A Sept. 16 report by the National Association of Pension Funds identifies U.K. companies that bucked a 2013 trend for “quiet diplomacy” by failing to respond effectively to shareholder concerns about remuneration. The NAPF analysis shows that while most companies who faced significant rebellions by their shareholders in the “shareholder spring” of 2012 “have listened and learned,” there are a few who have not. Afren, Immarsat, and Babcock are among 10 FTSE companies highlighted which, having received a warning from shareholders last year, received more than 15 percent dissent (votes against and abstentions) on their remuneration report in 2013, the NAPF said in a statement. The report details where the three companies fell short of investor expectations, as well as those which saw significant increases in support this year, such as Aviva, Tullow Oil, and Quintain Estates.
Most companies acted to avoid the reputational damage inflicted by 2012’s high profile shareholder rebellions by engaging more and earlier with shareholders, says the NAPF, and also appear to be cautious about introducing change ahead of the remuneration disclosure regulations and the binding vote on remuneration policy which take effect this month. “We hope that highlighting the few companies where shareholders have felt compelled to give the company another reprimand will cause them to reflect, listen to shareholder concerns and introduce changes next year,” said NAPF head Joanne Segars in a statement. “We will continue to keep an eye on them and encourage all companies to assess whether their current remuneration practices align rewards to long-term success and returns to shareholders.”
This year’s inaugural report also explores shareholder voting on auditors, which has been in focus following corporate governance code changes last year recommending regular tendering and rotation of auditors, and sweeping reforms to the U.K.’s statutory auditor market expected soon from the Competition Commission.
The NAPF lists four “significant rebellions” against audit-related resolutions this year where shareholders signaled their dissatisfaction over high levels of non-audit fees, including at Pennon Group, Inmarsat, Unite Group, and Laird. Meanwhile, other companies headed off audit-related disputes by either tendering their longstanding auditor contracts or “indicating an intention to do so in the near future,” the report states. These included: HSBC, which moved the U.K.’s largest audit contract after a more than 20 year relationship with KPMG, according to the NAPF; Unilever, which ended a 26 year relationship with PwC; Land Securities, where PwC was replaced by Ernst & Young after 69 year tenure; and BG Group, where PwC replaced Ernst & Young, which had been in place since the company’s incorporation in 2000.
Given the “sensational” performance of the stock market in 2013, one-third of public company board members are concerned that a focus on equity pay is leading to a growing gap in compensation between the CEO and other members of the management team, according to findings from a BDO USA survey.
Of those expressing concern, the survey–conducted in September with 74 corporate directors of public company boards with revenues ranging from $250 million to $750 million–finds a majority (56 percent) believe the best approach to address the gap is to expand equity-based compensation to more members of the management team, while one-third (33 percent) suggest moving a larger portion of CEO compensation back to traditional, long-term cash or annual cash incentive programs, according to a statement. Just 11 percent suggest re-introducing executive perquisites back into the compensation mix for key employees.
“The concern with the gap in compensation between the CEO and other members of management is a subject we are increasingly being asked to address by clients,” said Randy Ramirez, senior director on compensation in the groups’ corporate governance practice. “Given the ongoing increase in equity markets and the SEC’s current proposal to require companies to disclose the ratio of CEO pay to median employee pay, this issue is only going to get bigger. Boards must decide whether they want to close the gap by expanding equity pay to other members of management, moving more CEO compensation back to traditional compensation or a combination of both of these strategies.”
When asked what performance measurement they consider the best substitute for at least a portion of equity-linked pay, board members cite profit growth (39 percent) and free cash flow (24 percent) as the most likely substitutes. Operational efficiency (18 percent), revenue growth (14 percent), and market share (6 percent) are the other alternative measurements cited by the directors.
Meanwhile, the survey finds 84 percent of directors expect to the spend the same amount of time on executive pay-related issues as last year, with just 8 percent saying the time allocation would be less, and another 8 percent saying more. By comparison, close to half of the board members cite succession planning (47 percent) and studying industry competitors (45 percent) as areas they would like to spend more time on, underscoring the dominance of pay in board discussions.
One of my in-house friends recently noted that a “sleeper” in the SEC’s recently-proposed rules on pay ratios involves the compliance date. Under the proposal, companies that don’t have December 31st fiscal year-ends might not have the luxury of an extra year before complying as December 31 year-end companies would.
As proposed, companies would have to begin complying for their first fiscal year commencing on – or after- the effective date of the rule. The proposing release explains that if the final requirements were to become effective sometime in calendar year 2014 – which is likely to be the case – a company with a fiscal year ending on December 31 would be first required to include pay ratio information relating to compensation for fiscal year 2015 in its proxy statement filed in 2016. This gives those companies a long transition period.
However, if the requirements were to become effective prior to July 1, 2014 – then companies with fiscal years beginning on – or after – July 1, 2014 would be required to include pay ratio disclosures for fiscal year 2014 in their proxy statements filed in 2015 for their 2015 annual meetings. They would not have the extra year’s worth of lag time.
The SEC can easily fix this problem by including a reference in the compliance provision to January 1st when it adopts final rules – which would in effect make the final rule effective for all companies for their 2016 annual meetings regardless of their fiscal year end…
On Wednesday, ISS posted its draft 2014 Policy Updates, with a comment deadline of November 4th. That’s just two weeks – so no time to procrastinate. There are two proposed changes – changes to the pay-for-performance quantitative screen and board responsiveness to majority-supported shareholder proposals, as noted in Ning Chiu’s blog and Gibson Dunn’s blog. And here’s an excerpt from this Sullivan & Cromwell memo:
Board Responsiveness to Shareholder Proposals
– In determining whether to recommend withhold votes against directors, ISS would take a case-by-case approach in assessing whether a company has adequately implemented a shareholder proposal that received majority support in a prior year. ISS would take into consideration (among other things) the company’s disclosure on shareholder outreach efforts and the rationale for its level of implementation, as well as the level of support the proposal received.
– This potential broadening of what it means for a board to be “responsive” should be viewed together with last year’s change to lower the threshold for when the board needs to be responsive – beginning in 2014, the ISS responsiveness analysis will be triggered for directors if a proposal received the support of a majority of votes cast (not majority of shares outstanding) in the prior year.
Elimination of One-Year TSR from Pay-for-Performance Analysis
– The second proposed change relates to the pay-for-performance assessment used by ISS to formulate a say-on-pay recommendation. The ISS assessment begins with a quantitative analysis with three components, one of which measures the difference between (a) the percentile rank within the ISS-selected peer group of a company’s total shareholder return (or TSR) and (b) the percentile rank within that peer group of a company’s CEO pay.
– Under current policies, this metric is calculated on both one-year and three-year bases, weighed 40% and 60%, respectively. The proposed change would eliminate the one-year measurement, and base this aspect of the component solely on three-year TSR, on the theory that this removes volatility and improves comparability of sustained long-term performance.
Tune in today, Thursday, October 24th for the webcast – “Drilling Down: Statistical Sampling for Pay Ratios” – so you can hear Pearl Meyer’s Jan Koors, Towers Watson’s Rich Luss and Frederic Cook’s Mike Marino get into the nitty gritty about how to conduct statistical sampling under the SEC’s pay ratio proposal.
This program will not be an overview of the SEC’s new proposal on pay ratio disclosures; we have posted plenty of memos to get you up-to-speed. Among other topics, this program will cover:
1. When sampling makes sense (large dispersed workforce, multiple pay databases, etc.)
2. What might be unintended consequences of identifying a “median employee” using pay definition different than ultimate SCT-based calculation of that person’s compensation for use in ratio
3. Selecting a sampling technique, which is best
– Random sampling? Stratified sampling? Other?
– Ability to provide explanation of process chosen and implications of decisions (eg. stratified sampling may produce more reliable or valid answers but may also involve quite a few decisions of where/who to oversample)
4. Determining sample size, how much precision is required
– The square root of n+1? Other?
– Data availability or comparability issues for global firms?
5. Reliability & validity, how are they relevant
– Constant results
– Accurate results
I have posted the transcript for the recent webcast: “Doing Your Pay Ratio Homework Now: A Roadmap.”
Tune in tomorrow, Thursday, October 24th for the webcast – “Drilling Down: Statistical Sampling for Pay Ratios” – so you can hear Pearl Meyer’s Jan Koors, Towers Watson’s Rich Luss and Frederic Cook’s Mike Marino get into the nitty gritty about how to conduct statistical sampling under the SEC’s pay ratio proposal.
This program will not be an overview of the SEC’s new proposal on pay ratio disclosures; we have posted plenty of memos to get you up-to-speed. Among other topics, this program will cover:
1. When sampling makes sense (large dispersed workforce, multiple pay databases, etc.)
2. What might be unintended consequences of identifying a “median employee” using pay definition different than ultimate SCT-based calculation of that person’s compensation for use in ratio
3. Selecting a sampling technique, which is best
– Random sampling? Stratified sampling? Other?
– Ability to provide explanation of process chosen and implications of decisions (eg. stratified sampling may produce more reliable or valid answers but may also involve quite a few decisions of where/who to oversample)
4. Determining sample size, how much precision is required
– The square root of n+1? Other?
– Data availability or comparability issues for global firms?
5. Reliability & validity, how are they relevant
– Constant results
– Accurate results
Last week, Andrea Electronics became the 62nd company to fail its say-on-pay in ’13 – see the Form 8-K – with 41% support. Hemispherx Biopharma became the 63rd with just 43% support (Form 8-K), a microcap that voluntarily put up its SOP for a vote the past 3 years (failing in both 2010 and 2011 but passing last year).
And the 64th failure is LookSmart, which received ZERO votes in support of its say-on-pay. You say “bull”? Take a look at the company’s Form 8-K. The company is a former search engine from the dot.com era that is now an online ad enterprise. As gleaned from the company’s proxy statement, the NEOs don’t own any stock in the company. Here’s the analysis
Apparently, there was a complete board turnover in early 2013 (following a tender offer takeover), with the proxy explicitly stating that the former directors and executives were “terminated for cause or removed for cause or otherwise ceased to hold any office or position with the Company” (wow) – and the new board actually recommended AGAINST the company’s say on pay proposal. The proxy actually states “The current directors of the Company and the current compensation committee members believe that the executive compensation and the related practices of the former directors and former executive officers were ineffective and inappropriate and that the former directors and former executive officers consistently awarded themselves excessive compensation without regard to performance or what was in the best interests of the stockholders.” (double wow)
With 64 failures, this year now surpasses last year’s 61 failures. And we had three failures later in the year than at this time in 2012, so stay tuned. Thanks to Karla Bos of ING for the heads up on these!
Two Sundays ago, the NY Times ran this column about the overreliance on stock prices when setting executive pay levels. Here’s a quote from Nell Minow: “A statistic I’ve seen that makes sense to me is that 70% of executives’ stock option gains are attributable to the market’s movement as a whole.”
Mark Van Clieaf, an organizational & pay-for-performance consultant and partner in the newly formed “Organizational Capital Partners,” contributed the analytics for the article. Among the disturbing findings by Mark and the OCP team is that 18 Fortune 300 sample companies lost $134 billion – but yet they paid the top 90 officers a whopping $3.1 billion in executive pay. And the proxy advisors – ISS and Glass Lewis – only recommended against three of the 18 companies! Here’s Mark’s support for the stats shared in the NY Times piece – and here’s a related article…
As I blogged a few days ago on TheCorporateCounsel.net, SEC Chair White gave a huge speech this week about her desire to overhaul the disclosure regime to reduce information overhaul and provide more meaningful disclosures to investors. Here is an excerpt that deals with executive pay disclosures:
We see a similar phenomenon in the area of executive compensation disclosure – where the disclosures in some cases can amount to more than 40 detailed pages. The rules for such disclosure have been revised, perhaps, more times than any other set of disclosure rules as we have tried to keep pace with changing trends in compensation.
Part of this increase is not from new disclosure mandates, but from companies trying to do a better job of explaining the rationale for the compensation packages they pay executives because they now must provide investors with an advisory vote on executive compensation – a “say-on-pay” vote. The Dodd-Frank Act mandated such a vote, which most companies are providing annually. And, as a result, companies have decided to more fully explain to their shareholders the rationale and considerations for these compensation decisions. And we think these additional disclosures are a good thing, but we should be careful not to have too much of a good thing.
Does this mean that Item 402 of Regulation S-K will be revisited? The answer is “we don’t really know, but that a broad disclosure reform project – particularly one that would change the way information is delivered (eg. framework with “core” company document that is supplemented) would likely change all of S-K.”
The scope of this project looks to be humongous. But history shows that those types of projects tend to not get far off the ground (egs. Aircraft Carrier; proxy plumbing) – so maybe the SEC will learn from past experience and try to conduct disclosure reform in a piecemeal fashion. Of course, there are drawbacks to that approach too as the agency would want all the pieces to fit together, which is more easily accomplished in one stroke. Plus I imagine there would be a goal to finish the project within the span of SEC Chair White’s (and the Staffers doing the real work) tenure at the SEC.
It will be interesting to see where this goes, with the first step being the SEC’s Regulation S-K study required by the JOBS Act, which should be coming out pretty soon…