– Broc Romanek, CompensationStandards.com
Yesterday, ISS released their 2014 voting policy updates. The updated policies are effective for meetings as of February 1st. In a few weeks, ISS will be holding a series of webcasts about their policy updates. We will have our annual webcast with Pat McGurn on TheCorporateCounsel.net soon – “Pat McGurn’s Forecast for 2014 Proxy Season.”
ISS also launched a consultation on longer term changes on some core issues including auditor rotation, equity plans, and independent chairs. Here is a blog by Davis Polk’s Ning Chiu. Once I start getting them, I’ll be posting memos in our “ISS Policies” Practice Area.
Meanwhile, ISS has enhanced its voting platform for its investor clients – the new “ProxyExchange 2.0.” And the SEC has officially calendared its proxy advisors roundtable for December 5th – it’s only 4 hours long (but no agenda nor speakers announced yet).
– Broc Romanek, CompensationStandards.com
As Mike Melbinger blogged yesterday, it’s that time of the year. Here’s a note from Georgeson:
The major proxy advisory firm vote recommendations on “say-on-pay” and other executive compensation proposals are highly influenced by those advisory firms’ selection of the peer groups used to analyze a company’s pay-for-performance relative to its peers. Often the advisory firm-selected peer groups overlap with the peer group that appears in the company’s proxy statement, but there can be substantial differences that may lead to unexpected vote recommendations.
ISS and Glass Lewis consider input from companies as to what companies should appropriately be considered peers for compensation. While many issues influence the advisory firms’ recommendations on say-on-pay votes, the focal point of the analysis is pay-for-performance and peer-group selection plays an integral part in the vote analysis and recommendations. Therefore, Georgeson recommends companies take the opportunity to update these advisory firms on any changes in their selected peer groups.
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. Companies in the Russell 3000 Index can submit their peer groups on Equilar’s website, and here is background on their process. To be included in Equilar’s January calculations, the deadline for updating your peer group is December 31, 2013. The next updates will not be calculated until July 2014.
ISS
The timeframe for Russell 3000 companies with meetings in spring and early summer of 2014 updates began today, November 20, and will end at 5:00 p.m. ET on December 9, 2013. Here is where you can provide peer group feedback.
If a company does not inform ISS of any such changes, ISS will typically use the peer group information as disclosed in the prior year’s proxy statement (i.e., for meetings in 2014, ISS will typically use peers disclosed in 2013). If a company has not made any changes to its peer group since its last proxy statement, no action is necessary.
As you consider submitting information on your peer group changes, please note the following:
– ISS Research will use the information as an input to its peer group formulation for purposes of its pay for performance analysis in the proxy research report, and will not share it with any third party within or outside of ISS prior to the publication of its report.
– The list of peer group companies submitted to ISS should match the list as disclosed in the 2014 proxy statement. Otherwise, ISS may apply additional scrutiny to the variance in the peer groups, as part of its pay for performance analysis.
– The peer group indicated should be the peer group used for benchmarking CEO pay for FY2013. If a company does not use peer group in setting pay for its CEO, it may still be useful for the company to provide ISS with a list of representative peers, provided the list will be disclosed in the 2014 proxy statement. If a company uses a market index or broad survey, then it can indicate to ISS the index or survey used, but ISS will not directly use such information in its peer selection.
Here is the complete list of FAQs by ISS on this topic.
– Broc Romanek, CompensationStandards.com
Last year, I blogged about Professor Charles Elson’s study on peer group benchmarking. In the wake of the SEC’s pay ratio proposal, the importance of that study grows. This recent blog by Karen Kane takes notes about a recent meeting with Prof. Elson and his co-author Craig Ferrere & others with a group of independent directors. Here is one outgrowth of that meeting:
One suggestion is to look at the executives other than the CEO, whose pay is benchmarked as well and see how that has affected levels and ratios. Elson and Ferrere said they would like make it a follow-up to their current study.
And here’s a video of a debate over the study – and here’s a blog from The Conference Board with key take-aways. And here are some other reactions to the study:
– Tower Watson’s “Peer Group Benchmarking and Excessive CEO Pay – Is the Answer That Simple?”
– Time’s “Executive Pay: Is “I’ll Have What He’s Having” Really the Best Approach?”
Here’s an unrelated interesting article from Forbes entitled “Will You Be More Productive If You Know How Your Pay Compares With Your Colleagues’?“
– Broc Romanek, CompensationStandards.com
Last week, DFC Global became the 66th company to fail its say-on-pay in ’13 with just 26% support – see the Form !0-Q. DFC Global has failed two years in a row (last year with 25% support). And these four companies became first-time failures: Gigoptix with 39% support (Form 8-K); Corinthian Colleges with 48% support (Form 8-K); CytoDyn with 43% support (Form 8-K); and SWS Group with 48% support (Form 8-K). Thanks to Karla Bos for these as always!
Here are poll results in which readers predicted the number of say-on-pay votes that fail to garner majority support this year (here are results of 2012’s predictions):
– 10 or fewer failures – 7%
– 11-20 – 5%
– 21-30 – 15%
– 31-40 – 10%
– 41-50 – 22%
– 51-75 – 27%
– More than 75 – 15%
Check out this blog by Davis Polk’s Ning Chiu about how say-on-pay fared – Ning notes that of the 995 equity incentive plans voted on, ISS supported 73%, but ultimately only 8 plans did not pass.
– Broc Romanek, CompensationStandards.com
Recently, Soladi’s Cristina Ungureanu brought my attention to the fact that India had beaten the US to the punch in adopting a pay ratio disclosure law, as noted in this article. This is in India’s just released new Companies’ Act which includes many other governance-related rules. Here is the new law:
“(12) Every listed company shall disclose in the Board’s report, the ratio of the remuneration of each director to the median employee’s remuneration and such other details as may be prescribed.” (p. 121)
The Act has been approved by the Parliament, published in the official gazette and India’s Government has initiated the process to implement it in consultation with concerned regulatory Authorities and other stakeholders. In this regard, I understand draft rules needed to be placed for public comments within the implementation phase with the Indian Ministry of Corporate Affairs (MCA). I believe the matter was actually supported by the Indian regulators (SEBI in particular) and the public, given that CEO – employee pay levels have been considered uneven (think of India’s population which is average or below).
The comments to the new Law have not been published yet, so if – and when – they are, we can see the reaction from institutions. Bear in mind that corporate governance in India is only now emerging, taking more of a rules approach rather than a principles-based one.
– Broc Romanek, CompensationStandards.com
Here’s an interesting blog from Blank Rome’s Yelena Barychev about whether pay ratio information should be deemed “furnished” and not “filed” for purposes of the Securities Act of 1933 and Securities Exchange Act of 1934…
Come participate in today’s spreecast: “Crafting SEC Rulemaking Comment Letters.” During it, Hunton & Williams’ Scott Kimpel and Bass Berry’s Jay Knight will describe how to best craft a persuasive comment letter on a SEC rulemaking. This will certainly be handy for those of you writing in on the SEC’s pay ratio proposal. To access the spreecast, go here at 1 pm eastern. [Note last month’s “Latest Corp Fin Comment Letter Trends” spreecast has had over 500 views.]
Here are FAQs about how spreecasts work – but the upshot is you have to register for Spreecast first (although it’s possible to watch without registering if you close a prompt). Simply sign up by using an email address by clicking the “Or sign up via email” link in the upper right hand side of the site (it’s in small print under the “Connect with Facebook” logo).
– Subodh Mishra, ISS Governance Exchange
Concurrent to the ushering in of new regulations governing executive remuneration across the U.K., Britain’s Financial Reporting Council (FRC) released for consultation Oct. 1 proposed changes to the U.K. Corporate Governance Code dealing with remuneration. Specifically, the FRC is now consulting on three proposals, including on clawback arrangements, whether non-executive directors who are also executive directors in other companies should sit on the remuneration committee, and what actions companies might take if they fail to obtain “at least a substantial majority” in support of a pay resolution.
This announcement was timed to coincide with the introduction of sweeping new pay rules for U.K. companies contained in Enterprise and Regulatory Reform Act 2013 and the Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013. Under the new rules, companies would provide for separate “policy” and “implementation” sections within the directors’ remuneration report with the former subject to a binding vote at least once every three years, and the latter to an advisory vote annually, as has been the case since 2003.
The new rules also require companies to report all elements of directors’ pay in a single, cumulative figure and to provide enhanced disclosure on performance conditions determining variable pay awards. Other elements of the new regulations govern disclosure around exit payments, and other requirements unrelated to remuneration.
In June 2012, the FRC agreed to a request from the government to consult on whether to amend the market’s governance regime to address the three aforementioned issues. The FRC decided that the consultation should be conducted after the government’s legislation on voting and reporting on executive remuneration took effect this week.
With regard to clawbacks, the FRC seeks comment on whether the current code requirement is sufficient, or whether to include a comply-or-explain presumption that companies have provisions to recover and/or withhold variable pay. At present, the code currently states that “consideration should be given to the use of provisions that permit the company to reclaim variable components [of remuneration] in exceptional circumstances of misstatement or misconduct.”
New rules that took effect Oct. 1, meanwhile, require companies to disclose in the directors’ remuneration policy if there are provisions for clawback, and to disclose in their annual reports the details of any sums recovered or withheld and the reason why. Given this, the FRC also seeks comment on whether the code should adopt the terminology used in the regulations and refer to “recovery of sums paid” and “withholding of sums to be paid,” and whether it should specify the circumstances under which payments could be recovered and/or withheld.
“It seems to me that the incorporation of clawback into the code is the most important of the three suggestions,” said David Paterson, head of corporate governance at the National Association of Pension Funds, in comments to Governance Weekly. “It is already common among large companies and with the growing use of deferred bonuses is implied in many more arrangements. Logically it is hard to see how a company can object to adopting a policy giving it the right to withhold a bonus which, with the benefit of hindsight, was not really ‘earned.'” Paterson’s comments reflect personal observations, with the NAPF still to consult with members on a formal response to the consultation.
Backing Paterson’s assertion regarding the adoption of clawback provisions, institutions in the U.K. have pressed companies on the issue, while a growing number of companies have moved in recent years to adopt such policies. An analysis of ISS Governance QuickScore data for the U.K. markets finds 76 percent of 88 large capital firms studied disclosing the existence of clawback policies as of Oct. 1, a jump of 34 percentage points over figures evidenced in 2011.
Responding to a claim by Secretary of State for Business, Innovation and Skills Vince Cable in 2012 that “there is a perceived conflict” that non-executive directors on remuneration committees who serve as executives elsewhere “have a personal interest in maintaining the status quo in pay setting culture and pay levels,” the FRC seeks comment on whether to “deter” such appoints under an updated code.
In its consultation, the FRC notes the presence of such directors has declined markedly in the 10 years to 2012 across the FTSE250, dropping from 42 percent of companies with such a director in 2003, to 15 percent in 2012. Still, the consultation notes, dissent on remuneration voting was higher, on average, at the companies in all 10 years, save for 2006 and 2009, suggesting shareholder concerns over pay are more prevalent at firms where remuneration committees include directors serving as executives at other firms.
Under the current code, executive directors of other companies would normally be classified as independent unless they “hold cross-directorships or have significant links with other directors through involvement in other companies or bodies.” Any changes will likely face opposition from directors’ groups and others, with critics likely to question the barring of otherwise well suited board members over perceived conflicts.
Similarly, the final issue for consultation will likely engender controversy with corporate advocates and others arguing boards are best suited to determine the level of remuneration report voting dissent warrants engagement with shareholders. The FRC is seeking comment on criteria for determining what constitutes a “significant percentage” as well as the time period within which companies should report on post-meeting discussions with shareholders and subsequent disclosure to the market.
Under rule rolled out, companies must include in the annual remuneration report details of the vote on any remuneration resolutions at the previous general meeting and, where there was a “significant percentage” of votes against a resolution, give “a summary of the reasons for those votes, as far as known to the directors, and any actions taken by the directors in response to those concerns.” However, because this only requires companies to report yearly, some suggest that an additional, earlier disclosure, explaining how the company intended to respond to the concerns raised might be helpful.
The new rules fail to provide a figure defining a “significant percentage,” but recent guidance from the GC100 and Investor Working Group suggests “companies may wish to consider votes against in excess of 20 percent as being significant, although there may be reasons why, for some companies, a higher or lower level might be more appropriate.” According to the results of ISS’ 2011-12 benchmark policy survey, on a cumulative basis, 86 percent of investor respondents (and 52 percent of issuers) believed an explicit response is warranted if the say-on-pay vote received more than 40 percent opposition, and 72 percent of investors (versus 40 percent of issuers) believe that opposition in excess of 30 percent requires an explicit response. Those figures apply to the U.S. market and came in the wake of the inaugural year of mandatory pay votes in 2011. Such voting in Britain dates back to 2003, as noted earlier. “The 20 percent test for ‘significant dissent’ is highly subjective,” cautioned Paterson. “It is for companies to judge whether a particular level of opposition to their remuneration policy warrants a review.”
If changes to the code are ultimately proposed, they will be subject to consultation in the first quarter of 2014. The new code would then apply to accounting periods beginning on or after Oct. 1, 2014.