– Matthew Roberts, ISS Germanic Markets Research, and Subodh Mishra, ISS Governance Exchange
Regulators released June 14 a draft ordinance meant to address demands raised earlier this year by Swiss voters for the government to clampdown on executive remuneration. On March 3, roughly two-thirds of Swiss voters supported a referendum, spearheaded by businessman-turned-politician Thomas Minder, which radically empowered shareholders on matters of pay. Minder’s initiative gave shareholders a binding annual vote on pay, barred severance awards and other types of “golden” pay, gave investors a greater say in board elections, and required greater disclosure of voting records and policies by institutional investors.
Under the proposed rules released last week, shareholders would annually approve, on a binding basis, the total remuneration of the board, executive management, and the advisory board each year on an aggregate basis for each governing body. Fixed pay would be approved for each governing body on a forward-looking basis while variable pay would be approved on a retrospective basis. Effectively, the approvals would equate to six separate resolutions.
The proposed ordinance states that company articles of association may establish a different modus of vote (e.g., approval of a “budget” reflecting a lump sum of fixed and variable for the upcoming year), while respecting the annual meeting assembly’s authority to approve total remuneration annually.
If a vote is rejected, the board may make a second proposal at the annual meeting. If shareholders do not pass the second resolution, a special meeting must be convened within three months seeking approval.
On matters related to special, one-off, or bonus payments, the draft rules bar “remuneration in advance,” while allowing for sign-on payments . Severance payments–a rallying cry for those supporting the Minder referendum–are banned but non-compete agreements are permitted. Remuneration specifically for mergers, acquisitions, or other similar events is not allowed, but such events may be taken into consideration in the setting of variable compensation, the proposal stipulates.
More Say on Directors
The draft rules would allow shareholders to directly elect individual board members annually, as well as board chairman and members of the remuneration committee, as called for under the Minder referendum. The draft proposal also includes a provision that the annual meeting assembly can elect a vice chairman in order to prevent the possibility that a special meeting would have to be held if the chairman were to leave or otherwise be incapacitated.
With respect to overboarding, the draft regulations leave to the company’s articles of association a cap on the number of other board positions, while it remains unclear if the company set caps would apply only to Swiss companies and/or to privately held firms. Multiple directorships with a holding company group would be counted as one. The length of employment contracts, meanwhile, would also be regulated by company articles.
Investor Impact
Swiss-based pension funds will not be required to vote in all cases, under provisions of the draft rules. A number of funds had worried following the referendum that they would be penalized for doing so, even when the economic benefit of casting a vote was questionable.
Provisions allow for funds to abstain or not take part in votes at all if it is “in the interest of the pension fund members,” Investment & Pensions Europe reported. Provisions within the draft ordinance state that a pension fund’s board must draw up rules spelling out exactly how it will make decisions regarding members’ interests. In a televised press conference, a Justice Ministry spokesman said the government had set the fines for the violation of these regulations “milder” than other penalties within the legal framework “on purpose,” IPE reported. Funds must also report their shareholder voting activity to members at least once a year and will be given one year to comply with the rules that take effect Jan. 1.
Next Steps
Regulators intend to consult on the draft through July 28 with the aim of releasing final rules in late November. The rules would then take effect Jan. 1, though company articles of association must be amended within two years of that date.
The release of final rules is expected to occur within days of another referendum on pay, this one capping the ratio of highest paid employee to that of average rank-and-file at 12:1. In advance of the vote, the two heads of the main Swiss business lobby, Economiesuisse, announced on Wednesday they were both stepping down after the organization came under heavy fire over its failed campaign to oppose strict controls on executive pay, Reuters reported.
Economiesuisse, which represents 100,000 companies from all sectors employing 2 million people, lobbied hard against the Minder initiative, argued companies would leave Switzerland for more corporate-friendly locations and that businesses would suffer without flexibility to attract top talent. The group is likely girding itself for another fight over the pay ratio referendum, which most observers wrote off until voters made known their views in March.
– Broc Romanek, CompensationStandards.com
This Sullivan & Cromwell memo discusses the Simon case that I blogged about last week (that blog included the hearing transcript & related pleadings – and here’s a blog from Ning Chiu). Here’s a summary of the S&C memo:
Louisiana Municipal Police Employees Retirement System v. Bergstein concerns a $120 million equity grant to the Chief Executive Officer of Simon Property Group, Inc. (“SPG”) and a related amendment to SPG’s stock incentive plan that was required to make the grant. The shareholder plaintiff alleges that the board of directors’ amendment of the plan was a breach of fiduciary duty because the plan mandated shareholder approval of amendments where required by law, regulation or applicable stock exchange rules. The defendants moved to dismiss, noting that SPG had received email confirmation from New York Stock Exchange staff that shareholder approval of the amendment was not required under NYSE rules. Ruling from the bench, Chancellor Leo E. Strine, Jr. denied SPG’s motion to dismiss, citing concerns that a staff email did not serve as a definitive interpretation of NYSE rules – particularly where, in Chancellor Stine’s view, the email to the NYSE did not adequately describe the broader circumstances.
The process SPG used is the customary one by which listed companies receive interpretations from the NYSE staff on governance matters, and Chancellor Strine’s ruling is at an early stage of the case. However, until there is more definitive guidance as to the weight that courts will give NYSE staff interpretations, listed companies should bear in mind the Chancery Court’s ruling when evaluating the weight that a court will give an NYSE email interpretation on a governance matter, particularly when evaluating whether a proposed change to an equity compensation plan would require shareholder approval.
– Broc Romanek, CompensationStandards.com
There have been several more failures during the past week, including:
– Abercrombie & Fitch – Form 8-K (19% – also failed 2012 with 25%)
– Discovery Laboratories – Form 8-K (42%)
– Morgans Hotel Group – Form 8-K (25%)
It is noteworthy that at this time last year, there were 54 failed say-on-pay votes…
– Broc Romanek, CompensationStandards.com
Yesterday, Cooley’s Cydney Posner posted this news brief:
You might remember the as-yet-to be-implemented-by-the-SEC provision of Dodd-Frank (Section 953) that required disclosure regarding internal pay equity? In that provision, Dodd-Frank required the SEC to amend Item 402 of Reg S-K to require each company to disclose, in a wide range of its SEC filings, including registration statements, annual reports and proxy statements:
– the median of the annual total compensation of all employees of the company, except the CEO;
– the annual total compensation of the CEO; and
– the ratio of the two amounts above.
Under Section 953, total compensation must be determined in accordance with Item 402(c)(2)(x) of Reg S-K (that is, the provision governing the disclosure of “total compensation” in the Summary Compensation Table). There are numerous components of compensation in the SCT, including salary, bonus, stock awards, option awards, non-equity incentive plan compensation, change in pension value and nonqualified deferred compensation earnings and all other compensation. Needless to say, the calculation of these components just for the five NEOs currently required to be reported in the SCT can be very complex. As a result, there was substantial concern regarding the burden on companies of collecting and analyzing this data for all employees, especially for those companies with hundreds of thousands of employees located all over the world.
Today, the Wall Street Journal is reporting that the House Committee on Financial Services has advanced a bill, H.R. 1135, that seeks to repeal the pay-ratio disclosure requirement. The vote was 36-21, and the bill will now head toward a floor vote in the House.
According to the WSJ, “Rep. Bill Huizenga (R., Mich.), who sponsored the bill, said the provision would be ‘a logistical nightmare for all public companies,’ because they would have to calculate pay for all employees in the manner they currently do for their top five executives and disclose it in every SEC filing. Companies have complained it would be costly to accurately report the compensation of their median employee, amid concerns about how to calculate part-time employees, overtime, benefits, 401(k) matches and differences in the way employees are compensated overseas.”
The WSJ reports that, because the provision had no specific time limit for implementation, the SEC has delayed rulemaking, in part reflecting concerns on the part of some Commissioners: “SEC Commissioner Troy Paredes, for example, said last year that he was concerned the bill would not be ‘workable in practice’ because employee pay data is not often standardized….Chairman of the House Financial Services Committee Rep. Jeb Hensarling (R., Texas) said he didn’t believe investors needed this type of ratio to be disclosed and that the cost of regularly calculating compensation for every employee outweighs the benefits…. ‘I assume there is an infinite number of ratios some investors would find helpful to their decisions….’ Companies might as well be required to calculate the ratio of workers with or without college degrees, the ratio of old versus young workers, or the ratio of office supplies purchased from big box retailers to local suppliers, he joked.”
House Financial Services Committee Ranking Member Maxine Waters (D., Calif.), is reported to have sought, unsuccessfully, “to amend the proposal to require only annual disclosure, limit it to domestic employees and give the SEC more discretion in how it sets the rule.” According to the WSJ, she was concerned a repeal would simply allow “companies to hide embarrassing information.”
Although the bill seems likely to pass in the House, it could face a much tougher battle in the Senate.
– Broc Romanek, CompensationStandards.com
As noted in this WSJ article, a shareholder lawsuit challenging a $120 million stock award to Simon Property Group’s CEO David Simon was given a green light recently to proceed to trial in the Delaware Chancery Court. Due primarily to the stock grant, the CEO was the 2nd highest paid US executive in 2011. Grant & Eisenhofer filed the suit against Simon and its board on behalf of the Louisiana Municipal Employees’ Retirement System (LAMPERS). The company failed its say-on-pay vote last year, but passed this year.
As reflected in this hearing transcript, Chancellor Leo Strine allowed Simon shareholders to bring evidence that the company’s board rubber-stamped the pay package in 2011 without first putting the matter to a shareholder vote – as allegedly required by NYSE rules when compensation plans undergo a material change. Through this motion to dismiss, Simon sought to have the suit thrown out but Chancellor Strine ruled otherwise, questioning the process that the company undertook. The pleadings for this case – including the complaint – are posted in our “Compensation Litigation Portal.”
– Broc Romanek, CompensationStandards.com
In this letter, the National Association of Pension Funds – the UK equivalent of CII – called for executive pay salary increases “to be capped at inflation and in line with the rest of the work force.” Variable pay performance conditions “should be genuinely stretching and support the long-term growth of the business,” said NAPF, which also noted concern that some “stretch” goals lead to overly-short-term behavior. NAPF criticized over-emphasis on peer benchmarking: “We are often told that each company is unique; as such we would like to see boards reflect more upon the drivers needed to enact their own individual strategies and less comparing themselves against their ‘peers’.”
In February, NAPF and Hermes Equity Ownership Services published a paper that included principles for alignment of executive pay with long-term performance.
– Broc Romanek, CompensationStandards.com
In this blog, Kevin LaCroix gives a nice recap of the status of say-on-pay litigation, as covered by this Haynes and Boone memo…
Note that the NASPP Conference will include a panel – “Stock Plan Proposal & Say-on-Pay Litigation 2.0: How to Avoid the Sharks” – that features both the plaintiff’s lawyer who has brought the most lawsuits over proxy disclosures and stock plan proposals (Juan Monteverde of Faruqi & Faruqi) and the leading experts involved in defending these suits.
– Broc Romanek, CompensationStandards.com
Georgeson recently emailed out this information:
Glass Lewis
Glass Lewis partners with compensation data provider, Equilar, which generates Equilar Market Peers that are subsequently used to prepare Glass Lewis’ pay-for-performance quantitative analysis. Starting May 27, 2013, companies in the Russell 3000 Index can submit their peer groups on Equilar’s website. The deadline for updating your peer group for meetings scheduled for July through December 2013 is June 28.
Going forward, Equilar expects to update the peer groups it prepares for Glass Lewis, with company input, semi-annually in July and January.
Institutional Shareholder Services (ISS)
We understand that ISS will reach out in July to companies in the Russell 3000 (as of June 30) with meetings in the fall of 2013 or the early winter of 2014 and ask if they have changed their peer group since their last proxy disclosure. ISS will update those companies’ peer groups in the July-August timeframe. The timing of any future ISS peer group updates has not yet been determined, but will be considered as part of ISS’s annual policy update process. Companies should remain alert to communications from ISS regarding any peer group update opportunities.