– Broc Romanek

Here’s an excerpt from this blog by Professor Jack Coffee:

So what should a reasonable and prudent board or compensation committee do? Obviously, one answer is to avoid the kind of extreme equity award that Valeant used to motivate its former CEO. But another answer is to counter-balance the impact of incentive compensation with an appropriately designed clawback. Clawbacks mandate the forfeiture of incentive compensation (including unexercised stock options and equity awards) on the occurrence of specified trigger events. Section 10D of the Securities Exchange Act of 1934 only requires a clawback in the event of an accounting restatement that reduces the earnings that produced the incentive award. Still, a responsible board can design a broader clawback that does not require a restatement to trigger it.

In this light, let’s take a closer look at Wells Fargo & Co’s policy, because, in this one unique respect, Wells Fargo may supply a model for other companies to emulate. Wells Fargo’s 2016 Proxy Statement indicates that the triggers for clawbacks and recoupments include (with respect to restricted stock awards and performance shares):

1. “Misconduct which has or might reasonably be expected to have reputational or other harm to the Company or any conduct that constitutes ‘cause’;”
2. “Misconduct or commission of a material error that causes or might be reasonably expected to cause significant financial or reputational harm to the Company or the executive’s business group;”
3. “Improper or grossly negligent failure, including in a supervisory capacity, to identify, escalate, monitor or manage, in a timely manner and as reasonably expected, risks material to the Company or the executive’s business group;”
4. “An award was based on materially inaccurate performance metrics, whether or not the executive was responsible for the inaccuracy;” and
5. “The Company or the executive’s business group suffers a material downturn in financial performance or suffers a material failure of risk management.”

These are broad provisions that go well beyond financial restatements (but do leave business judgment discretion in the board as to whether to implement them). In reality, most boards will stonewall and not impose clawbacks when they have discretion. Still, the real lesson of Wells Fargo may be that pressure can mount to the point where the board will be compelled to invoke a clawback. Also, shareholders can sue derivatively, and Wells Fargo has been sued in a derivative action in California, which may prove hard to dismiss.

In the approaching Era of Trump, clawbacks may be the last line of defense for shareholders. Clearly, incentive compensation is here to stay, but it should be reasonable and needs to be counterbalanced by broad clawbacks. If activists lobby Institutional Shareholder Services, using the Wells Fargo clawbacks as their model, the proper design of clawbacks could move to front and center on the corporate governance stage.

– Broc Romanek

In response to my outpouring of love for SunTrust Banks’ clawback policy, Meredith Miller – Chief Corporate Governance Officer of the UAW Retiree Medical Benefits Trust – reminded me that the impetus for SunTrust’s updated policy was a shareholder proposal submitted by the Trust and others that comprise an investor coalition on clawbacks. This coalition has been operating since 2013, starting with sending proposals to a group of Pharma Six – and then later, an expanded proposal that included disclosure of the use of the clawback which they have successfully achieved adoption at McKesson, Bank of America, JP Morgan, Allergan, Stryker and SunTrust. The coalition submitted this comment letter to the SEC on its clawback proposal back in 2015 that outlines the coalition’s efforts…

Also see this blog from myStockOptions.com about ExxonMobil’s fine clawback. And see this Willis Watson memo about how companies are adopting stronger clawbacks despite the SEC’s proposal not being adopted yet…

– Broc Romanek

Here’s an excerpt from this Harvard Business Review blog:

Although good CEOs make a big difference, bad CEOs may matter even more. Indeed, the consequences of destructive leadership are well documented, and they are most severe at the top. Jeffrey Skilling’s greed cost Enron shareholders $63 billion. Carly Fiorina lowered HP’s stock price by 50% while firing thousands of employees, paying herself handsomely, and touring the lecturing circuit. Stan O’Neal’s reckless risk-taking sunk Merrill Lynch, yet he still managed to walk out the door with $161.5 million in severance. Although these examples may seem extreme, they are simply bigger and more famous than thousands of other less-known examples.

For instance, narcissistic CEOs pay themselves substantially more (in salaries, bonus, and stocks) even when they fail to boost business performance. Meta-analytic studies suggest that destructive CEOs, who tend to be more antisocial, volatile, and overconfident, generate higher levels of turnover, counterproductive work behaviors (bullying, theft, and cheating), and lower levels of employee engagement. It is difficult to estimate the combined economic cost of these outcomes. In the U.S. alone, the productivity losses of disengagement could amount to $550 billion, not to mention the negative effects on employee health and well-being. Clearly, CEOs are not the only determinant of disengagement, but research indicates that leadership is a significant predictor of people’s engagement (both high and low).

– Broc Romanek

Tune in tomorrow for the webcast – “The Latest Developments: Your Upcoming Proxy Disclosures” – to hear Mark Borges of Compensia, Alan Dye of Hogan Lovells and Section16.net, Dave Lynn of CompensationStandards.com and Morrison & Foerster and Ron Mueller of Gibson Dunn discuss all the latest guidance about how to overhaul your upcoming disclosures in response to pay ratio and say-on-pay – including the latest SEC positions, as well as how to handle the most difficult ongoing issues that many of us face.

– Broc Romanek

In our “Say-on-Pay” Practice Area, we’re posting a number of new memos on say-on-frequency since many companies will have that on their ballot this year – including this CII memo…

– Broc Romanek

Here’s the intro to this Goodwin Procter memo:

Section 6039 of the Internal Revenue Code requires corporations to provide information statements to employees (including former employees) and information filings to the IRS regarding exercises of incentive stock options (ISOs) by employees and former employees. Similar information statements and filings are required to report transfers of shares of stock by employees and former employees that were purchased under an employee stock purchase plan (ESPP) designed to meet the requirements of Section 423 of the Internal Revenue Code. To satisfy the information return and statement requirements, companies will need to complete and file Form 3921 with respect to ISO exercises and Form 3922 with respect to ESPP transfers, as applicable.

These deadlines are at the end of the memo:

With respect to ISO exercises and ESPP share transfers that occurred in 2016, Copy A of the respective form must be filed with the IRS no later than February 28, 2017, if filing on paper, or March 31, 2017, if filing electronically. A 30-day extension of the Copy A deadline may be requested and obtained by filing a Form 8809 with the IRS before the original filing deadline. An extension request on Form 8809 may be filed electronically. Copy B of the respective form must be furnished to the applicable employee or former employee by January 31, 2017.

– Broc Romanek

I just blogged something lengthy over on TheCorporateCounsel.net about how rare it is for a deal lawyer to be tapped as the SEC Chair. Yesterday, Sullivan & Cromwell’s Jay Clayton was named by President-Elect Trump as Chair White’s successor. As I blogged, Jay won’t likely need to clear much of a hurdle during his Senate confirmation hearings – but given Trump’s posturing during his campaign, he will need to sit through questions about his ties to Goldman Sachs – including his wife’s job there (as noted in this Reuters article).

Some folks asked me yesterday what was “normal” for a SEC Chair. There really isn’t a standard for the job – the backgrounds of former SEC Chairs are all over the lot. A few have worked at the SEC before. Chair Levitt wasn’t a lawyer. Chair White was a prosecutor. Chair Ruder was an academic. Chair Cox was a Congressman. And it’s not the sort of appointment where you read tea leaves from past writings. Obviously, someone’s background plays a role – but the biggest indicator of what a Chair will do is looking at the general direction the President points to…and since Trump has sent us mixed messages what he feels about executive pay, it still really is hard to know where this bus is headed…

– John Jenkins

This Equilar study says that stock grants are declining among the S&P 500.  Here are some of the key findings:

– The average number of shares granted at S&P 500 companies overall declined during the past five years.

– Just over 80% of S&P 500 companies granted performance equity to their executives and about 65% granted options in 2015, the reverse of what held in 2011.

– Approximately 80% of companies in the technology sector granted performance equity in 2015, the lowest prevalence of any sector, while about 90% of the utilities sector granted performance equity, the highest.

– Total dilution overhang from stock options and restricted stock declined from approximately 5.2% in 2011 to 2.9% at the median in 2015. The decline was almost entirely attributable to waning stock option overhang.

– John Jenkins

This study reports the results of a survey suggesting that a lot of the payoff on options & other performance-based comp is based on a roll of the dice:

We empirically estimate that approximately 90% of option-based compensation constitutes pay for luck. This value is very robust, and stems from the inherent fact that chance plays a dominant role in determining firm performance. The impact of a manager on her expected compensation via the improvement of firm performance is low, hence, in contrast to common wisdom, standard option-based compensation does not constitute a strong motivating force for rational managers.