– Broc Romanek, CompensationStandards.com

As noted in its Form 8-K, Patriot Scientific is the 12th company holding an annual meeting in 2013 to fail to gain majority support for its say-on-pay (46% support). And as noted in its Form 8-K, Gentiva Health Services is the 13th company (37% support – and also failed last year with 37% support). Thanks to Karla Bos of ING for the heads up!

– Broc Romanek, CompensationStandards.com

Thanks to Brink Dickerson of Troutman Sanders, who sent me this form of letter that Troutman is using in order to provide compensation committees with the information that they need in order to consider the independence of their outside legal counsel. According to Brink, Troutman considered a number of different approaches but ultimately decided to:

(i) cover a specific time period (which it expects to be the prior fiscal year of the client), and
(ii) define the terms used in the NYSE rule so that there would be clarity in the response. They also decided to solicit input from all relevant attorneys, much as they would do in preparing an audit response letter.

I know many law firms are just starting to think how they will deal with this new independence issue. Drop me a line and let me know what approach your firm is thinking of taking. I will keep it confidential unless you tell me otherwise. I am posting any samples that firms decide to make public in our “Outside Advisors” Practice Area.

– Broc Romanek, CompensationStandards.com

In this blog, Leonard Street’s Steve Quinlivan gives us this news:

The Public Company Accounting Oversight Board, or PCAOB, has reproposed a new auditing standard, Related Parties, and certain other amendments to its standards. Overall, the reproposal is directed at detecting material misstatements and fraud. But the proposed standards also include audit procedures related to executive compensation, given the possible incentive compensation can have on to manipulate financial results or engage in fraud.

Required audit procedures include reading employment and compensation contracts with executive officers and reading proxy statements. For some reason, I thought auditors already did this. The term “executive officers” is defined the same as Rule 3b-7 under the Exchange Act. The proposal does not change the existing standard to obtain an understanding of compensation arrangements with “senior management,” a broader term than “executive officers.”

Some procedures the auditors “should consider” include (see pages A3-1 to A3-2):

– Inquiries of the compensation committee chair and any compensation consultant regarding the structure of executive officer compensation; and
– Obtaining an understanding of policies and procedures regarding the expense reimbursements of executive officers.

Influence on Executive Compensation. The reproposal and comments on the original proposal are explained on pages A4-75 to A4-87. Some commenters objected to the initial proposal on the grounds that auditors might influence the design of compensation programs or require the auditor to substantively judge the executive compensation programs. The PCAOB thinks it solved these problems by emphasizing that the purpose of the procedures is to further the auditor’s risk assessment of material misstatement rather than to determine the appropriateness of executive compensation.

Inquiries of Compensation Committee Chair and Consultants. The PCAOB received mixed comments on suggesting the auditors make inquiries of the compensation committee chair and compensation consultants. Not surprisingly, some said this would be intrusive. The PCAOB responded by stating it is not required, the auditors only need consider it. Once this suggestion appears on an audit checklist, we wonder how many auditors will be able to resist, given the threat of a PCAOB inspection.

Litigation. Another commenter pointed out that auditor documentation could complicate any litigation or claims related to executive compensation disclosures. The PCAOB seems to give this the short shrift by stating litigation is not a concern when preparing audit workpapers. We can now see these workpapers on a standard discovery list by the strike-suit types, and can only hope that they are prepared with the same sensitivity as say loss contingency and tax accrual workpapers.

Determination of Executive Officers. Some commenters recommended that the amendments clarify the role of the auditor in determining who is an executive officer. The PCAOBs response is the amendments do not require the auditor to evaluate management’s identification of “executive officers” for SEC filing purposes and that the SEC definition is “objective.” Objective perhaps, but fact intensive and specific, and who knows what happens if the auditors draw a different conclusion, including possible significant Section 16 issues.

– Subodh Mishra, ISS Governance Exchange

As the U.S. annual meeting season reaches its peak, an ISS analysis of early shareholder voting finds less dissent on say-on-pay compared with this time last year, while support for some shareholder proposals has slipped from levels evidenced in 2012. As of May 6, average support for say-on-pay resolutions across the Russell 3000 stands at 92.5 percent, a nearly two point jump over this time last year and three point increase over 2011. ISS is also tracking fewer votes receiving less than majority support this year – six – compared with eight during the same period in 2012 and 11 in 2011. Notably, 2012 and 2011 numbers are based on voting results for 345 and 383 companies, respectively, well below the 417 results collected by ISS through May 6 of this year.

When examining majority supported yet low votes, ISS finds just 4.3 of Russell 3000 companies fall within the 50-70 percent support level range, compared with 6.7 percent through early may 2011. Companies falling between the 70 and 90 percent support level also has dipped by nearly one point to 13.9 percent thus far in 2013.

Larger Companies Lead Gains
Parsing the numbers, large capital companies appear to account for much of the gains in 2013 shareholder support levels. S&P500 firms saw the lowest average support level compared with the broader S&P1500 and Russell 3000 last year at 88.3 percent, which represented no change from 2011 while both of the broader indices saw gains from 2011 to 2012 of roughly one point each. This year, however, large capital companies have seen the greatest growth in average support levels of 3.5 points, compared with three for the S&P1500 and just under two for the Russell 3000.

Driving the change are companies such as International Game Technology, The Bank of New York Mellon, C.R. Bard, Johnson Controls, and Huntington Bancshares, which, as S&P500 constituents, comprise five of the top 10 companies seeing year-over-year gains in say-on-pay voting. By contrast, just one large capital firm–Tyco International–is among the top 10 decliners thus far in 2013, having gone for 94.9 percent support of votes cast “for” and “against” in 2012 to 68.5 percent this year.

Governance watchers suggest large capital firms are doing a better job this year than last in communicating to shareholders steps taken following low support for say-on-pay and also taking steps better align pay and performance. When examining pay-for-performance concern levels undergirding ISS’ pay vote evaluations, S&P500 firms again show the greatest improvement reducing to 7.1 percent the portion of companies deemed to have “high” concerns, compared with just under 12 percent last year. The Russell 3000 broadly, by contrast, has seen no year-over-year change with 10.1 percent of companies analyzed thus far in 2013 netting “high” pay-for-performance concerns. Overall, ISS recommendations against S&P500 companies’ advisory pay resolution are down from 13.5 percent this time last year to 8.2 percent. The figure stands at 10.1 for Russell 3000 firms this year.

“Say-on-pay has proven quite effective in addressing and discouraging cases of pay practices and structures that are viewed by investors as ‘egregious’ or ‘out of line’,” Harvard Law School Prof. Lucian Bebchuk noted on a May 7 ISS GovernanceExchange webcast. “This is an improvement,” he acknowledged.

Bebchuk cautioned, however, that more needed to be done to fully leverage the right, noting the vote has been “less effective or not effective at all” in addressing and discouraging practices that are widespread yet still “subpar and suboptimal.” Bebchuk suggested this will be an issue for institutional investors to “think about, going forward” and, specifically, how investors can use say-on-pay to go beyond addressing egregious practices to include those that are prevalent yet still problematic.

– Broc Romanek, CompensationStandards.com

As noted in its Form 8-K, Stillwater Mining is the 9th company holding an annual meeting in 2013 to fail to gain majority support for its say-on-pay (32% support). And as noted in its Form 8-K, AXIS Capital Holdings is the 10th company (also 32% support).

And for the 11th failure, as noted in its Form 8-K, Comstock Resources had just 32% support this week – it also failed last year with 35% support.

– Broc Romanek, CompensationStandards.com

The early bird deadline for 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 expires at the end of tomorrow, Friday, May 10th. Register now.

The full agendas for the Conferences are posted – but the panels include:

– Q&A with ISS
– Q&A with Glass Lewis
– Say-on-Pay Shareholder Engagement: The Investors Speak
– Compensation Committees & Advisors: The NYSE & Nasdaq Speak
– Realizable Pay Disclosure: How to Do It
– How to Improve Pay-for-Performance Disclosure
– We Don’t Have a Good Pay Story: What Do We Disclose?
– How to Avoid Executive Pay Disclosure Litigation
– Peer Group Disclosures: What to Do Now
– In-House Perspective: Strategies for Effective Solicitations
– The SEC Staff Review Process
– Creating Effective Clawbacks (and Disclosures)
– Pledging & Hedging Disclosures
– The Executive Summary
– The Art of Supplemental Materials
– Dealing with the Complexities of Perks
– Say-on-Parachute & Post-Deal Disclosure Developments
– Compensation Accounting, Tax & Risk Assessment Disclosures
– Shareholder Proposals & Executive Pay
– The Rise of Political Contribution Disclosures

– Broc Romanek, CompensationStandards.com

Mark Poerio of Paul Hastings writes this on ExecutiveLoyalty.org:

A recent Wall Street Journal article (“Blind Spot Covered Ex-Trader’s Trail,” 4/8/13), describes Morgan Stanley’s plan to claw back $100,000 to $200,000 of deferred compensation as a result of a trader’s guilty plea to charges arising from his work for a prior employer. This proposed clawback suggests a desirable business dynamic, in the sense that employers should have the discretion to decide what circumstances should trigger the forfeiture or repayment of executive compensation.

By contrast, Section 954 of the Dodd-Frank Act requires that employers pursue mandatory clawbacks regardless of business judgment or cost-benefit analysis. The vast majority of employers have clawback policies and rights, and there is a healthy move toward deepening them (as evidenced by the recoupment policy that the major pharmas recently approved in conjunction with an investor coalition.)

Section 954’s misguided mandate is merely getting in the way of healthy governance. Before there is further waste of SEC or business resources, it would be smart to convert Section 954 into a discretionary right for employers. The fix would be simple, and would remove a drag that current law creates.

– Broc Romanek, CompensationStandards.com

As noted in its Form 8-K, Dendreon is the 8th company holding an annual meeting in 2013 to fail to gain majority support for its say-on-pay (31% support). Hat tip to Steven Hall & Partners for pointing this out!

– Broc Romanek, CompensationStandards.com

Here’s a Forbes article by Paul Hodgson entitled “Mega Stock Option Time Bombs Go Off at Sirius XM and Starbucks”…

– Broc Romanek, CompensationStandards.com

Recently, Exequity & Alliance Advisors put out this interesting white paper entitled “Equity Plan Proposal Failures: 2007-2012” including how ISS viewed the proposals and key takeaways…