Yesterday, the SEC issued this statement explaining that in the event of a government shutdown, EDGAR will remain fully functional – but that the SEC’s Divisions (including Corp Fin) will be unable to process filings, provide interpretive advice, issue no-action letters or conduct any other normal activities. As a result, new or pending registration statements or applications for exemptive relief will not be processed regardless of the status of any review of those filings.
There will be only an “extremely limited number” of Staffers working during the shutdown – so although the SEC’s statement provides an email address and phone number for emergencies, I imagine only true emergencies will be handled by the Staff. Other than these designated essential Staffers, any attempt to work during the shutdown is a firing offense – so there is nothing that a staffer can do for you even out of kindness of their heart. The government is scheduled to shutdown tonight at midnight.
Poll: How Many Corp Fin Staffers Will Be Working During the Shutdown?
As noted above, the SEC’s statement regarding the shutdown notes that only an “extremely limited number” of Staffers will be working if the shutdown is not avoided. Take a moment to predict how many Corp Fin Staffers that phrase means:
Last week, the SEC issued this “Small Entity Compliance Guide” regarding say-on-pay and say-on-golden parachutes. It’s brief and to the point and summarizes the new rules…
While we do not expect a huge amount of investor rejections of the SOP vote request, there will be a number of negative recommendations from proxy advisory firms (ISS and/or Glass Lewis (GL)) against issuer plans in 2011. The question for companies is how to react if and when you receive notification of the negative vote advisory from ISS and/or GL. Last week, Katie Wagner of Agenda had a story discussing the tactics and strategies used by certain issuers to fight back against negative vote recommendations from the proxy advisory firms, not always successful.
Hitting the Reset Button
For the issuer whose SOP vote request is in the crosshairs of either proxy advisory firm, the release of a negative vote recommendation requires the affected company to take immediate steps to communicate with ISS/GL, and shareholders, it’s point of view concerning the proxy advisors’ analysis – why the company disagrees as it relates to the pay package approved by the Compensation Committee.
While the proxy advisory firms have spoken through their vote recommendations – and they have an amplified voice – issuers have the ability to communicate to the broader market via SEC disclosure and to strategically communicate to specific investors whose support will be key to overcoming ISS or GL. This represents a second opportunity to present the Compensation Committee’s philosophy of pay in the context of the company’s performance and to rebut the contentions and factual inaccuracies, if any, from the proxy advisory analysis.
Using The SEC Disclosure Regime: 8-K or Additional DEF 14s
An issuer in this situation should take a moment to view the points of disagreement with the proxy advisory firms and develop strong and contextual responses to refute their analysis. Those key points of response then become the heart of the company’s communication to shareholders. Once disclosed, as an 8K or DEF14 filing, the company can then reach out to those shareholders identified, by their governance advisor/proxy solicitor, as open to dialogue on the compensation issues in contention.
Some advisors have suggested, to companies in the middle of contested SOP votes, that the Compensation Committee make immediate changes to CEO or named executive officer pay in an effort to appease the proxy advisors and announce the adoption of their concept of “best practices in pay”. We would counsel that such a course of action in advance of conversations with shareholders would be premature and harmful to the issuer’s cause. If an issuer is prepared to seriously consider potential “horse-trading” on a compensation issue, it should be after discussions with shareholders, not prior to them. Issuers forced to undertake this effort should be focused on educating their shareholder base.
Who Speaks to the Shareholders
Usually the CEO or other members of senior management speak for the company on all issues. In this instance, however, having the CEO or one of the named executive officers discussing the board’s rationale for the officers’ compensation might appear self-serving and may be viewed as if the board and compensation committee is a rubber stamp for management – a belief held by many shareholders. The company should be prepared, if necessary, to have a member of the Compensation Committee (if not the committee chair) involved in the engagement discussions. Engagement with a director often underscores for shareholders the fact that the board was involved and knowledgeable about the company’s executive compensation process and that the CEO’s pay was not determined by executive fiat.
The disclosure and communications strategy outlined above provides a company with a fighting chance against the proxy advisory firms, could potentially shift shareholder votes, and, irrespective of the immediate 2011 outcome, creates the basis of a strong shareholder engagement program for the 2012 and 2013 proxy seasons.
Recently, Fidelity issued its 2011 Proxy Voting Guidelines. As promised, they are a significant departure from past guidelines in the area of equity plan proposals. Where in years past Fidelity looked to dilution as the guiding principle along with assorted other concerns in determining its vote on equity plan proposals, it has now replaced that with 3-year average burn rates:
– 1.5% for Large Caps–companies in the Russell 1000 Index
– 2.5% for Small Caps–companies not in the Russell 1000 Index
– 3.5% for Micro Caps–companies with a market cap under US$300 million
Here is what I believe to be true about the new Fidelity guidelines (thanks to Reid Pearson at Alliance Advisors for sharing what he had learned with me as well):
– The new guidelines, including the burn rate policy for equity plan proposals, is effective immediately;
– Fidelity will not use a multiplier for full-value awards, i.e., options granted during the fiscal year + full value awards granted during the fiscal year / weighted average common shares outstanding (this is the “Traditional Burn Rate” in my Burn Rate Calculator available under Reference Materials -> Excel Tools; this is also reported on ISS’s Proxy Reports as the “unadjusted burn rate”);
– Fidelity will be considering mitigating factors to permit them to support a plan when a company has burn rates that exceed the burn rate caps (similar to what Fidelity did with its prior dilution caps). But, Fidelity is still working out the details.
I think there are a few open questions on the new Fidelity guidelines as well. For example, since Fidelity will look at historic burn rate, will it look at prospective burn rate at all in terms of the size of the share request and how many years it might last? Does that matter to Fidelity? One would assume that exceptions will have to made for extraordinary situations that cause a spike in burn rates from typical practice, but what will Fidelity be looking for in order to approve such exceptions?
Will Fidelity make allowances to its general burn rate caps for companies in various industry groups that have historically had higher burn rates (technology and biotech come to mind)? If not, what will this mean for these companies’ ability to gain shareholder approval of equity compensation plan proposals and continue to make use of equity awards as part of their compensation packages? We’ll have to wait and see how Fidelity ends up developing these guidelines further to see what the practical implications will be for share requests.
Tune in tomorrow for the webcast – “What the Top Compensation Consultants Are NOW Telling Compensation Committees” – to hear Ira Kay of Pay Governance, Mike Kesner of Deloitte Consulting and George Paulin of Frederic W. Cook & Co. discuss what every director and compensation committee member should be asking, and focusing upon, today as well as practical guidance, inside tips and red flags from those “in the know.”
Note: You need Windows Media to listen to the webcast. Since our webcast provider no longer supports it, Real Player will not work going forward.
Both Disney and HP filed materials with the SEC strongly condemning ISS’s no recommendation on say-on-pay and other matters. Disney ultimately changed course and received support on its advisory vote on executive compensation, while HP did not. Why the differences in strategy? We do not know because we were not involved, but perhaps a few clues can be ascertained.
ISS apparently had two issues with Disney’s proxy statement. ISS objected to tax gross-ups in executive employment agreements. ISS also recommended voting for a shareholder proposal regarding performance tests for restricted stock unit awards.
Disney ultimately eliminated the tax gross-ups from the executive employment contracts prior to the meeting. Perhaps after engaging with a few key shareholders, it determined that absent such action its rational set forth in response to ISS’s recommendation was not going to carry the day. The key here however was there was something Disney could do, given the cooperation of its executives. By taking that action, it avoided the embarrassment of a failed vote and having to spend board resources to deal with the issue in the upcoming year. Perhaps Disney also reasoned that by removing that institutional irritant it was more likely institutions would not be persuaded by what appeared to be ISS’s weak recommendation with respect to the shareholder proposal on restricted stock units.
Like Disney, ISS had two issues with HP. One appeared to center on the employment arrangements in connection with its new CEO. The other was a concern regarding its CEO’s participation in indentifying director candidates.
While HP may have found ISS’s recommendation on say-on-pay offensive, it devoted scant attention to supporting its pay-for-performance philosophy in its additional materials. Only a single paragraph at the end of three pages of text addressed that issue. But unlike Disney, there was no immediate action HP could take to correct the situation before the shareholder vote. We assume that asking its new CEO to return his signing bonus and renegotiate his employment package was not an option. So HP stayed the course.
It is also likely that HP’s primary concern was ISS’s recommendation against the reelection of three directors as a result of the nominating process. HP has a majority voting standard. If a director fails to receive a majority of votes for reelection, it triggers a process where the director must submit his or her resignation to the governance committee for consideration. That process would have put HP governance back in the spotlight. As pointed out by Martin Lipton, ISS’s logic was tenuous, if not unsupportable. So it is not a surprise HPs materials centered on this point.
Why did Tyco International succeed with an approach similar to HP while HP failed? We suspect it is because Tyco’s materials were much more precise and informative as to why a pay-for-performance link existed and therefore persuasive to institutional investors. HP’s arguments were general and vague in comparison.