– Increase in say-on-pay opposition: The number of say-on-pay votes receiving less than 70 percent support rose to a new high in 2019. The say-on-pay failure rate, which had nearly doubled in 2018, remained at that level this year: 2.5 percent of votes in the Russell 3000 Index received majority opposition. After falling below 96 percent for the first time in 2018, median support rate for say-on-pay proposals was unchanged in 2019.
– Steady growth in median CEO pay: The median pay raise for continuing S&P 500 CEOs was 5.3 percent in fiscal year 2018 (reported during the 2019 proxy season), a relatively slower growth compared to a median raise of 9.5 percent in 2017. The median pay level among S&P 500 CEOs reached a new high of $12.5 million.
– Impact of 162(m) tax code changes is still apparent: The number of companies submitting equity plan proposals for shareholder approval increased somewhat from the low point in 2018, but remained well below historical levels prior to the repeal of tax code section 162(m)—which removed a requirement to reapprove incentive plan metrics every five years. Despite the removal of tax advantages for performance-based incentive awards, the prevalence of performance-conditioned equity awards fell only slightly and the use of non-equity incentive awards increased.
– Shareholder proposals on pay gain some traction: After three proxy seasons without any compensation-related shareholder proposals receiving majority support, two proposals succeeded in receiving majority support during 2019. Both proposals sought the adoption of a clawback policy.
Here’s something John blogged yesterday on TheCorporateCounsel.net: I have a friend who keeps trying to persuade me to buy a Tesla. He owns one, and I guess there’s some kind of bounty the company pays to Tesla owners who convince other people to pony up for their own E-Z-Go on steroids. I’ve told him he’s barking up the wrong tree. I’ve always driven a beater. My current ride is a 2012 Chevy Equinox with 140,000 miles on it. It goes through 2 quarts of oil a month and I’m still determined to keep it for at least another couple of years.
But I also confess that even if I was in the market for a new car, I just can’t see buying one from Elon Musk. The guy’s antics really rub me the wrong way. So it pains me to have to blog about him again – but I do. This time, Elon and his board have gotten themselves sideways with Tesla shareholders in the Delaware Chancery Court, and the issue isn’t his tweets, it’s his comp.
Last year, the Tesla board – and shareholders – signed-off on a pay deal that would provide Musk with a potentially gargantuan payout if its stock hit some very aggressive market cap & operational goals. How gargantuan? Try more than $50 billion. A shareholder subsequently filed a lawsuit against Musk and the Tesla board alleging that the comp award was a breach of fiduciary duty.
By way of background, the Chancery Court decided last year that Musk was a “controlling shareholder” of Tesla in an unrelated case, despite the fact that he owned only around 20% of the stock. So, for purposes of the motion to dismiss filed in this case, the parties treated him as if he was a controller. That complicates things considerably, because the default standard for reviewing for transactions between a company and its controlling shareholder – even comp decisions – is the demanding “entire fairness” standard and not the deferential business judgment rule.
Delaware has laid out a path to the business judgment rule for these transactions, but in his 40-page opinion denying the defendants’ motion to dismiss, Vice Chancellor Slights found that despite the approval of the comp award by Tesla’s shareholders, the process wasn’t good enough to allow this award to make the cut:
Had the Board ensured from the outset of “substantive economic negotiations” that both of Tesla’s qualified decision makers—an independent, fully functioning Compensation Committee and the minority stockholders—were able to engage in an informed review of the Award, followed by meaningful (i.e., otherwise uncoerced) approval, the Court’s reflexive suspicion of Musk’s coercive influence over the outcome would be abated. Business judgment deference at the pleadings stage would then be justified. Plaintiff has well pled, however, that the Board level review was not divorced from Musk’s influence. Entire fairness, therefore, must abide.
The Vice Chancellor held that the defendants were unable to establish that the award was entirely fair at the pleading stage, so he declined to dismiss the plaintiff’s breach of fiduciary duty & unjust enrichment claims. That probably means I’ll have to blog about Musk again at some point in the not-too-distant future. Lucky me.
I’ve blogged a couple times about the on-again, off-again requirement to report gender pay data to the Equal Employment Opportunity Commission. For 2017 & 2018 data, the requirement is still “on” – and the deadline is this Monday, September 30th! But this Faegre memo reports that companies might be relieved of this requirement in future years, since the EEOC has announced that (at least for now) it doesn’t intend to renew its request for authorization to collect the pay data.
What this means for shareholder initiatives that are premised on the availability of the EEOC data is anyone’s guess. The comments on the EEOC’s announcement suggest that the general public is pretty interested in getting the info…
As you can see from the studies posted in our “Director Pay” Practice Area, it’s become a pretty rare thing for public companies to pay director meeting fees. In fact, this Pearl Meyer blog reports that fewer than 25% of companies are doing it (though it’s still a majority practice at private companies). The blog gives these recommendations if your directors insist on being paid for attendance:
1. If your number of board or committee meetings is consistently above your peer group meeting, revisit whether your retainers account for that workload
2. If there’s a non-recurring situation, consider an ad-hoc retainer for affected directors
3. If directors are uncertain about their workload, consider conditional meeting fees if the number of meetings exceeds a pre-established threshold
Wow. Broc & I have blogged a couple of times over the past year about the SEC’s Nissan investigation, which (among other reasons) is of interest because Nissan is a Japanese company, and also because of the bold efforts people took to conceal former CEO Carlos Ghosn’s pay.
Yesterday, the SEC announced that it settled Section 10(b)/Rule 10b-5 fraud charges with Nissan, Ghosn, and a former director/HR exec for omitting $140 worth of Ghosn’s compensation from Japanese securities filings – which were published in the US because the company’s securities trade as ADRs on the OTC – and which required information about executive pay. Allegedly, Ghosn went to all this effort to restructure & hide his pay because he was worried that people would criticize the amounts (pro tip: at least in the US, that’s a hint that you’re probably required to disclose the info).
Nissan is ponying up $15 million – while the individuals are getting off with civil fines of $1 million and $100k. Seems like a pretty good deal for those two, based on the allegations in the SEC’s complaint against them – e.g., Ghosn first brainstormed ways to conceal part of his pay by paying it through Nissan-related entities…when that didn’t work, he started entering into secret contracts with employees and executing backdated letters for LTIP awards, and decided that “postponing” pay (along with creative accounting) would get him around the disclosure obligations.
Initially, one problem here for the company might have been faulty internal controls. But according to the SEC’s complaint against the company, the fatal blow was that because Nissan had specifically delegated to Ghosn the authority to set individual pay arrangements – including his own! – he was acting within the scope of his employment when he intentionally misled investors, and the company was liable under the principles of respondeat superior. We can complain all we want about the burdensome listing rules here, but maybe they’re saving some companies from themselves…
Here’s something I blogged last week on TheCorporateCounsel.net: I’ve blogged from time to time that people are starting to question whether “pay-for-performance” is all it’s cracked up to be – and now you can add CII to its list of skeptics. The Council of Institutional Investors has announced an overhaul to its “Executive Compensation Policy” to urge companies to dial back the complexity of their plans and use at least a five-year period to measure performance.
While the old policy called for executive pay to be driven predominately by performance and said that salary should be no more than $1 million, the new policy suggests that some companies may be able to do without annual metric-based incentives – and says this about fixed pay:
Fixed pay is a legitimate element of senior executive compensation. Compensation committees should carefully consider and determine the right risk balance for the particular company and executive. It can be appropriate to emphasize fixed pay (which essentially has no risk for the employee) as a significant pay element, particularly where it makes sense to disincentivize “bet the company” risk taking and promote stability. Fixed pay also has the advantage of being easy to understand and value, for the company, the executive and shareholders. That said, compensation committees should set pay considering risk-adjusted value, and so, to the extent that fixed pay is a relatively large element, compensation committees need to moderate pay levels in comparison with what would be awarded with contingent, variable pay.
The new policy also broadens its approach to clawbacks – adding to the list of appropriate recovery events “personal misconduct or ethical issues that cause, or could cause, material reputational harm to the company and its shareholders.”
While some of these changes may be driven by the repeal of 162(m) (there’s no longer a tax advantage to keeping salaries low), CII hasn’t been shy about its concerns about murky pay-for-performance disclosure. And based on its reaction to the BRT’s recent emphasis on “stakeholders,” there may be some heartburn about ESG metrics that are starting to pop up in incentive plans…
Here’s something that John Jenkins recently blogged on the “DealLawyers.com Blog”: I recenly blogged about the Chancery Court’s decision in In re Towers Watson & Co. Stockholder Litigation, (Del. Ch.; 7/19), in which Vice Chancellor McCormick determined that the business judgment rule applied to decision of the seller’s board to enter into a merger agreement despite the CEO’s non-disclosure of the post-closing comp negotiations with the buyer.
The plaintiffs in the Chancery Court alleged that the CEO’s potential post-closing compensation improperly incentivized him to seek nothing more than the bare minimum required to get the deal done – and that the undisclosed information about his comp discussions was therefore material to the seller’s directors. While VC McCormick was unmoved by those allegations, the plaintiffs in a federal merger objection lawsuit appear to have fared better with similar claims.
In In re Willis Towers Watson Proxy Litigation (4th. Cir.; 8/19), the 4th Circuit held that those undisclosed CEO comp discussions were sufficient support allegations that the company had omitted material facts in violation of Section 14(a) of the Exchange Act and Rule 14a-9. In reaching this conclusion, the court specifically rejected one of the arguments that VC McCormick found compelling in the fiduciary duty litigation – the fact that it was public knowledge that the CEO’s comp would be higher after the deal. Here’s an excerpt:
The defendants insist that disclosing the alleged compensation agreement wouldn’t have changed the total mix of information available to shareholders. In the defendants’ telling, the proxy statement and other publicly available information made it clear that Haley would be CEO of the combined company and that his compensation would increase after the merger.
It’s true that shareholders knew Haley would make more money after the merger. But they didn’t know that—before the merger had closed—Haley had entered secret discussions with Ubben, who was slated for a seat on WTW’s Compensation Committee, for a more than six-fold increase in his current compensation.
As alleged in the complaint, Haley had a powerful interest in closing the merger to get the compensation he’d discussed with Ubben, even if the terms were unfavorable for Towers shareholders. A jury could thus reasonably conclude that disclosing the secret compensation discussions between Haley and Ubben would have changed the total mix of information available to shareholders.
I don’t know that there are any broad conclusions to be drawn from this case about the differences between federal merger objection lawsuits & Delaware fiduciary duty litigation. While the Chancery Court did tangentially address shareholder-disclosure claims, they weren’t at the center of the breach of fiduciary duty lawsuit, which focused primarily on the extent to which the failure to disclose the information in question to the directors impacted the board’s fulfillment of its fiduciary duties. Still, the two courts’ different approaches illustrate the complicated realities of the post-Trulia deal litigation environment, where there’s not just a new sheriff in town, but often multiple sheriffs.
With the Business Roundtable’s recent statement about moving away from “shareholder primacy” and towards stakeholder interests, this opinion piece from Bob Pozen about how this would work with pay-for-performance is worth a read…
Today is the “16th Annual Executive Compensation Conference”; yesterday was the “Proxy Disclosure Conference” (for which the video archive is already posted). Note you can still register to watch online by using your credit card and getting an ID/pw kicked out automatically to you without having to interface with our staff. Both Conferences are paired together; two Conferences for the price of one.
– How to Attend by Video Webcast: If you are registered to attend online, just go to the home page of TheCorporateCounsel.net or CompensationStandards.com to watch it live or by archive (note that it will take about a day to post the video archives after it’s shown live). A prominent link called “Enter the Conference Here” – on the home pages of those sites – will take you directly to today’s Conference (and on the top of that Conference page, you will select a link matching the video player on your computer: HTML5, Windows Media or Flash Player). Here are the “Course Materials.”
Remember to use the ID and password that you received for the Conferences (which may not be your normal ID/password for TheCorporateCounsel.net or CompensationStandards.com). If you are experiencing technical problems, follow these webcast troubleshooting tips. Here is today’s conference agenda; times are Central.
– How to Earn CLE Online: Please read these “FAQs about Earning CLE” carefully to see if that is possible for you to earn CLE for watching online – and if so, how to accomplish that. Remember you will first need to input your Bar number(s) and that you will need to click on the periodic “prompts” all throughout each Conference to earn credit. Both Conferences will be available for CLE credit in all states except for a few – but hours for each state vary; see this “List: CLE Credit By State.”
Today is the “Proxy Disclosure Conference”; tomorrow is the “16th Annual Executive Compensation Conference.” Note you can still register to watch online by using your credit card and getting an ID/pw kicked out automatically to you without having to interface with our staff. Both Conferences are paired together; two Conferences for the price of one.
– How to Attend by Video Webcast: If you are registered to attend online, just go to the home page of TheCorporateCounsel.net or CompensationStandards.com to watch it live or by archive (note that it will take about a day to post the video archives after it’s shown live). A prominent link called “Enter the Conference Here” – on the home pages of those sites – will take you directly to today’s Conference (and on the top of that Conference page, you will select a link matching the video player on your computer: HTML5 or Flash Player). Here are the “Course Materials.”
Remember to use the ID and password that you received for the Conferences (which may not be your normal ID/password for TheCorporateCounsel.net or CompensationStandards.com). If you are experiencing technical problems, follow these webcast troubleshooting tips. Here is today’s conference agenda; times are Central.
– How to Earn CLE Online: Please read these “FAQs about Earning CLE” carefully to see if that is possible for you to earn CLE for watching online – and if so, how to accomplish that. Remember you will first need to input your Bar number(s) and that you will need to click on the periodic “prompts” all throughout each Conference to earn credit. Both Conferences will be available for CLE credit in all states except for a few – but hours for each state vary; see this “List: CLE Credit By State.”