The Advisors' Blog

– Liz Dunshee

There have been murmurings about say-on-pay for directors for nearly a decade now (see this blog). But the idea is getting a fresh look in the wake of Delaware’s Investor Bancorp opinion, as plaintiffs are sending demand letters to investigate director awards – and companies are looking for ways to protect themselves. This blog from Exequity’s Ed Hauder envisions how the approach could work:

Companies might be able to gain some certainty if they have an equity plan that states a “reasonable” limit for annual director compensation, and also put forth on the proxy statement a “Say on Director Pay” vote concerning the next year’s director compensation. Directors’ terms typically run from annual meeting to a subsequent (usually next) annual meeting, so having shareholders approve the directors’ compensation program for the next year period should work. The Say on Director Pay (SODP) vote would create a powerful presumption that shareholders approved the directors’ compensation (assuming directors only receive compensation that was detailed in the approval), which should enable the company to shut down any nuisance suits concerning director compensation.

Of course, care would need to be taken in drafting the SODP. The SODP should apply for the next year period or until shareholders are asked to approve a different compensation program for directors. In this way, companies would only need to present a SODP on their proxy statements when director pay changes. For some companies, this might mean it becomes an annual item in the proxy. But for other companies, it could be a less frequent item on the proxy.

As Ed notes and as I blogged last summer, OvaScience has agreed as part of a settlement to conduct a say-on-director-pay vote every three years. And a few years ago, Broc blogged about a vote at Digirad. So there’s some precedent, but it’s still pretty rare.

Keep in mind that adopting a “high-water” limit (with compensation committee discretion to make awards below that), is probably just a retooling of the old “meaningful limits” standard – and not enough on its own to let you avoid the entire fairness test.

Outside of having shareholders approve specific director awards, plaintiffs will likely be deterred by companies who appear to have their act together. Review & document your process for determining director pay, and beef up your disclosure to show those decisions are reasonable. You probably won’t be worth plaintiffs’ time if you disclose that you’ve used a compensation consultant and made director awards based on robust data and a defensible director pay philosophy.