Two weeks ago, a majority of Disney shareholders re-elected their Board of Directors and approved the company’s executive compensation program. Ordinarily this would have been a non-newsworthy event of concern only to Disney’s holders, senior management and directors. However, in the post-Dodd-Frank world of Say on Pay where “fear” of ISS (and Glass Lewis) vote recommendations hold sway, it has become a bellwether for public companies concerned with the passage of their own compensation plans and the potential for shareholder backlash against directors on various corporate governance issues where companies are deemed not to be following proscribed best practice.
Let’s discuss this year’s Disney vote both in immediate context of what it means for the company and for what it tells us about the broader influence of the proxy advisory firms on institutional investors. Last year, Disney was a among a number of mega cap S&P 500 companies to make changes to the pay arrangements of the CEO and senior team in response to concerns raised by proxy advisor ISS. The market presumed from the fact that Disney acceded to ISS pay concerns that the company passage of Disney’s SOP was in danger of failure. There was also a question of how the company would manage its board leadership structure and whether it would maintain a dual board leadership structure with an independent chairman or would recombine the roles under Mr. Iger.
In this instance, Disney’s pay plan once again raised concerns for ISS and the company’s plan to recombine the board leadership roles was also disconcerting to the proxy advisor and to many other shareholders. What appears to be different this year from last is that Disney was prepared and had engaged with its shareholders on compensation issues – whether they also held discussions with investors on dual board roles for Mr. Iger is unknown – the bottom line, the likely pre- and post-ISS recommendation engagement and Disney’s pushback was sufficient to provide Disney with passage of their executive compensation/SOP plan and to protect directors from ISS’ withhold vote recommendation for elevating Mr. Iger to Chairman of the Board.
Beyond the immediacy of the Disney case is the fact, as stated in previous columns, that institutional investors – beyond the governance advocates (public pension and Taft-Harley funds) – the majority are not advocates or drivers of corporate governance thought or practice. The other exceptions are the largest institutional investors: Blackrock (formerly Barclays), Fidelity, Vanguard, Capital Research, T-Rowe Price and State Street. These firms have made an investment of people and money in understanding and developing processes for voting the proxy assets of the funds they manage. The recent Disney vote coming in the wake of the Blackrock letter and comments from Vanguard have led some commentators to state that there is a new breath of freedom from proxy advisory firms blowing among institutional investors.
This is not really the case, but a slow trend in favor of developing internal corporate governance teams, having them make decisions on votes in conjunction with investment teams or committees is taking place. When Blackrock and Vanguard go “public” with their internal processes or ask companies to seek them out in advance of discussions with proxy advisory firms, that is not a sign of courage but an acknowledgement of standard operating practice. This is more a sign of issuer pressure on proxy advisory firms and the need of some investors to clarify to issuers how they arrive at determining their proxy voting guidelines – and the role proxy advisors play as aggregators of governance and compensation information – in helping them.
It is early yet in the 2012 proxy season. Out of the number of meetings held thus far ISS has made 166 “FOR” SOP recommendations and 27 “AGAINST” SOP recommendation. I would also guess, based on past statement made by the California State Teachers’ Retirement System (CalSTRS) as a proxy for other governance advocate funds that they might well have a higher number of rejections than ISS at this point. The large asset aggregators and mutual funds may well presently represent the balance between the proxy advisors and the governance advocates on pay and other governance issues, but those celebrating the “new found” independence of the institutions should keep in mind that the balance can swing both ways – pro-management today and pro-ISS or governance advocate tomorrow.
Proxy advisors – such as ISS and Glass Lewis – provide Say-on-Pay recommendations that guide institutional shareholders in their voting. The single most powerful determinant of whether their recommendations will be positive or negative is the overall alignment of CEO pay to company performance – measured primarily by Total Shareholder Return (TSR). Many large companies receive “high concern” or “medium concern” ratings for pay-for-performance alignment – and in more extreme cases, “against” recommendations for Say-on-Pay votes from Institutional Shareholder Services – despite the reality that, when properly measured, their pay programs exhibit true alignment. This may adversely affect the outcomes of Say-on-Pay votes.
Pay Governance found strong alignment of a company’s TSR with realizable CEO pay. Realizable pay is the sum of actual cash compensation earned, the aggregate value of in-the-money stock options the current value of restricted shares, actual payout from performance share or cash plans, plus the estimated value of outstanding performance share or performance contingent cash. The alignment between pay and performance found in these measurements is directly linked to the substantial amounts of stock-based incentives in these compensation packages. Other assessment methods cannot provide this clear linkage of pay and performance because the time period used to measure pay opportunity is usually not concurrent with the one used to measure performance. […]
Using both tests, approximately 86 percent of the companies exhibited the same levels of alignment versus misalignment of pay with performance. In more than 10 percent of the cases, however, the opportunity-based test found misalignment (high pay opportunity with low TSR) when pay was actually aligned with performance.
In this podcast, Jim Kroll of Towers Watson discusses the latest developments in using supplemental proxy materials for say-on-pay votes (here’s our ongoing list of supplemental materials), including:
– How many companies have filed them so far this year?
– Is the approach that companies are taking any different than last year?
– What are the pros and cons of using supplemental materials?
We have been monitoring proxy statement disclosures made by S&P 500 companies pursuant to Item 402(b)(1)(vii) of Regulation S-K. That provision, which was added as part of the SEC’s say-on-pay rules, requires companies to discuss in the Compensation Discussion and Analysis (CD&A), “[w]hether and, if so, how the registrant has considered the results of the most recent shareholder advisory vote on executive compensation . . . in determining compensation policies and decisions and, if so, how that consideration has affected the registrant’s executive compensation decisions and policies.”
Of the 126 S&P 500 companies in our survey that, as March 14, 2012, had filed preliminary or definitive proxy materials that discussed the results of their 2011 advisory vote, 98% had received majority shareholder support for their 2011 advisory vote to approve their executive compensation. Our survey shows that companies are discussing their consideration of the results of the inaugural advisory vote in the following ways:
1. Every company in our survey stated that it had considered the results of the 2011 shareholder advisory vote on executive compensation. Two companies did not include the discussion in their CD&As, but those companies did discuss the 2011 advisory vote in other sections of their proxy statements.
2. A majority of companies (64%) discussed their consideration of their 2011 advisory vote under a separate caption in the CD&A.
3. Most companies (85%) stated the percentage level of support for their 2011 advisory vote.
4. With respect to the requirement to state how consideration of the 2011 advisory vote on executive compensation has affected executive compensation decisions and policies:
– All of the companies whose shareholders did not approve their executive compensation stated that they had made changes in response to the shareholder advisory vote.
– 16% of the companies whose shareholders approved their executive compensation stated that they had made changes in response to the shareholder advisory vote. This percentage has been increasing in recent weeks as more proxy statements are being filed. The companies making this disclosure generally received lower shareholder votes for their executive compensation (ranging from just over 50% to about 93% support, with a median of 70% support) than companies that did not announce changes in response to a favorable vote.
– A further 11% of companies whose shareholders approved their executive compensation stated, when discussing their 2011 advisory vote, that they had made changes to their compensation decisions or policies but did not state whether those changes were a result of their consideration of their 2011 advisory vote. The level of shareholder support for the executive compensation at companies that did not disclose changes to their executive compensation policies and decisions ranged from about 66% to more than 99%, with most of these companies reporting shareholder support between 90% and 100%.
5. About 46% of companies that did not disclose changes to executive compensation policies in response to a favorable advisory vote stated that shareholder support of their advisory vote was “an endorsement” (or similar language) of the company’s compensation policies.
6. As reflected by the statistics above, in addressing how consideration of the 2011 advisory vote has affected executive compensation decisions and policies, approximately 84% of the companies that received majority shareholder support for their 2011 advisory vote did not disclose changing their executive compensation policies and decisions as a result of the 2011 advisory vote. Of those companies:
– Approximately 45% of the companies affirmatively stated that after consideration of their 2011 advisory vote they did not change their executive compensation policies and practices.
– Approximately 30% of the companies stated that after consideration of their 2011 advisory vote they determined to continue or to maintain their executive compensation policies or practices.
– Approximately 25% of the companies did not affirmatively state whether or not their consideration of their 2011 advisory votes affected the company’s executive compensation decisions and policies. This percentage includes those companies that, when discussing their 2011 advisory vote, stated that the company made changes to compensation policies or practices in 2011, but did not expressly state that those changes reflected how consideration of the 2011 advisory vote affected the company’s executive compensation decisions and policies. However, other companies either are not expressly addressing the issue, or are being more subtle in addressing how consideration of their 2011 advisory vote affected the company’s executive compensation decisions and policies.
As noted in its Form 8-K, International Game Technology is the second company holding its annual meeting in 2012 to fail to gain majority support for its say-on-pay with only 44% voting in favor. A list of the Form 8-Ks filed by the “failed” companies is posted in our “Say-on-Pay” Practice Area.
By the way, Semler Brossy is putting out these excellent weekly updates on the say-on-pay votes, summarizing all the latest voting results – including how they jibe with proxy advisor recommendations – and analysis of specific situations. Towers Watson also has put out this excellent memo analyzing the early vote results and how they indicate what is in store for the remainder of the proxy season…
Now that we’ve already had one failed vote in 2012 – please take a moment to participate in this anonymous poll and express how you read the tea leaves for the number of failed say-on-pays to befall companies this year (last year, there were over 40 – many more than I expected, evident by how much I vastly underestimated the range of choices in last year’s poll):
Recently, Keith Bishop of Allen Matkins blogged about a new California bill that could require companies to disclose the compensation of their “five most highly compensated retired executive officers.” Keith’s blog is repeated below:
In 2002, the California legislature enacted the Corporate Disclosure Act to require publicly traded corporations and publicly traded foreign corporations qualified to transact intrastate business in California to file a statement of information with the California Secretary of State. Cal. Corp. Code §§ 1502.1 & 2117.1. For additional background on the CDA, see my article, California Joins the Parade: The California Disclosure Act, 16 Insights 21 (2002).
The Secretary of State has implemented an online search tool that allows the public to search and view these filings. Unfortunately, the information provided is a poor substitute for the information that these companies include in their filings with the SEC. Thus, the public is more likely to be misled than informed by the these California filings.
Rather than repeal this duplicative and decidedly unhelpful requirement, Senator Mark Leno has introduced legislation that signals an intent to expand it. Currently, SB 1208, consists of only of the following section:
SECTION 1. It is the intent of the Legislature to enact legislation that would require publicly traded corporations to report to the Secretary of State all forms of compensation, including pensions and benefits from other types of employee benefit plans, to the five most highly compensated retired executive officers of the corporation.
– CEO pay magnitude, along with poor total shareholder returns (TSR), helped drive investor dissent on 2011 “say on pay” resolutions.
– For example, average CEO bonuses for large capital, S&P 500 firms with low MSOP support stood at $3 million, compared with $1.1 million at higher supported peers.
– The value of “all-other-pay,” including perks and exit compensation, for CEOs at S&P 500 companies with low MSOP support was 138 percent greater than that for high support peers, while that for option grant values was 127 percent greater.
Tune in tomorrow for the webcast – “What the Top Compensation Consultants Are NOW Telling Compensation Committees” – to hear Mike Kesner of Deloitte Consulting, Jan Koors of Pearl Meyer & Partners, Blair Jones of Semler Brossy and Eric Marquardt of Pay Governance “tell it like it is. . . and like it should be.”
Time permitting, the panel hopes to tackle all of these topics during the program:
– Weaknesses in ISS’ P4P assessment
– How ISS over values options
– Whether to consider ISS’s peer group in addition to their own
– How to best demonstrate pay/performance alignment (like Jan’s “right” pay and “right performance”)
– Rethinking severance (contracts, benefits, etc.) in a P4P world
– Whether to ‘fight’ a ISS recommendation with supplemental materials, etc.
– How and when to move away from a relative TSR program
– Whether to implement a clawback if they haven’t already
ISS would like to respond to the inaccuracies in the recent blog by Mike Kesner at Deloitte Consulting regarding ISS’ Governance Risk indicators (GRId) as follows:
To begin with, we would like to emphasize that every issuer has access to its own scores and ratings completely free of charge. This includes the company’s answers to every GRId question and an indication of their impact – positive, neutral, or negative. Each question’s impact on the scores and rating is described in the GRId 2.0 technical document (posted at www.issgovernance.com/grid-info). Together, the technical document and the online issuer data verification site provide a clear indication of the particular practices a company would want to target in order to improve its corporate governance profile (and thus its GRId score).
Mr. Kesner’s posting also mischaracterizes or misunderstands the GRId 2.0 scoring methodology. The goal of GRId is to flag governance-related concerns, and the new scoring system is therefore designed to ensure that important single factors – such as apparent pay-for-performance disconnects, excise-tax gross ups or modified single triggers – or important particular combinations of factors, such as equity granting practices that mitigate (or fail to mitigate) risk – are appropriately reflected in the overall level of concern.
As a result the scoring model is not purely linear – while category scores range from 0 to 100, with 75 being neutral, there are many more than 75 negative points and 25 positive points available within each category. We have paid a great deal of attention to the interaction of a company’s practices in each subsection and how practices either increase or mitigate levels of concern. In some cases (for instance, in the termination subsection), good practices may mitigate concerns seen elsewhere. In others (for instance, pay-for-performance), the absence of a concern does not mitigate concerns identified elsewhere. These interactions – both question-level concerns and the level of concern and/or mitigation available in each subsection – are detailed in the GRId 2.0 technical document.
Indeed, the scenarios described in the original posting are working as designed: it is appropriate that companies with apparent pay-for-performance misalignment raise a concern, even in the presence of good practices elsewhere. These good practices can mitigate but not eliminate the concerns raised under pay-for-performance. Conversely, companies that do not exhibit pay-for-performance misalignment may still receive low scores if there are other concerning practices such as modified single triggers, excise-tax gross ups, incomplete disclosure of performance metrics, etc.
Finally, issuers should know that they can view their scores and underlying data and submit updates at any time before their definitive proxy is filed through the free GRId data verification site. ISS will review any publicly disclosed changes to company governance practices and issue updated GRId scores and ratings, if appropriate, within five business days.
Here is a page with our technical document, issuer FAQs, and more information on the GRId data verification process.