As noted in this blog by Manifest, “the Shareholder Spring has clearly had an effect on remuneration committee thinking. This has been galvanized by regulatory intervention to reinforce investors actions. However, the single figure “accounting for pay” approach has created more uncertainty for shareholders.” This is among the information provided in the blog:
– Shareholder Spring effect has reduced CEO pay awards by 7%, following a 5% reduction in the previous year.
– Regulatory intervention has had a galvanizing effect. Vince Cable’s efforts and threats of further legislation have helped in the reduction in CEO pay.
– The accounting-based ‘Single Figure’ of total remuneration is not a true and fair view of pay. It dramatically understates the real amounts of remuneration that will be earned and should be revised.
The latest survey hows that top pay awards have reduced for two consecutive years: by -7% in 2013 and -5% in 2012. The findings are from research and analysis of the latest annual reports of FTSE100 companies.
As noted in this Gibson Dunn blog and this Towers Watson blog, ISS has opened its annual survey ahead of updating its policies. The survey closes on August 29th – and then the results are released a few weeks later. Then there’s an open 30-day comment period in October – with the final policy updates arriving sometime in November typically. The entire policy process is described on ISS’ website..
Since 1969, there has no question that directors of a Delaware corporation have the authority to set their own compensation. 8 DGCL § 141(h). Having authority to do something, however, doesn’t mean that the use of that authority won’t be challenged, as was illustrated by newly appointed Chancellor Andre G. Bouchard’s ruling last month in Cambridge Ret. Sys. v. Bosnjak, 2014 Del. Ch. LEXIS 107 (Del. Ch. June 26, 2014). Some plaintiffs’ firms may view these challenges as tempting because the Delaware Supreme Court has held:
Like any other interested transaction, directoral self-compensation decisions lie outside the business judgment rule’s presumptive protection, so that, where properly challenged, the receipt of self-determined benefits is subject to an affirmative showing that the compensation arrangements are fair to the corporation.
Telxon Corp. v. Meyerson, 802 A.2d 257, 265 (Del. 2002) (citing Hall v. John S. Isaacs & Sons Farms, Inc., 37 Del. Ch. 530, 146 A.2d 602, 610-11 (Del. Ch. 1958), aff’d in part, 39 Del. Ch. 244, 163 A.2d 288 (Del. 1960); Meiselman v. Eberstadt, 39 Del. Ch. 563, 170 A.2d 720 (Del. Ch. 1961); Wilderman v. Wilderman, 315 A.2d 610 (Del. Ch. 1974)). In fact, Chancellor Bouchard cited this holding to find in Cambridge Ret. Sys. that it would be the “defendants’ burden to demonstrate the fairness of the cash compensation paid to the outside directors.”
This jurisprudence contrasts with Nevada’s statute which actually presumes fairness and places the burden on person challenging the fairness:
Unless otherwise provided in the articles of incorporation or the bylaws, the board of directors, without regard to personal interest, may establish the compensation of directors for services in any capacity. If the board of directors establishes the compensation of directors pursuant to this subsection, such compensation is presumed to be fair to the corporation unless proven unfair by a preponderance of the evidence.
While somewhat obscure, the phrase “without regard to personal interest” was added to the statute in 1997. The legislative history indicates that the change “allows even interested directors to vote on their compensation.” Minutes of the Senate Committee on Judiciary, April 22, 1997.
As the 2014 proxy season comes to a close, ISS Voting Analytics has taken an in-depth look into key statistics for shareholder voting. Some of the most interesting stats include (these stats came from a report you have to pay for):
– Say-on-pay proposals at a record high of 2,229, a 14.4% jump in the volume of advisory pay votes from 1,948 in 2013
– Average support level for the 2014 say-on-pay proposals at a record 91.7% of votes cast, up slightly from 91.5% in 2013
– Only 51 of the 2,229 proposals failed to win majority backing. The majority of the 51 that failed did so for the first time. However, 14 failed at least once in the past, with 11 of those failing in 2013. One company failed for a third year in a row, while 2 others failed four years in a row.
The global average for shareholder support on say-on-pay is on par with that of the US, standing at 91.7% for the 2014 proxy season. The highest levels of 2014 support for say-on-pay support by country, as tracked by ISS Voting Analytics, are:
Here’s an excerpt from the latest by Semler Brossy:
We have collected Say on Pay vote results for 84 additional Russell 3000 companies, bringing our total to 2,207. The average vote result for all companies in 2014 is 91%. Five additional companies failed since last week’s report; 53 companies (2.4%) have failed so far this year. Of companies with four years of Say on Pay votes, 1,511 (92.0%) have passed all four years, 109 (6.6%) have passed in three years and failed in one year, 17 companies (1.0%) have passed in two years and failed in two years, three companies (0.2%) have passed in one year and failed in three years, and two companies (0.1%) have failed all four years. Proxy advisory firm ISS is recommending ‘against’ Say on Pay proposals at 13% of companies in 2014.
Under Delaware’s corporate benefit doctrine, a stockholder who presents a meritorious claim to a board of directors may be entitled to attorneys’ fees if the stockholder’s efforts result in the conferring of a corporate benefit. On June 20, 2014, the Delaware Chancery Court considered in Raul v. Astoria Financial Corporation whether attorneys’ fees are warranted under this doctrine when a stockholder identifies potential deficiencies in executive compensation disclosures required by the SEC pursuant to the Dodd-Frank Act “say on pay“ provisions. The court held that the alleged omissions at issue failed to demonstrate any breach of the Board of Directors’ fiduciary duties under Delaware law and accordingly the Plaintiff did not present a meritorious demand to the Board. This decision makes clear that the courts will not shift fees to a stockholder (and the stockholder’s law firm) who “has simply done the company a good turn by bringing to the attention of the board an action that it ultimately decides to take.”
Sarah Good reports that her firm – Pillsbury – has finally came out with what they believe to be their final report on proxy disclosure litigation with updated metrics. Although it appears that things are drawing to a close, it is interesting to see the latest stats. Also see this piece from Mintz Levin…
Tune in tomorrow for the webcast – “Executive Pay Basics: The In-House Perspective” – during which Winston & Strawn’s Erik Lundgren, Motorola Solutions’ Kristin Kruska and KAR Auction Services’ Becca Polak provide analysis about how a struggling in-house practitioner might best keep up with executive pay practices & disclosures, including an overview of fundamental securities law issues, stock exchange requirements, proxy advisor policies.
Hat tip to the Society of Corporate Secretaries for this info: The Delaware Court of Chancery granted in part and denied in part a motion to dismiss a derivative suit claiming breach of fiduciary duty and corporate waste concerning compensation paid to the non-executive directors. In Cambridge Retirement System v. Slavko James Joseph Bosnjak, et al. and Unilife Corp., C.A., plaintiff Cambridge challenged two components of compensation awarded to Unilife directors: (1) equity awards the directors granted to themselves which were approved by stockholders; and (2) cash compensation the directors paid to themselves without obtaining stockholder approval. The entire compensation awarded directors (all directors and both cash and equity) was “$1,356,040 in fiscal year 2012, or approximately 25% of the Company’s revenues that year, and a total of $668,240 in fiscal year 2013, or approximately 24% of the Company’s revenues that year,” an amount the plaintiff alleged was excessive compared to total revenues and to other companies in Unilife’s sector.
The defendants moved to dismiss both claims for failure to make demand. The court excused demand given the directors were not disinterested. The defendants also moved to dismiss the claim relating to the equity component under Rule 12(b)(6). They did not move to dismiss the allegations regarding most of the cash compensation, but did move to dismiss the claims made against cash compensation awarded to one director because it included amounts paid to a consulting entity of which the director was a principal.
With respect to the fiduciary duty claim on the equity component of the compensation, the court granted the motion to dismiss:
[D]efendants argue that they are protected by the business judgment rule because each of those awards was approved by a disinterested majority of Unilife’s stockholders. I agree and dismiss this aspect of the fiduciary duty claim because plaintiff has failed to plead facts to legitimately call into question the validity of the stockholders’ approval or to rebut the presumption of the business judgment rule.
The court also granted the motion to dismiss the waste claim, noting:
These allegations raise questions concerning the fairness of the outside directors’ compensation, but they do not rise to the level necessary to establish a complete failure of consideration or that the director defendants authorized an exchange that was so onesided that no reasonable business person could conclude that Unilife received adequate consideration.
The Court did not dismiss the fiduciary duty claim related to the cash compensation.
Plans featuring fungible or flexible ratios continue to gain ground. Fungible plans often add flexibility to the way a company can deliver its equity awards; these plans employ a “fungible ratio” that, in many cases, makes shareholders indifferent between a company granting appreciation awards, such as options or SARs, and full-value awards.
A fungible ratio provides that appreciation awards will deplete the equity plan’s share reserve by one share for each appreciation award issued, and that full value awards will deplete the share reserve by some greater number. That number is generally tied to the relative value of appreciation and full value awards at time of grant; using this ratio, at the time of grant, shareholders should be indifferent whether the company grants appreciation awards or full value awards.
Fungible plan adoption rates vary by size of company, but they are rising among companies across all market indices. In 2013, 44.2 percent of S&P 500 companies proposing an equity plan adopted fungible share plans vs. 29.3 percent of small cap companies that make up the S&P 600 index. Even among the smallest companies, nearly one in five equity plan proposals contained fungible features.
Companies across all indices are becoming more sophisticated in the way that they employ equity compensation. Firms today have a much richer broad based equity strategy that encompasses their Short term/Long term compensation plan design needs, inducement and retention grants, and the overall metrics around percentage of employees eligible to receive grants. And, they have increased their appetite for flexibility in granting full value versus appreciation awards from the same pool – and for delivering those awards efficiently.
On the other hand, many companies have sound rationale for choosing to adopt a more conventional monolithic or limit-based plan. In numerous cases, the costs associated with fungible plan administration are higher, and there is more complexity involved in maintaining a plan – and these factors can be especially material for smaller companies. However, technology has significantly lowered the cost and administrative burden associated with managing and tracking award types, making fungible plan designs accessible to more and more firms.
Some of the non-adopters consciously continue to practice liberal share recycling. Under this provision, which is generally frowned upon by institutional investors, shares tendered from option exercise or for tax withholding can replenish the plan reserve in perpetuity. The benefit of such a provision is that companies receive more utilization for their shares – using option proceeds to repurchase shares to increase the plan reserve has the effect of increasing the share reserve continuously. Proxy advisory firms generally require plans with fungible designs to prohibit liberal share recycling provisions or be faced with the prospect of a higher award valuation.
We expect the adoption rates of fungible plans to continue to rise.