As you know, a new SEC rule (Item 407(e)(3)(iv) of Regulation S-K) requires disclosure if a conflict of interest has arisen in connection with the work of a compensation consultant (whether selected by management or the compensation committee). To satisfy this disclosure requirement, companies will need to conduct a conflicts of interest assessment. This raises the question of whether companies will include voluntary disclosure (so-called “negative disclosure”) in their proxy statement when a determination of “no conflict” has been made. Here are the results from our recent survey regarding what companies are preparing to do:
1. For our next proxy statement, when it comes to the newly required conflicts of interest disclosure about compensation consultants (ie., Item 407(e)(3)(iv) of Regulation S-K), assuming that no conflict of interest is identified, our company:
– Has made a decision, at least at the staff level, whether to make voluntary negative disclosure (eg., as an anticipatory “best practice” or simply to signal to the SEC Staff and our shareholders that we were aware of the new disclosure requirement) – 62%
– Hasn’t yet figured out whether it will make any voluntary negative disclosure – 35%
– I hadn’t realized that there is a new conflicts of interest disclosure (and assessment) requirement! – 3%
2. For those of you who know which approach your company will take, our company intends to:
– Only provide disclosure if a conflict of interest is identified – and not provide any voluntary negative disclosure – 25%
– Provide voluntary disclosure that a conflicts of interest assessment was conducted and that no conflict of interest was identified – 67%
– Provide voluntary negative disclosure that works through one or more of the six non-exclusive factors supporting a “no conflict of interest” conclusion – 8%
With the SEC staring at yesterday’s deadline for its extension to approve the NYSE & Nasdaq proposals to comply with Rule 10C-1 under the Exchange Act comes this news from Davis Polk’s Ning Chiu on Friday:
Both the NYSE and Nasdaq have filed further amendments to their proposed listing standards on compensation committees and their advisers. The amendments copy directly from the exception in Item 407(e)(3)(iii) of Regulation S-K with respect to the proxy disclosure rules for compensation consultants.
The amendments clarify that a compensation committee is not required to conduct the independence assessment of an adviser whose role is limited to (a) consulting on any broad-based plan that does not discriminate in scope, terms, or operation, in favor of executive officers or directors, and that is available generally to all salaried employees or (b) providing information that either is not customized or that is customized based on parameters that are not developed by the adviser, and about which the adviser does not provide advice.
The SEC enhanced proxy disclosure rules in December 2009 permitted these exceptions in response to commentators who suggested that broad-based, non-discriminatory plans and the provision of information, such as surveys, that are not customized, should not be treated as compensation consulting services that would raise conflict of interest concerns.
The NYSE amendment also added language indicating that nothing in the section requiring a compensation committee to consider the specific adviser independence factors is intended to limit compensation committees from selecting or receiving advice from any adviser that they prefer, including ones that are not independent. NASDAQ already had a similar statement.
My ten cents: Given that the SEC’s deadline to act was yesterday – and a statement is in both the exchange’s latest amendments saying they don’t consent to an additional extension for the SEC to act – maybe the SEC will approve the amendments today or soon enough. Since a portion of the new rules will be effective July 1st, they have to give companies time to comply…
Although over 100 companies faced the grim prospect of a “second strike”, only 13 companies actually received a “second strike” in the recently completed Australian proxy season (and only 2 had their board spill resolution approved). This seems to indicate that shareholders are taking this newly-granted responsibility quite seriously. Furthermore, companies are as well , as indicated by the increased dialogue and subsequent policy and design reform.
CGI Glass Lewis has found that “first strike” companies have been more proactive in consultations with, and feedback from, institutional shareholders, proxy advisors and remuneration advisors. As a result, their remuneration reports tend to be well explained with feedback from shareholders incorporated in those companies’ remuneration policy reviews.
Some companies, such as Bluescope Steel Limited, implemented remuneration freezes for executives until financial year 2013. Others, such as Crown Limited, undertook major efforts to improve their disclosure and explanation of remuneration practices. Some companies, such as Dexus Property Group, revamped their executive remuneration structures by introducing a deferred short-term incentive and a new long-term incentive plan, each of which, in our view, better align that company’s remuneration framework with shareholders’ long-term interests.
As previously mentioned, only 13 companies received a “second strike”. Of these, only two companies had their board spill resolution approved at their AGM. Subject to majority approval of a separate resolution (the “board spill resolution”) at the AGM, companies that receive two strikes (two consecutive votes of 25% or more against the remuneration report proposal) may face a board spill, where directors (except the managing director) would need to be re-elected to maintain their board seats.
This of course means that the two companies with majority-supported spill motions (Penrice Soda and Globe International) need to hold an extraordinary general meeting within 90 days to re-elect the board.
Last week, the Canadian Coalition for Good Governance (CCGG) updated its Executive Compensation Principles, whose 46 members manage nearly $2 trillion in assets on behalf of Canadian investors, to focus on approaches to aligning pay with performance as well as integrating “risk management functions into the executive compensation philosophy and structure.” The principles were last updated in ’09. Broadly, the document comprises six principles covering the following:
– A significant component of executive compensation should be “at risk” and based on performance;
– “Performance” should be based on key business metrics that are aligned with corporate strategy and the period during which risks are being assumed;
– Executives should build equity in the company to align their interests with those of shareholders;
– A company may choose to offer pensions, benefits and severance and change-of-control entitlements. When such perquisites are offered, the company should ensure that the benefit entitlements are not excessive;
– Compensation structure should be simple and easily understood by management, the board and shareholders; and
– Boards and shareholders should actively engage with each other and consider each other’s perspective on executive compensation matters.
There has been so much going on with the wave of “Say-on-Pay Litigation 2.0” (although the lawsuits are more than just say-on-pay related) that I have been tempted to blog about it daily (see this Mark Borges’ blog and this D&O Diary Blog – as well as this list of cases posted by Faruqi & Faruqi and our own list & memos in the “Executive Compensation Litigation Portal“).
But I have held off blogging because I knew you could tune in tomorrow for the comprehensive webcast – “The Litigation Explosion in Executive Compensation” – to hear Orrick Herrington’s Rick Gallagher, Simpson Thacher’s Joe McLaughlin and Paul Hastings’ Mark Poerio discuss what is involved in the rash of new executive compensation-related lawsuits, as well as how to handle them. Please print off these “Course Materials” in advance.
Just like ISS did during the end of December, Glass Lewis – via Equilar – seeks input from companies on the peer groups they should use by January 18th. Under new methodology used by Glass Lewis, peer groups are constructed using a “market-based” approach developed by Equilar that uses a company’s self-disclosed peers and the peers of those peers. Input should be provided using this online form…
The WSJ has been conducting this spot survey asking if the US should have binding shareholder votes on pay here in the US. So far the voting has been strongly in favor – over 80% with over 11,000 votes being cast…
In his blog, Ed Hauder of Exequity describes the new burn rate caps – and he includes this PowerPoint comparing the rates over the past five years. Here is an excerpt from the blog:
Interestingly, there are no instances for Russell 3000 GICS groups where the ISS 2 percentage point governor limited an increase/decrease from last year’s ISS burn rate caps. This is the first time since the governor was introduced that this happened. Note though that the governor did apply to a few Non-Russell 3000 company GICS groups.
Also, on an aggregate basis, the burn rate caps didn’t change all that much and remained flat (aggregate total -0.76% decline in burn rate caps for 2013 versus a 6.21% aggregate increase in 2012, a 29.74% aggregate increase in 2011, and a -15.53% aggregate decline in 2010).
If you were out during the last week or so, perhaps you missed my blog about ISS’ new sets of FAQs. In addition, here are some random articles about pay practices that came out:
And mark your calendar for next Wednesday’s webcast: “The Litigation Explosion in Executive Compensation.” As all memberships expired on December 31st, please renew now if you haven’t yet renewed your membership for CompensationStandards.com for ’13. The grace period for this site will end this Friday night- and you will need to renew to access this upcoming program.