– Broc Romanek

Over on TheCorporateCounsel.net this morning, John blogged about this memo from Rep. Jeb Hensarling that appears to lay out changes to the “Financial Choice Act.” John handicaps the odds of the Act being passed. It appears that the original executive pay provisions in the Choice Act remain mostly untouched in this revised version, including:

– Repeal of pay-ratio, say-on-pay frequency, employee & director hedging disclosure, board leadership structure disclosure
– Requirement to solicit say-on-pay votes only in those years “in which there has been a material change to the compensation of executives of an issuer from the previous year”
– Change making the Dodd-Frank no-fault clawback for erroneously awarded compensation applicable only where the “executive officer had control or authority over the financial reporting that resulted in the accounting restatement”

– Broc Romanek

Here’s the intro from this Manifest blog:

While regulation on directors’ pay can be counter-productive the business community needs to address the concerns of politicians and the wider public about pay inequality in the UK, advisors PricewaterhouseCoopers (PwC) have warned in a report. This is a response to Teresa May’s pledge to tighten up executive pay regulation made just before she became Prime Minister and reported on in a previous blog.

PwC notes that since the 1970s to today while globally people have been pulled out of poverty in large nunbers incomes for the developed world’s working and middle classes (between the 80th and 95th percentiles of the global income distribution) have largely stagnated in real terms. Meanwhile real incomes of the Top 1% globally have increased by over 60%. These trends have been reflected in growing inequality in a number of rich western countries, and in particular the UK and the US.

It was notable that May devoted significant attention to the executive pay issue in launching her campaign for leadership of the Conservative Party, as had Michael Gove, the report said. All the candidates emphasised the importance of an economy that works for all and so income inequality is a concern that now spans political divides, it concludes. Executive pay is a public concern that politicians can not ignore. Research carried out for PwC in June 2016 by Opinium 4 showed that two-thirds of the population believe that executive pay is generally too high, over half believe it is a big problem in Britain today, and 72% said that it made them angry if a CEO is being paid a lot and their company is doing badly.

PwC analysed the Pew Research Centre’s data on attitudes to inequality against data on actual inequality from the OECD Top Incomes database and found that there is virtually no correlation between concerns about inequality and actual levels of inequality in the countries where comparison data exists. Levels of concern about inequality are much higher in France, Italy, and Spain than in the US and UK, despite levels of inequality being up to twice as great in those latter two countries, PwC found. By contrast, PwC discovered that concerns about inequality are very highly correlated with concerns about employment opportunities. This suggests, according to PwC, that anger about inequality and CEO pay is primarily an expression of frustrations about job insecurity and stagnating wage growth for ordinary workers.

The research carried out in June found that solutions to high CEO pay continue to be seen as being able to be tackled by shareholders and PwC said it is encouraging that much of the public is still looking for a market rather than a regulatory answer to the problem. May has proposed changing shareholder votes on pay from advisory to binding, more transparent pay disclosure and simplified bonus schemes. Separately she called for employees to be represented on company boards.

– Art Meyers, Choate

The Dodd-Frank pay ratio disclosure requirements may be repealed, but several cities & states may continue their efforts to impose pay ratio surtaxes. If the federal rules are repealed, they would need to redraft their legislation to build in the pay ratio rules rather than simply incorporating the federal rules by reference.

Here is a list of locations (in addition to Portland’s measure) & where things stand to our knowledge:

Connecticut: Two of them –

– 2017 CT H 6373, Title: An Act Establishing a Pay Ration Corporation Income Tax on Publicly Traded Companies. Introduced 1/23/2017. Status: Referred to Jt. Comm. On Finance, Revenue and Bonding.

– 2017 CT H 6101, Title: An Act Concerning Financial Assistance and Tax Expenditures for Businesses With High Chief Executive Officer Pay. Introduced 1/20/2017. Status: Referred to Jt. Comm. On Commerce.

Minnesota: (2017) MN H 65, A bill for an act relating to taxation; corporate franchise; imposing a surtax on certain corporations with high principal executive officer to median worker pay ratios; amending Minnesota Statutes 2016, section 290.06, by adding a subdivision. Introduced 1/5/2017. Status: Referred to Taxes.

Rhode Island: 2017 H 5141, An Act Relating to Taxation (Establishes a surtax on the business corporation tax for publicly traded corporations subject to SEC disclosure and reporting requirements, if corporation’s ratio of compensation for its CEO to median worker is equal to or greater than 100 to 1.) Introduced 1/18/2017. Status: Referred to House Finance.

San Francisco: The San Francisco “legislation” is still at the discussion stage as of late January. City Supervisor Jane Kim and Supervisor Hilary Ronen requested the City Attorney’s Office to draft legislation on the issue.

– Broc Romanek

Here’s Semler Brossy’s final say-on-pay report for last year, showing that 2,118 Russell 3000 companies held say-on-pay votes in 2016, with 92% of companies passing with tallies above 70%. The average vote result was 91%. 36 companies (1.7%) failed in 2016, resulting in the lowest failure rate since the first year of say-on-pay in 2011. ISS recommended ‘Against’ say-on-pay proposals at 12% of companies assessed in 2016.

– Broc Romanek

He’s on a tear! Yesterday, Acting SEC Chair Mike Piwowar issued yet another statement directing the Corp Fin Staff to revisit another set of existing rules – the pay-ratio disclosure rules. Last week, Piwowar did the same thing with the conflict minerals rules.

The stated rationale for the reconsideration is that some companies are experiencing “unanticipated compliance difficulties that may hinder them in meeting the reporting deadline.” No mention of employee morale – or the desire to avoid negative publicity with the general public. Comments should be submitted on the pay ratio rules within the next 45 days.

Although this statement doesn’t repeal – or even suspend – the looming deadline for the effectiveness of the pay ratio rule, it evidences a clear intent to re-visit the rule. It also gives a strong indication that the rule is going to be under scrutiny from both regulators & Capital Hill over the next few months. Since pay ratio disclosures aren’t mandated until next proxy season, there is some time for this to play out. But not a whole lot of time…

In this blog yesterday, I noted this list of “major” rules that are on the potential “hit list” under the “Congressional Review Act” – the resource extraction rules were just killed under that Act. Conflict minerals & pay ratio aren’t on the list.

How Fast – Or Slow – Can the SEC Act?

That is the question of the day. Here’s an excerpt from this WSJ article:

Republicans on the SEC could be stymied by the commission’s own procedures on the pay-ratio rule because undoing a regulation is handled by an often lengthy process that is similar to creating one. It also is difficult for the SEC to delay it outright, because of the commission’s depleted ranks. There are just two sitting commissioners—Mr. Piwowar and Kara Stein, a Democrat—meaning the SEC is politically deadlocked on most matters. Ms. Stein on Monday signaled opposition to efforts to ease the pay rule. “It’s problematic for a chair to create uncertainty about which laws will be enforced,” she said.

But Maybe Congress Will Act Faster…

Mark Borges notes that this Bloomberg/BNA article reports that a new version of the “Financial Choice Act” will be introduced in Congress later this month. Not only is this bill likely to include a provision that would repeal of the pay ratio rule, it appears that it will also contain a version of the “Proxy Advisory Firm Reform Act of 2016.” As you will recall, that’s the bill that was introduced last year that would require the major proxy advisory firms register with the SEC and, among other things, disclose potential conflicts of interest.

– Broc Romanek

This Equilar blog gives a run down of how much typically is paid to those that serve on special board committees…

– Broc Romanek

Check out this Skadden memo that summarizes the ISS Equity Plan Scorecard, including the nifty Appendix A – which identifies the allocation of points by EPSC factor…

– Broc Romanek

Two days ago, the “Investor Stewardship Group” wrapped up two years of work to release these long-term value principles: “Framework for U.S. Stewardship and Governance.” The group includes 16 large institutional investors & global asset managers: BlackRock, CalSTRS, Florida State Board of Administration, GIC Private Limited (Singapore’s Sovereign Wealth Fund), Legal and General Investment Management, MFS Investment Management, MN Netherlands, PGGM, Royal Bank of Canada (Asset Management), State Street Global Advisors, TIAA Investments, T. Rowe Price Associates, ValueAct Capital, Vanguard, Washington State Investment Board and Wellington Management.

– Broc Romanek

Here’s a study by FW Cook about annual incentives. The findings include:

– 83% of companies in the Top 250 use at least one specific financial measure to determine annual
incentive payouts, of which 75% use two or more financial measures.
– Non-financial measures (e.g. strategic and individual performance) are also common and are used as a stand-alone
measure by 52% of companies with non-discretionary plans.
– Profitability measures are not only the most prevalent annual incentive measures (utilized by 92% of companies with
non-discretionary plans), but profitability measures also carry the heaviest weighting among the companies that use
them (on average, comprise 59% of the weighting of annual incentive plans among those that use them).
– Among companies with heads of business units reported in their proxy statements, the dominant practice is to
emphasize corporate over business unit results for these officers.
– 62% of companies in the Top 250 provide a maximum annual incentive payout opportunity of 200% of
target, with the remainder divided approximately equally above and below 200%