As noted in this blog from Bill Tysse, the IRS recently proposed new regulations under Section 83 of the Internal Revenue Code that would consolidate the IRS’s position from an earlier Revenue Ruling (Rev. Rul. 2005-48) and, in effect, cabin-in a First Circuit Court of Appeals decision (Robinson v. Commissioner) handed down over 25 years ago to its specific facts. Here are a few firm memos on the new proposal.
On TheCorporateCounsel.net’s “Q&A Forum” last year, Dave answered a question (#6407) that I thought was worth repeating:
Question: While the say-on-pay and say-on-frequency proposals are now being described as advisory, why aren’t companies doing the same thing re the auditor ratification proposal? This proposal really is also advisory as most companies describe in the proposal that if shareholders do not ratify the appointment the Audit Committee will consider that fact in determining whether to select new auditors (and vice versa – if the selection is ratified e AC may nonetheless determine to select new auditors).
This issue is especially pronounced when companies include disclosure in Q&A or another section at the beginning of the proxy statement regarding the various proposals included in the proxy statement and describe the say on pay and say on frequency as advisory but not auditor ratification. This implies to me that auditor ratification must then be considered binding by these companies. My guess is that is not really the case.
If you ask shareholders to ratify the selection and ratification is not approved by a majority of the shares, it doesn’t mean the audit committee has to select new auditors (i.e., the auditor’s selection is not conditioned on shareholder ratification). Given this, isn’t it necessarily advisory even if “advisory” is not in the title of the proposal? Any views?
Dave’s Answer: I agree, this is a good point, it is in reality an advisory vote cast as ratification of the auditor. I think that leads to the language included in the proposal which describes the advisory nature in that the Audit Committee may determine that it is not advisable and in the best interests of the stockholders to replace the auditor if the ratification is not obtained. I guess I wouldn’t go as far to say that if the proposal language is adequate as to the meaning of the vote, you necessarily would need to indicate in the title of the proposal or otherwise that the vote is advisory.
I’ve added 10 more companies to our failed say-on-pay list for 2012! We are now at 49 companies that have failed to garner major support – with Nabor Industries becoming the fourth company to fail for two consecutive years (and the first company to fail a proxy access by-law vote). Hat tip to Karla Bos of ING Funds for keeping me updated!
Sure, people in the US are angry about excessive executive pay. And even though there are more failed say-on-pay votes already this year compared to all of last year, it still isn’t a wave of failures as might be expected. In comparison, it has been quite a show in the UK this year, with CEOs resigning after an adverse say-on-pay vote. I can’t imagine that happening in the States.
The latest in the United Kingdom is the WPP saga. Last week, WPP’s CEO – Sir Martin Sorrell – wrote an op-ed in the Financial Times defending his pay and calling the controversy over his compensation “deeply disturbing.” As could be expected, WPP shareholders are now even more up in arms.
Although some write that Sir Sorrell was brave to speak out, it seems that B-School Lesson # 1 would be “do not write op-ed pieces defending your pay.” WPP’s shareholder’s meeting is on Wednesday and it should be a hoot…
I know I’ve blogged before about this topic, but it’s an important item – so I refer you to this Davis Polk blog which includes a link to the March consultation paper from the UK’s Department of Business Innovation & Skills (BIS).
I’ve added 7 more companies to our failed say-on-pay list for 2012! We are now at 39 companies that have failed to garner major support – with Digital River garnering support only in the teens (19.2%; going even lower than Chiquita Brands)! And Safety Insurance Group became the first company to fail after receiving a ‘For’ recommendation from ISS, as noted in this Semler Brossy blurb. Hat tip to Karla Bos of ING Funds for keeping me updated!
I’m still in the camp that peer group surveys aren’t an inherently evil thing in isolation – but that the heavy reliance on boards on them to pay CEOs in the top quartile over many years has unfortunately tainted the pay databases so much that the data is useless unless there is some sort of reboot. That’s why this blog by Steven Kittrell about how some New York agencies have proposed the use of benchmarking to limit pay made me smile. The proposal is that if pay exceeds $199,000, the total pay cannot be greater than the 75th percentile of comparable executives of comparable companies (as to size and services) in a comparable geographic area. The slippery slope downwards.
I imagine that if this type of proposal was ever floated for public companies, many of those that blindly follow benchmarking today would suddenly find religion and claim that boards should have the discretion to set pay levels based upon their own circumstances and that benchmarking should barely even be considered…