides in the governance debate have argued for a more qualitative review and analysis, by proxy advisory firms, of executive pay that spotlights positives and negatives in an issuer’s compensation practice (from the point-of-view of the reviewer) and allows the investor to make their own decision as to whether to support the board’s recommendation.
This type of analysis is reminisce of the work of the Investor Responsibility Research Center (IRRC). The IRRC, which was purchased by ISS, had a huge storehouse of governance data on compensation, shareholder resolutions, and other issues that could be put at the service of institutional shareholders seeking data to make decisions about proxy voting, investor engagements on governance, social and environmental issues. IRRC did not make recommendation on issues in the proxy statement, but did provide management’s case and the opposing view (or shareholder proponent’s view) without providing a recommendation to investors as to how their vote should be cast.
While GovernanceMetrics International’s effort does not fit the format of the well-remembered IRRC analysis model, it is can be seen as a move back in that direction. Irrespective of the potential impact on SOP votes, the reactions of institutional investors and issuers to this new model should be positive as it offers more than a simple up or down vote recommendation.
We have announced the line-up for our annual package of executive pay conferences to be held on November 1st-2nd in San Francisco and by video webcast: “Tackling Your 2012 Compensation Disclosures: The 6th Annual Proxy Disclosure Conference” and “The Say-on-Pay Workshop Conference.” Save 25% by registering now at our early-bird discount rates.
As you can see from our agendas, this year’s pair of Conferences (for one low price) will be workshop-oriented more than ever before in an effort to provide the practical guidance that you need in the new say-on-pay world that we live in:
1. November 1st’s “Tackling Your 2012 Compensation Disclosures: The 6th Annual Proxy Disclosure Conference” includes:
– “Say-on-Pay Disclosures: The Investors Speak”
– “Say-on-Pay: The Executive Summary”
– “Drafting CD&A in a Say-on-Pay World”
– “The In-House Perspective: Changing Your Processes for ‘Say-on-Pay'”
– “Getting the Vote In: The Proxy Solicitors Speak”
– “Handling the New Golden Parachute Requirement”
– “The Latest SEC Actions: Compensation Advisors, Clawbacks, Pay Disparity & Pay-for-Performance”
– “Dealing with the Complexities of Perks”
– “Conducting – and Disclosing – Pay Risk Assessments”
– “Say-on-Frequency & Other Form 8-K Challenges”
– “How to Handle the ‘Non-Compensation’ Proxy Disclosure Items”
2. November 2nd’s “The Say-on-Pay Workshop: 8th Annual Executive Compensation Conference” includes:
– “The Say-on-Pay Process Playbook: Breaking It Down”
– “Say-on-Pay: How to Interpret Your Voting Results”
– “Say-on-Pay: How to Best Tell Your Story”
– “Say-on-Pay Shareholder Engagement: What’s Working – and What Isn’t”
– “How to Work with (or Against) the Proxy Advisors: Navigating the Say-on-Pay Minefield”
– “Pay-for-Performance Workshop: How to Properly Implement”
– “Plan Design Workshop: Hot Button Say-on-Pay Issues and More”
– “The Say-on-Pay Lightning Round: 50 Ideas to Implement Now”
In his “Proxy Disclosure Blog,” Mark Borges gives us the latest say-when-on-pay stats: with 514 companies filing their proxies, 46.3% triennial; 4.1% biennial; 44.9% annual; and 4.6% no recommendation.
House Republicans Seek to Repeal Dodd-Frank’s Pay Disparity Provision
As noted in this Market Watch article, House Republicans have been working on four separate discussion draft bills to repeal or change parts of Dodd-Frank and one draft bill to ease smaller company capital raising that is not Dodd-Frank related (here’s a piece from “The Hill” and a Reuters article). The article lists these 5 topics that would be addressed through the bills:
– No longer make credit-ratings firms liable if their initial ratings turn out to be faulty
– Exempt companies that use derivatives to hedge commercial risk from new requirements that they route their transactions through clearinghouses
– Exempt private-equity fund managers from registering with the SEC
– Overturn requirement requiring companies to disclose the median annual total compensation of all employees and calculate a ratio of how employee compensation compares with that of the CEO
– Increase the offering threshold for companies that don’t need to register with the SEC to $50 million from $5 million
My Final Four Predictions…
Notre Dame over Duke in final, Syracuse and Kansas State. And for the record, I have an #11 seed for the Elite 8 (Gonzaga) and #12 Richmond and #13 Oakland in the Sweet 16 (that’s three double-digit teams for the Sweet 16). And I have Kentucky beating Ohio State to make the Elite 8 also…
Here’s news from John Savarese and Wayne Carlin drawn from this Wachtell Lipton memo:
The SEC recently announced a settled enforcement action in which it obtained a “clawback” of prior compensation and stock sale profits from a CEO pursuant to Sarbanes-Oxley Section 304. SEC v. McCarthy, No. 1:11-CV-667-CAP (N.D. Ga. March 3, 2011). This case marks the second time the SEC has obtained this type of relief without alleging that the CEO in question personally engaged in any wrongdoing.
Section 304 requires a CEO or CFO to return incentive-based compensation to an issuer when a financial restatement occurs “as a result of misconduct. . . .” The SEC’s position is that the issuer’s “misconduct” alone is a sufficient predicate for this relief, and that it need not establish any personal misconduct by the CEO or CFO. The SEC’s position is supported by the one federal district court decision that has been rendered on this issue. SEC v. Jenkins, 718 F. Supp. 2d 1070 (D. Ariz. 2010).
The defendant in SEC v. McCarthy is the CEO of Beazer Homes USA, Inc. Beazer had previously restated its financial statements and entered into a settled cease-and-desist proceeding with the SEC, as well as a deferred prosecution agreement with the Department of Justice. The SEC also previously charged the company’s former chief accounting officer with violations of the antifraud provisions of the federal securities laws, but the CEO was never charged with any misconduct in any of these proceedings.
Under the Section 304 settlement, the CEO agreed to reimburse to the company $6,479,281 (comprised of bonus payments plus certain stock sale proceeds); 40,103 restricted stock units; and 78,763 shares of restricted stock. Although the SEC has been silent concerning its general approach to calculating the amounts recoverable under Section 304, this settlement may reflect a recognition that not all proceeds from the sale of stock are appropriately reimbursable. The SEC’s complaint alleges $7.3 million in stock sale profits during the relevant period, yet the portion of the settlement attributed to stock sale proceeds is $772,232.
Finally, the SEC has never publicly articulated the criteria it applies in determining whether or not to pursue such no-fault Section 304 relief. Greater transparency about the Commission’s criteria would be in the public interest. Now that the SEC has had some initial success in establishing that it can recover substantial sums from individuals who are not accused of any wrongdoing, it would be appropriate for the SEC to provide some explanation concerning when it will seek this extraordinary form of relief.
Section 951 of the Dodd-Frank Act requires companies that are subject to the SEC’s proxy rules to include in their proxy statements “a separate resolution subject to shareholder vote” to determine whether a shareholder vote on executive compensation will occur every 1, 2, or 3 years. However, the Dodd-Frank Act specifically declares that this vote shall not be binding on the companies or their boards of directors.
This leads to the question of how companies will describe the vote required with respect to these resolutions. See Item 21 of Schedule 14A. The Dodd-Frank Act and the SEC’s proposed rule do not specify a particular voting rule.
Recently, I came across this description in a proxy statement:
The proposal on whether advisory votes on executive compensation should be conducted annually, biennially or triennially will be determined by a plurality of votes, which means that the choice of frequency that receives the highest number of “FOR” votes will be considered the advisory vote of the Company’s stockholders. Abstentions and broker non-votes will not count as votes cast “FOR” or “AGAINST” any frequency choice, and will have no direct effect on the outcome of this proposal.
The voting rule described above is a plurality voting rule. This means that the choice that attracts the highest number of affirmative votes will be considered to have “won” even if a majority of the shares voting on the matter do not vote in favor of that particular choice. For example, if the corporation has 100 stockholders and the vote is 25 for 1 year; 45 for 2 years; and 30 for 3 years, the stockholders will be considered to have approved the choice of 2 years even though it attracted far less than a majority of the votes and more stockholders preferred a different outcome.
Although the above excerpt is from a proxy statement filed by a Delaware corporation, I will, for the sake of discussion, address the disclosure from a California perspective. Pursuant to Section 602(a) of the California Corporations Code, an “act of the shareholders” requires the affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present provided the number of shares voting affirmatively constitute at least a majority of the required quorum. Thus, California imposes a modified majority vote rule. Moreover, it seems to me that this rule should be applied even when determining whether the shareholders have adopted an advisory resolution. This would be consistent with many companies’ descriptions of the vote required with respect to ratification of the selection of auditors.
Thus, it is my view that the same voting rule should be applied to determine whether the shareholders have adopted a non-binding resolution as is used in determining whether they have adopted a binding resolution. In other words, an advisory resolution is still a resolution that can only be adopted by the voting rule imposed by or in accordance with applicable law.
When shareholders are given multiple choices, neither a plurality nor a majority voting rule provides directors with the best information regarding shareholder preferences. Thus, I have argued that corporations should be free to use other voting rules such as a Borda count or preference ranking system.
As a final note, there are two exceptions the California voting rule described above. First, a greater vote may be required by other provisions of the General Corporation Law or the articles of incorporation. Second, a special voting rule applies when there is a loss of a quorum during a meeting. See Cal. Corp. Code § 602(b).
Here is something I recently blogged: Item 5.07 to Form 8-K was revised in connection with the adoption of the final say-on-pay rules. Issuers must now amend their Form 8-Ks that disclose voting results to “disclose the company’s decision in light of such vote as to how frequently the company will include a shareholder vote on the compensation of executives in its proxy materials until the next required vote on the frequency of shareholder votes on the compensation of executives.” The amendment must be made “no later than one hundred fifty calendar days after the end of the annual or other meeting of shareholders at which shareholders voted on the frequency of shareholder votes on the compensation of executives as required by section 14A(a)(2) of the Securities Exchange Act of 1934 (15 U.S.C. 78n-1), but in no event later than sixty calendar days prior to the deadline for submission of shareholder proposals under §240.14a-8.”
Although issuers are not required to disclose their decision on how often the advisory vote on compensation will be held for a period of time, some issuers are including the disclosure in the initial reports filed with respect to the results of the vote. Obviously that cuts off the need to file an amendment, but only works where a quick decision can be made.
For instance, one issuer stated “In accordance with the voting results for this item, the Company’s Board of Directors determined that an advisory vote to approve the compensation of the named executive officers of the Company will be conducted every two years, until the next stockholder advisory vote on the frequency of the advisory vote to approve the compensation of the named executive officers of the Company.”
Another issuer stated “In accordance with the results of this vote, the Board of Directors determined to implement an annual advisory vote on executive compensation, commencing with the company’s 2012 annual meeting of shareholders.”
We like the relative precision of Irish company, Accenture PLC’s disclosure: “In light of the voting results with respect to the frequency of shareholder votes on executive compensation, Accenture’s Board of Directors has decided that Accenture will hold an annual advisory vote on the compensation of named executive officers until the next required vote on the frequency of shareholder votes on the compensation of executives. Accenture is required to hold votes on frequency every six years.”
While not required to do so, other issuers are stating they will consider the results in the future. An example is “The Compensation Committee of the Board of Directors expects to review and consider the results of these two non-binding advisory votes in conducting the affairs of the Compensation Committee over the coming year.”
Another more precise example from Zoll Medical is “The Board will evaluate the results of such non-binding advisory vote regarding the frequency of future non-binding, advisory votes on executive compensation at a future meeting and make a determination as to whether the Company will submit future non-binding advisory votes on executive compensation for consideration by shareholders every one, two or three years. The Company will amend this Current Report on Form 8-K to provide information regarding such determination.”
Last week, the SEC proposed rule regarding incentive compensation for large brokers and investment advisors. Here’s the SEC’s press release – and here’s the proposing release in draft form (since other regulators need to sign off on this, the SEC posted it in draft form, which I believe is a “first”). Here’s Mike Melbinger’s blog on the proposal and we are posting memos in our “Bonus” Practice Area.
As I blogged on TheCorporateCounsel.net today, on Friday, Corp Fin issued nine new Compliance and Disclosure Interpretations on a variety of topics – including this one repeated below regarding the CD&A and performance targets:
Section 118. Item 402(b) – CD&A – Question 118.07
Question: In Compensation Discussion and Analysis (CD&A), is a company required to discuss executive compensation, including performance target levels, to be paid in the current year or in future years?
Answer: No. The CD&A covers only compensation “awarded to, earned by, or paid to the named executive officers.” Although Instruction 2 to Item 402(b) provides that the CD&A should also cover actions regarding executive compensation that were taken after the registrant’s last fiscal year’s end, such disclosure requirement is limited to those actions or steps that could “affect a fair understanding of the named executive officer’s compensation for the last fiscal year.” [Mar. 4, 2011]
Sidenote: In his “Proxy Disclosure Blog,” Mark Borges gives us the latest say-when-on-pay stats: with 365 companies filing their proxies, 49.8% triennial; 4.6% biennial; 40.2% annual; and 5.4% no recommendation.
Check out Steve Quinlivan‘s piece entitled “Disney Takes on ISS” from the Dodd-Frank Blog, repeated below:
Disney has reacted to ISS’ no vote on its say-on-pay vote by filing additional definitive proxy materials. Styled as a letter to shareholders, Disney notes:
We write with respect to the ISS Proxy Report you may have seen regarding the proposals to be voted on at The Walt Disney Company annual shareholder meeting. We take serious issue with ISS’s recommendations against the Company’s position on the advisory vote on executive compensation and the shareholder proposal regarding performance tests for restricted stock units. We set forth below why we believe the two negative ISS recommendations are unwarranted.
1. ISS’s recommendation to vote “against” the advisory vote on executive compensation relates to a practice that no longer exists. The recommendation appears to be grounded on a concern that the Company “recently extended excise tax gross ups.” But, in point of fact, the Company’s Compensation Committee has adopted a policy, fully disclosed in the proxy statement, that prohibits excise tax gross ups in any future agreements with executive officers, or in any material amendments or extensions of existing agreements, unless the provision is submitted to approval by shareholders. The “recent” extension of a gross up that ISS refers to (which would not be permitted under the new policy) occurred over a year ago, was fully disclosed in a Company filing on January 8, 2010, well prior to last year’s annual meeting and prior to last year’s ISS proxy report, which made no mention of it. Subsequent to that time, the Compensation Committee, in response to feedback from shareholders, adopted a policy that would prohibit tax gross ups as outlined above. For that reason, we urge that you vote in favor of the advisory vote on executive compensation.
2. In its original recommendation to support the shareholder proposal regarding performance tests for restricted stock unit awards, ISS made frequent reference to what it argued was the short-term nature of a one-year earnings per share component of the Company’s current performance test. In point of fact, however, the EPS test is a three-year test. ISS acknowledged this mistake in the introduction to its update, but the body of the report (which relied on that error) and the rationale supporting the recommendation remained unchanged. Again, we believe that, on the basis of a corrected record, ISS’s rationale does not hold. The three year EPS measure is an integral component of a long-term performance test that was designed to tie vesting of RSU’s to the attainment of long-term performance metrics.
For the foregoing reasons, we believe ISS’s recommendations are unwarranted and urge you to vote “for” the advisory vote on executive compensation and “against” the shareholder proposal relating to performance tests for restricted stock units.
In this podcast, Dave Lynn and Marty Dunn engage in a lively discussion of the latest developments in securities laws, corporate governance, and pop culture. Topics include:
– The latest FAS 5 developments, including recent Staff comment trends
– A debate on Say-on-Pay voting standards
– Fond memories of life at the Commish
Here is news from Cleary Gottlieb (here is a related blog from Paul Hodgson):
Recently, the Board of Directors of the Federal Deposit Insurance Corporation approved a Notice of Proposed Rulemaking on incentive-based compensation arrangements pursuant to Section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “NPR”). The NPR is an interagency publication created jointly by the FDIC, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Office of Thrift Supervision, the National Credit Union Administration, the Securities and Exchange Commission and the Federal Housing Finance Agency.
The NPR has five key components: (1) requiring deferral of at least 50% of incentive compensation for a minimum of three years for executive officers of covered financial institutions with $50 billion or more in total consolidated assets; (2) prohibiting incentive-based compensation arrangements for executive officers, employees, directors or principal shareholders (“covered persons”) that would encourage inappropriate risks by providing excessive compensation; (3) prohibiting incentive-based compensation arrangements for covered persons that would expose the institution to inappropriate risks by providing compensation that could lead to a material financial loss; (4) requiring policies and procedures for incentive-based compensation arrangements that are commensurate with the size and complexity of the institution to help ensure compliance with the NPR’s requirements and prohibitions; and (5) requiring annual reports on incentive compensation structures to the institution’s appropriate Federal regulator.
As noted above, the NPR’s mandatory deferral requirement applies only to “executive officers,” which is defined as those persons holding the title or performing the function of one more of the following positions: (1) president, (2) chief executive officer, (3) executive chairman, (4) chief operating officer, (5) chief financial officer, (6) chief investment officer, (7) chief legal officer, (8) chief lending officer, (9) chief risk officer, or (10) head of a major business line. However, the NPR also specifically requests public comment on whether the mandatory deferral provisions should apply to a differently defined group of individuals, such as the institution’s top 25 earners of incentive-based compensation.
In addition to the mandatory deferral provisions described above, covered financial institutions with total consolidated assets of $50 billion or more will be required to take additional steps with respect to incentive compensation paid to “employees presenting particular loss exposure.” The institution’s board of directors (or a committee thereof) will be required to identify those covered persons (other than executive officers) who “individually have the ability to expose the institution to possible losses that are substantial in relation to the institution’s size, capital, or overall risk tolerance.” The board or committee will then be required to approve the incentive-based compensation arrangement for each identified covered person by specifically determining that the arrangement “effectively balances the financial rewards to the employee and the range and time horizon of risks associated with the employee’s activities, employing appropriate methods for ensuring risk sensitivity such as deferral of payments, risk adjustment of awards, reduced sensitivity to short-term performance, or extended performance periods.” Finally, the board or committee will be required to perform an evaluation of the effectiveness and suitability of the balancing methods used, as well as their ability to “make payments sensitive to all the risks arising from the employee’s activities, including those that may be difficult to predict, measure or model.”
The NPR will have a 45-day public comment period beginning after its publication in the Federal Register. Publication will occur after all seven of the Federal agencies listed above have formally approved its text, a process which is expected to be completed within the next several weeks.