A newly published study of shareholder letters and executive compensation finds that CEOs who name shareholder value as their primary objective in investor letters received larger increases in their annual pay packages than chiefs who cited other priorities, such as improving customer loyalty or increasing market share. The study, recently published in the Journal of Management Studies, examined 2,373 letters to shareholders from 590 CEOs of S&P 500 companies between 1998 and 2005. Authors Taekjin Shin of San Diego State University and Jihae You of Louisiana State University determined that corporate leaders who explicitly communicated their interest in maximizing shareholder value received higher annual compensation increases. The pay packages included salaries, bonuses, the value of stock-option grants, restricted stock grants and long-term incentive plans.
After controlling for company size, stock performance, the chief executive’s tenure and other factors, CEOs could count on an additional $116,000 for every mention per 1,000 words of boosting the company’s share value. The explanation isn’t simply that CEOs are ingratiating themselves to corporate boards and compensation committees, Mr. Shin said. Instead, the leaders are using language that signals the appearance of competence and control.
A new academic study, “Rank and File Employees and the Discovery of Misreporting: The Role of Stock Options,” finds that companies that flout financial reporting rules tend to grant more stock options than their peers that adhere to those rules. Moreover, the study found that violators that granted more options to rank-and-file employees during periods when violations were ongoing were more likely to avoid whistleblowing allegations. Although it may sound cynical, the authors of the study posit the theory, as reported in this article in the WSJ, that violators may be using option grants in “an attempt to discourage whistleblowing.”
France’s legislative bodies have been debating the introduction of stricter say-on-pay rules for a the past few months (see blog post), but last Tuesday the final text of the amendment emerged (Amendment 161); its final passage into law awaits only the French President’s signature, which is expected within two weeks. Embedded in an omnibus transparency and economic modernisation bill (known colloquially as “Sapin 2”), this amendment institutes two separate binding votes on remuneration; a forward looking vote on policy, and a backward looking vote on variable and exceptional pay amounts. In terms of timing, the former vote will come into force in 2017, while the latter won’t grace the AGM ballot card until 2018.
More specifically, blog include a forward looking, annual, binding shareholder vote on the “principles and criteria of determination, distribution and allocation of fixed, variable and exceptional components of total compensation and benefits any kind”, attributable to the chair, CEO, and Deputy CEO in a single board structure, or to the members of the executive board, the sole managing director, and the members of the supervisory board in a dual board structure.
In case of failure of this forward looking vote, the previous principles and criteria will continue to apply or, if there was no previous policy, remuneration will be determined “in accordance with the previous year’s remuneration”.
In 2018, the second binding vote will come into force; for any payment to occur, shareholders will be required to approve the payment of variable and exceptional pay amounts to the chair of the board of directors or the supervisory board, the CEO, deputy CEO, the members of the management board or a sole managing director. The amendment does not specify what recourse issuers may have in case of a failure of this second binding vote.
A few days ago, the SEC announced that Corp Fin Director Keith Higgins is leaving in early January. I am happy for Keith – sad for the rest of us. Keith did an amazing job under tough circumstances. For example, getting the “disclosure effectiveness” project off the ground was a huge challenge. Having seen the launch of the “aircraft carrier” up close, I know how difficult it is to engage in comprehensive reform. Directors never get the time to achieve their goals these days, as Congress gives them plenty to do. I’m sure we would have even seen more change during Keith’s tenure if he was given the leash.
And Keith is among the best speakers out there. His wit never dimmed, even wearing the “Gov” mantle…I’m glad that Keith got this rousing standing “O” at the ABA meeting last month…
Deputy Director Shelley Parratt will serve as Acting Director as she did during the last transition…
Recently, the SEC brought this SEC enforcement case with insider trading charges against a board member (who also happens to be a lawyer) who allegedly purchased securities of a target company during a board committee meeting where the not-yet-announced deal was being discussed. Here’s an excerpt from the SEC’s press release:
According to the SEC’s complaint, Cope learned confidential details about the planned merger during a board executive committee meeting on Jan. 5, 2016, and proceeded to place his first order to purchase Avenue Financial stock while that executive committee meeting was still in progress. He allegedly placed four more orders within an hour after the meeting ended.
As I mention during this 8-minute podcast, it’s about the craziest case I’ve ever heard – meaning that I can’t believe the director was that dumb. I call it the “Golden Ticket” for corporate secretaries as it’s a great way for them to scare directors when they provide insider trading reminders.
And what can be better than a reenactment of how this situation went down? In this 30-second video, a director places a trade with her broker to buy shares in the company being acquired while she is learning about the not-yet-announced deal:
Recently, a member asked: “How do you see the Presidential election influencing incentive compensation and corporate governance in 2017?” Here’s my response (also see this Choate memo):
Although it is difficult to know in practice, on paper, there is a wide gulf in difference in how the markets would be regulated between a Trump Administration & a Clinton one. Whereas a Clinton Administration might have been widely influenced by Senator Elizabeth Warren and resulted in restraints on how Wall Street operated, a Trump Presidency might result in unprecedented deregulation at the behest of a GOP Congress. A Clinton Administration was rumored to pick an investor as the next SEC Chair – which would have been a first. It appears that Trump will tap someone who believes that minimal regulation is good regulation.
So I think it’s clear that restraints on how companies can govern themselves will become looser. However, executive compensation specifically could be another matter. Trump ran a populist campaign, often railing about excessive executive compensation. It’s unknown whether that was empty campaign fodder to generate votes – or whether he’ll follow through and do something concrete in this area. And I note that during a House hearing about Mylan’s controversial EpiPen pricing, some GOP reps really grilled Mylan’s CEO about her pay package…
Also see this note from myStockOptions.com entitled “How The Trump Presidency And Tax Reform May Affect Stock Compensation.” This Bloomberg BNA article has quotes with experts giving mixed reactions to guessing whether pay ratio will disappear…
It’s that time of year. Dusting off the ole “D&O questionnaire” for 12/31 companies. Luckily, the only update is for Nasdaq-listed companies – who now have to face a “golden leash” disclosure requirement. I’ve updated our “D&O Questionnaire Handbook” – see Question 19 in our Model D&O Questionnaire on page 47 including footnote 79.
Just like ISS announced earlier this week, the window is now also open to update your peer groups with Equilar, which is the service used by Glass Lewis. The deadline is December 31st. This applies to companies that file their proxy between January 15th & July 15th, 2017.
How to Order a Hard-Copy: Remember that a hard copy of the 2017 Treatise is not part of a CompensationStandards.com membership so it must be purchased separately. Act now as this will ensure delivery of this 1600-page comprehensive Treatise soon after it’s done being printed. Here’s the “Detailed Table of Contents” listing the topics so you can get a sense of the Treatise’s practical nature. Order Now.