– Broc Romanek, CompensationStandards.com
There are 20 panels on executive pay disclosure! There is a 75-minute Q&A session with ISS – and one also with Glass Lewis! Only one week left for you to take advantage of the 33% early bird discount for the pair of our popular conferences – “Tackling Your 2014 Compensation Disclosures: The Proxy Disclosure Conference” & “Say-on-Pay Workshop: 10th Annual Executive Compensation Conference” – to be held September 23-24th in Washington DC and via Live Nationwide Video Webcast. Here are the agendas for the Conferences.
Early Bird Rates – Act by March 8th: Act now for the special early bird discount rate (both of the Conferences are bundled together with a single price). So register by March 8th to take advantage of the 33% discount.
– Broc Romanek, CompensationStandards.com
Last week, SEC Commissioner Luis Aguilar gave this speech on proxy disclosure. I briefly noted that fact in a blog last week because its rare that disclosure is the topic covered in a Commissioner speech (here’s Mark Borges’ blog on the speech). But otherwise, I didn’t give it much thought as Commissioner speeches typically don’t mean a whole lot. It doesn’t change the rules nor interprets them – nor is it a harbinger of potential changes in most cases.
Anyways, some folks perhaps have read more into Aguilar’s speech than there really is on pay ratios. Or even if the speech says what they think it says, it’s just the opinion of one Commissioner. Here is the excerpt from the speech dealing with executive pay disclosure (my emphasis added to the pay ratio part so you can find it easily):
Compensation Risks
A key provision of the 2009 amendments is Item 402(s) of Regulation S-K, which requires a narrative discussion of a company’s compensation policies and practices relating to risk management. Although, by its terms, this rule requires such disclosure only “to the extent” that risks arising from the issuer’s compensation policies and practices are “reasonably likely to have a material adverse effect,” it would be prudent and appropriate for all issuers to discuss the role of compensation in risk management in their proxy statements.
By their very nature, policy decisions on compensation create incentives, and therefore have consequences that go beyond the dollar amount paid. The manner in which companies assess and respond to the risks and rewards embedded in compensation plans and other policies is inherently material to investors. Few if any issuers may disregard the effects of compensation on risk management without exposing the company and its business to potentially material adverse effects.
Moreover, risks relating to compensation go beyond the immediate incentives of a particular compensation plan or policy. The relative pay of different classes of employees, such as the ratio between CEO compensation and median pay, can also create risks to an enterprise, including the risk of employee, customer, and shareholder discontent. Decisions regarding executive compensation may also affect succession planning and related risks. Companies should consider whether additional disclosure is necessary to enable stockholders to assess such risks and the manner in which any such risks may be affected by a company’s compensation policies and practices.
Issuers should also consider including enhanced disclosure in the proxy statement regarding the relationship between executive compensation actually paid and a company’s long-term performance. Policies and practices that reward management despite poor performance, or that result in a poor correlation between pay and performance, may adversely affect risk management by sending the wrong signals to a company’s executives and by impeding the board’s ability to exercise the oversight for which it is responsible.
It is recognized that the discussion called for by Item 402(s) will vary among different companies and industries. Investors are not looking for boilerplate, and there is no one-size-fits-all solution that issuers can take off a shelf. Rather, I urge public companies and their counsel to apply thought and judgment to the principles set forth in the rules, and, most importantly, to be guided by a clear vision of the investors who are relying on the disclosure to make important voting and investment decisions.
– Broc Romanek, CompensationStandards.com
Here’s an excerpt from Latham’s Jim Barrall‘s news over on “The Conference Board Blog“:
In a very important development in the current proxy disclosure litigation wars relating to annual meeting votes, last Thursday the Santa Clara County Superior Court sustained Symantec Corporation’s demurrer in Natalie Gordon vs. Symantec Corporation dismissing a shareholder lawsuit which had sought declaratory relief and damages against Symantec and its directors based on allegations that the directors had breached their fiduciary duties by failing to provide adequate disclosure to shareholders regarding Symantec’s say-on-pay vote in the company’s August 2012 proxy. (For background on the annual vote proxy disclosure litigation cases, see my recent post and Latham’s commentary.)
While the court’s earlier denial of the plaintiff’s motion to preliminarily enjoin Symantec’s annual say-on-pay vote (in October 2012) was welcome and important news to public companies and their advisors (especially since the same court had previously granted a shareholder’s motion to preliminarily enjoin an equity plan approval vote in Stephen Knee v. Brocade Communications Systems), as a decision on the merits, the court’s Thursday decision will be even more valuable than the injunction denial decision to companies in defending proxy disclosure lawsuits.
In its Symantec complaint, the plaintiff alleged on behalf of shareholders as a class that Symantec’s directors had breached their fiduciary duties to shareholders by failing to provide adequate disclosure in support of the company’s say-on-pay vote proposal, pointing to eight alleged deficiencies. Among the eight alleged deficiencies (proving that no good deed goes unpunished, no matter how well trumpeted) were that Symantec had failed to disclose how the board had determined to shift its executive officer pay targeting from 65th to 50th percentile of its peer group and how it had determined to increase officer ownership guidelines and implement a requirement that officers hold at least 50 percent of their after-tax equity grants.
After dispensing with some procedural issues, the court recited the applicable legal standards governing the adequacy of proxy disclosures, namely that directors have a duty to fully and fairly disclose all material information within their control when seeking shareholder action, and that information is material if there is a substantial likelihood that that a reasonable shareholder would view it as significantly altering the “total mix” of information if it were to be made available. The court then applied these standards to each of the alleged deficiencies and concluded that the additional disclosures sought by the plaintiff were not material in view of all of the other information in the proxy, and that the plaintiff had failed to state a cause of action. The court gave the plaintiff ten days leave to amend the complaint to attempt to state a cause of action.
Jim’s analysis of the possible implications of this development are at the bottom of this blog. Here’s the court correspondence since inception (relates to annual meeting from last year).
– Broc Romanek, CompensationStandards.com
As noted in its Form 8-K, Navistar International is the first company holding its annual meeting in 2013 to fail to gain majority support for its say-on-pay with only 17% voting in favor since abstentions count as “against.” Lower than anything we saw last year, although perhaps not surprising since nearly 50% of Navistar is held by just 3 investors, including Carl Icahn, who has blasted them for poor governance. Hat tip to Karla Bos of ING Funds for pointing this out!
– Brink Dickerson and David Meyers, Troutman Sanders
We suggest inclusion of the language below in insider trading policies as a possible response to the new ISS voting guidelines for pledging and hedging. Companies will need to decide whether to narrow the language to just “executive” officers (ISS uses the term “executives”) and whether to define “significant” (ISS does not). Also, a few companies already prohibit all pledging, and not just significant pledging, and companies may want to consider that approach as well, although we view that approach as a bit harsh.
Board members and officers are prohibited from, directly or indirectly, [pledging and hedging any of the Company’s equity securities] [(1) pledging a significant number of the Company’s equity securities, or (2) hedging with respect to any of the Company’s equity securities]. For these purposes, [(a)] “pledging” includes the intentional creation of any form of pledge, security interest, deposit, lien or other hypothecation, including the holding of shares in a margin account, that entitles a third-party to foreclose against, or otherwise sell, any equity securities, whether with or without notice, consent, default or otherwise, but does not include either the involuntary imposition of liens, such as tax liens or liens arising from legal proceedings, or customary purchase and sale agreements, such as Rule 10b5-1 plans[, and (2) “significant” means [the lesser of] 1% of the Company’s outstanding equity securities [and 50% of the equity securities of the Company owned by the board member or officer]]. Also for these purposes, “hedging” includes any instrument or transaction, including put options and forward-sale contracts, through which the board member or officer offsets or reduces exposure to the risk of price fluctuations in a corresponding equity security.
“Equity securities” include common stock, voting preferred stock and options and other securities exercisable for, or convertible into, settled in, or measured by reference to, any other equity security determined on an as-exercised and as-converted basis.
The equity securities attributable to a board member or officer for these purposes shall include equity securities attributable to the board member or officer under either Section 13 or Section 16 of the Securities Exchange Act of 1934. [Equity securities that are pledged shall not be counted toward board member and officer ownership requirements.]
– Broc Romanek, CompensationStandards.com
From this Bloomberg article:
Swiss company chief executive officers, including Roche Holding AG’s Severin Schwan and Nestle SA’s Paul Bulcke, earn some of the world’s highest salaries. That may soon change. With more than 100,000 Swiss citizens having signed a petition to limit “fat-cat” pay, voters will decide at a March 3 referendum whether top executives should have their compensation set by shareholders. While a poll shows a majority may vote yes, the industry’s lobby group warns that it will drive out tax-paying companies and is campaigning for a softer counter proposal. “If you have this kind of limitation on executive pay, why should an American company put their European headquarters into Switzerland,” Philip Mosimann, CEO of Bucher Industries AG, a Swiss maker of street sweepers with a market valuation of 2.1 billion francs ($2.3 billion), said in an interview. “They would leave. I’m certain of that.”
The vote is the brainchild of Thomas Minder, a Swiss lawmaker and managing director of herbal toothpaste business Trybol AG, whose petition blames highly-paid “fat cats” — “Abzocker” in German — for the financial crisis. If successful, the proposal will give shareholders an annual ballot on executives’ pay and block big payouts for new hires and for managers when they leave companies.
Schaffhausen to Fordham
“Shameless executive payouts have very clearly come from the U.S.,” said Brigitta Moser-Harder, an activist shareholder, who owns shares of the country’s biggest bank UBS AG and largest engineering company ABB Ltd. and regularly speaks on the subject at annual shareholder meetings and on Swiss TV. “People have been outraged about high earners for years.” Minder, 53, has led a five-year campaign after collecting the signatures needed for a referendum. The businessman, who has an MBA from New York’s Fordham University and runs his family’s 113-year-old company, grew up near Schaffhausen, a small city bordering Germany that’s home to Swiss companies such as automobile parts-maker Georg Fischer AG.
The former Swiss army company commander wants to curb what he sees as a culture of chiefs who only stay for a short time and are still rewarded with high salaries, according to his campaign website. Minder plans to eliminate sign-on bonuses, as well as severance packages and extra incentives for completing merger transactions. He proposes to punish executives who violate the terms with as long as three years in jail.
Swiss Referendums
A survey conducted in January by researcher gfs.bern showed 65 percent of 1,217 voters supported Minder’s proposal. Switzerland holds regular referendums for issues that are able to draw the required 100,000 signatures. In 1989, an initiative to get rid of the Swiss army was rejected by the Swiss people. “I hope it doesn’t pass, I don’t think it’s good for Switzerland at all,” ABB CEO Joe Hogan said in an interview today. “For multinational companies like ABB, we have to attract and retain the best talent in the world. If that inhibits us, and I think this initiative could, that’s a problem.”
Opposition to excessive executive pay has been building in Switzerland, even though the country has the highest average monthly wage in Europe. Minder and Moser-Harder say payouts such as the 71 million francs of shares that Dougan, Credit Suisse’s CEO, received in 2010 under an incentive program created five years earlier show how executive compensation has become disconnected from average salaries.
Top Salaries
At least five of Europe’s 20 highest-paid CEOs work for Swiss companies, according to data compiled by Bloomberg. The list includes three Americans, Dougan, Hogan and Joe Jimenez of Novartis AG, as well as Roche’s Austrian chief Schwan and Nestle’s Bulcke of Belgium. Jimenez, Switzerland’s highest earning CEO, got 13.2 million Swiss francs in 2012 and Schwan received 12.5 million francs. That compares with an average of about 2.7 million euros (3.3 million francs) for CEOs of companies in Europe’s Stoxx 600 Index which have disclosed 2012 executive salaries, according to data compiled by Bloomberg.
Minder’s supporters see swollen salaries as an “Americanization” imported by investment bankers in the 1990s. The proposal has broad support among low- and middle-income earners and also among those with vocational training, Susanne Leutenegger Oberholzer, a Social Democratic Party lawmaker, said at a Jan. 31 press conference in Bern.
Liberal Laws
The plan would result in one of the world’s strictest laws on executive pay, according to Robert Kuipers, a partner in charge of remuneration services in PriceWaterhouseCoopers’ Zurich office. The U.K., by comparison, has instituted a non- binding “say on pay” rules. Switzerland would become less attractive to foreign multinationals such as offshore drilling contractor Transocean Ltd. and oilfield service company Weatherford International Ltd., which relocated because of liberal corporation laws, taxes and infrastructure, said Meinrad Vetter, an official at Economiesuisse, a lobby group for Swiss companies. Economiesuisse has budgeted as much as 8 million francs on a campaign to block the initiative and backs a counter proposal from the government, which would automatically come into force next year if the Swiss people reject Minder’s law.
Switzerland’s largest corporations such as Novartis, Credit Suisse, Syngenta AG and UBS back the counter proposal, which omit Minder’s demands for a binding shareholder vote, prison sentences and a sign-on bonus ban. At the same time, the government plan would allow shareholders of individual companies to decide if they want to introduce a binding vote.
Social Cohesion
Economiesuisse’s Vetter said it was necessary to address the concerns of enraged voters. “It’s more a question about social cohesion,” he said. “We need an answer to the Minder initiative and an answer to the anger of Swiss people about executive salaries.” Switzerland’s ranking as the world’s most competitive country in the World Economic Forum’s annual index won’t be affected by the vote’s outcome, at least in the short term, because executive pay isn’t part of the overall assessment, said Margareta Drzeniek, who is part of the team that covers Switzerland at the WEF. It may even be a positive in the long term, assuming such a change improves social cohesion, she said.
Novartis’s Jimenez has said voters shouldn’t ignore the negative consequences of Minder’s initiative for some of the country’s biggest employers. “From a competitive standpoint, it’s very difficult for me as a CEO to hire outside talent if any offer I make is contingent on a shareholder vote,” Jimenez said last month. “I think it puts Novartis or any Swiss company at a competitive disadvantage.”
– Broc Romanek, CompensationStandards.com
In a blog entitled “Moody’s Warns Jeffries on ‘Excessive’ Pay,” Paul Hastings’ Mark Poerio notes:
This article from the New York Times begins: “To Moody’s, the high pay [of $78 million for top executives] is a reminder of ‘excessive compensation’ among Wall Street firms, potentially leading investment banks to take excessive risks and irritating critics on Capitol Hill and among regulators.” Fast forward to the proxy statement disclosure implications: How will the company handle its discussion of the riskiness of its executive compensation structures? Going to the design of the firm’s executive compensation, Moody’s has apparently expressed concern that “the firm has not put in place measures like longer award vesting periods and more expansive powers to claw back compensation . . . to ensure that employees will not suffer consequences from excessive risk-taking.” It will be interesting to see how the firm’s shareholders and proxy advisory firms react to the Moody’s report, and whether the firm’s compensation committee acts preemptively beforehand.
I can’t recall a rating agency ever making a concern over excessive executive pay public? Maybe the NY Times sleuthed this out. Or maybe it’s a new trend…