We’ve blogged a few times about the Great Resignation and the increasing focus given to human capital management – and this Skadden memo highlights that March 2022 set new records in the U.S. for both the number of employees quitting & the number of open positions. One of the key differentiating factors in attracting and retaining employees is a good company culture (though it’s an amorphous concept). The Skadden memo sets out several ways that boards can help push the company’s culture in a positive direction, as excerpted below:
– Receive regular reports with employment data and monitor progress in addressing any negative trends. Good data is an important starting point. A board should receive regular reports from management with hiring and attrition data by office, department, job title, protected status and geographic location. This data can highlight what is working and areas that need attention.
– Clearly define the organization’s values and consistently communicate these principles to its employees. Boards should play an active role in defining the company’s values, communicating to employees the importance of its values and ensuring that the organization acts in accordance with them.
– Consider framing a policy with respect to commenting on political and social issues. A board should consider establishing a clear policy that defines the circumstances in which the corporation will take a position on political and social issues, the process for approving the substance of any statement made on behalf of the corporation and whether any such statement will be limited to internal communications or disseminated more broadly.
– Develop programs to engage with employees. If the organization does not already have focus groups and listening sessions with employees, the board may want to suggest those to elicit information about the employee experience.
– “The Evolving Compensation Committee” – with Davis Polk’s Kyoko Takahashi Lin, Semler Brossy’s Blair Jones, American Water’s Jeffrey Taylor and Pay Governance’s Tara Tays – will give you practical action items for your compensation committee to take to meet expanding stakeholder expectations.
– “Human Capital Disclosure: Mastering SEC & Investor Expectations” – with Aon’s Pam Greene, Gibson Dunn’s Ron Mueller, CalPERS’ Tamara Sells and Wilson Sonsini’s Amanda Urquiza – to get you ready for your upcoming human capital disclosures.
Here’s the full agenda for the Conferences – 18 sessions over 3 days. And some excellent news to kick off the week: our “Early Bird” rate has been extended to this Friday, June 17th – so make sure to register today for the best prices. Sign up online, email sales@ccrcorp.com, or call 1-800-737-1271.
Here are just a few of the important trends that are going to grow in importance as you make year-end pay decisions and draft your 2023 proxy disclosures:
Our Conferences deliver expert guidance in a fast-moving, engaging format – plus invaluable course materials in the form of speaker “talking points” – so that you and your directors aren’t caught flat-footed by new expectations. You can also revisit all of the practical guidance as you prepare your proxy statement – along with the talking points you’ll receive, the on-demand archive will be available till next July at no extra cost.
Here are the agendas for the Conferences – 18 sessions over three days – with an incredible speaker lineup that includes BlackRock’s Michelle Edkins, Corp Fin’s Renee Jones, Wachtell’s Leo Strine, FW Cook’s Bindu Culas, Semler Brossy’s Blair Jones, Pay Governance’s Tara Tays, Morrison & Foerster’s Dave Lynn, WilmerHale’s Meredith Cross, Compensia’s Mark Borges, Hogan Lovells’ Alan Dye, Gibson Dunn’s Ron Mueller, and more…:
1. Renee Jones: The Latest From Corp Fin
2. The SEC All-Stars: Proxy Season Insights
3. Next-Gen Activism: Are You Prepared?
4. ESG Disclosures: Staying Out of Hot Water
5. Protecting Your Board From the Next Maelstrom
6. Climate Disclosure: What To Do Now
7. Environmental Proposals: Beyond Climate
8. Social Proposals: What’s Next
9. Shareholder Proposals: Working with the Staff
10. Human Capital Disclosure: Mastering SEC & Investor Expectations
11. Navigating ISS & Glass Lewis
12. The SEC All-Stars: Executive Pay Nuggets
13. The Top Compensation Consultants Speak
14. Pay-for-Performance: Latest Updates
15. Dealing with the Complexities of Perks
16. Clawbacks: Where Things Stand
17. The Evolving Compensation Committee
18. Hot Topics: 30 Practical Nuggets in 30 Minutes
Early Bird Rate – Act by June 10th: Your directors are looking at you to stay ahead of the curve on new SEC disclosure rules, shifting stakeholder expectations, and heightened risks. To help you address these changes – and avoid costly pitfalls – we’re offering a special Early Bird Rate to attend these critical conferences (both of the Conferences are bundled together with a single price). Register by the end of today, Friday, June 10th to save $320 on a single user registration, and over $500 on our single office location and firm-wide registrations.
In addition, this year marks our “1st Annual Practical ESG Conference.” Anyone working in the compensation space also needs to understand ESG issues and how ESG data is tracked, because those metrics are now appearing in a majority of compensation plans. Our agenda covers employment law landmines, DEI trends, carbon accounting risks, and other hot topics. The registration fee for this Conference can be bundled together with the Proxy Disclosure & Executive Compensation Conferences for an additional discount – and is also subject to an Early Bird Rate that expires at the end of the day tomorrow, June 10th. Sign up online, email sales@ccrcorp.com, or call 1-800-737-1271 to ensure you’re able to face these rapidly evolving issues with confidence.
Yesterday, the SEC announced that it has (once again!) reopened the comment period for proposed listing standards relating to recovery of erroneously awarded compensation. This is the second time in less than one year that the Commission has reopened the comment period for its 2015 proposal, which would implement Section 954 of the Dodd-Frank Act. The proposal was first reopened for comment last October. I blogged in February about some of the notable responses so far.
Along with yesterday’s announcement, the Commission released this DERA memo to provide supplemental baseline data and analysis – which is now posted along with all of the comments to-date. The memo:
– Discusses the increase in voluntary adoption of compensation recovery policies by issuers (noting that the increase in voluntary adoption relative to the baseline in the proposing release may reduce the anticipated benefits and mitigate the anticipated costs of the proposed rules);
– Provides estimates of the number of additional restatements that would trigger a compensation recovery analysis if, as the Commission described in the October 2021 reopening release, the rules were extended to include all required restatements made to correct an error in previously issued financial statements (noting that while there are a lot more “little r” restatements, they would be less likely to trigger a clawback, and including “little r” restatements could increase both benefits & costs); and
– Briefly discusses some potential implications for the costs and benefits of the proposed rules.
This announcement about the reopened comment period arrived only one day after the SEC celebrated a SOX 304 clawback settlement. In that action, SEC Enforcement Director Gurbir Grewal said the action should “put public company executives on notice.” This 2010 Latham memo explains the difference between these two statutes and how the rules will coexist.
The pairing of an enforcement action with the additional study of the 2015 signals that the Commission means business on clawbacks. You’ll need to revisit your policies and plans with an eye toward new rules as well as new fodder that they may provide for activists and plaintiffs. This may also add to the trend of incorporating non-financial metrics into plans.
We’ll be sharing critical guidance on all of these issues at our “Proxy Disclosure & 19th Annual Executive Compensation Conference” this October. Our session on “Clawbacks: Where Things Stand” – with Davis Polk’s Kyoko Takahashi Lin, CompensationStandards.com’s Mike Melbinger, Gibson Dunn’s Ron Mueller, and Hogan Lovells’ Martha Steinman – will give you practical action items to take in response to SEC rulemaking and enforcement activity. Here’s the full agenda for the Conferences – 18 sessions over 3 days. Our “Early Bird” rate expires tomorrow, June 10th – so make sure to register today for the best prices. Sign up online, email sales@ccrcorp.com, or call 1-800-737-1271.
Yesterday, in connection with charges against a software company for accounting-related misconduct that resulted in restatements of 4 years’ worth of previously filed financials, the SEC announced that the company’s founder and former CEO had agreed to reimburse the company for more than $1.3 million in stock sale profits & bonuses, as well as to return previously granted shares of company stock, pursuant to Section 304 of the Sarbanes-Oxley Act.
The SEC settled with 7 former employees for their role in the misstatements (including the longtime GC, who paid $25k in penalties). Unlike the former CFO and Controller, who are under the most scrutiny here, the CEO was not charged with misconduct. Here’s the 5-page settlement order, which summarizes the Section 304 violation as:
As a result of the conduct described above, Waldis violated Section 304 of the Sarbanes-Oxley Act of 2002, which requires the chief executive officer or chief financial officer of any issuer required to prepare an accounting restatement due to material noncompliance with the securities laws as a result of misconduct to reimburse the issuer for (1) any bonus or other incentive-based or equity-based compensation received by that person from the issuer during the 12-month period following the first public issuance or filing with the Commission of the financial document embodying such financial reporting requirement and (2) any profits realized from the sale of securities of the issuer during that 12-month period. Section 304 does not require that a chief executive officer or chief financial officer engage in misconduct to trigger the reimbursement requirement.
The order says that the restatement related to improper revenue recognition practices – including for transactions for which there was no persuasive evidence of an arrangement and prematurely recognizing software license revenue. According to the order, at least two of the revenue misstatements were facilitated through the use of “side letters or agreements” that had not initially been considered in recognizing revenue and materially changed the terms of the transactions.
Section 304 clawbacks are pretty rare, although there was one last year. Maybe we’ll see more as the Staff works through the restatements resulting from the SPAC boom. The SEC says that yesterday’s action should “put public company executives on notice that even when they are not charged with having a role in the misconduct at issue, we will still pursue clawbacks of compensation under SOX 304 to ensure they do not financially benefit from their company’s improper accounting.”
I blogged a few weeks ago about Pay Governance findings that ESG metrics aren’t leading to the executive windfalls that some had feared. A new Willis Towers Watson memo also defends the “new kid on the block” – pointing out that the challenges & drawbacks of ESG metrics are not all that different from those associated with financial & operational metrics.
If you take it as fact that financial & operational metrics are a good thing (not everybody does), then here are some “lessons learned” that WTW suggests can also be applied to the ESG context:
1. Establish more consistent disclosure requirements. Consistent disclosure will improve transparency and accountability, allowing stakeholders to make more informed decisions. For example, this may involve the consistent adoption of the Task Force on Climate-Related Financial Disclosure standards, or more consistent Human Capital Report disclosures.
2. Improve external standards. Over time, with enhanced disclosures, companies and investors can develop better external standards. For example, the ability of organizations such as Institutional Shareholder Services (ISS) and Glass Lewis (GL) to develop and deploy compensation plan assessment models only exists because of robust disclosure that has evolved over time. We would expect to see the rapid development of external ESG standards once enhanced, consistent disclosure requirements are in place.
3. Compile a set of precedents. Similar to how companies learned to understand the pitfalls of using certain financial and operating metrics by trial and error (e.g., don’t measure working capital or cash flow at a point in time because it drives poor timing decisions at year end), companies will learn how to adjust incentives when encountering pitfalls with certain ESG metrics as they gain experience with those metrics.
4. Apply appropriate weighting to ESG metrics. A relatively small weight (e.g., 15-20%) should be applied to ESG incentive metrics to properly signal the importance of the metric while not disproportionately weighting these metrics. We see a similar approach taken with financial metrics such as revenue and working capital, which are typically weighted less than 25% of the total incentive.
5. Ensure ESG results are measurable, actionable and tied to business strategy. Similar to financial metrics, it is important and possible to make sure ESG metrics are linked to business strategy, can be acted upon by participants and are measurable. For example, goals tied to achieving greater leadership diversity may work best when an incentive plan is geared towards a limited population of senior leaders. And climate-related goals could be disaggregated such that all participants understand how their actions can contribute to the successful execution of the strategy, much like financial metrics such as EPS are broken down via value driver analyses.
If you’re among the 60% of S&P 500 companies that have already added ESG metrics and are looking to take the next step – or among the large number of companies that are still in the “consideration” stage – make sure to visit our checklist on “ESG as an Executive Compensation Performance Component” for step-by-step practical guidance – as well as the other resources in our “Sustainability Metrics” Practice Area.
And tack on our “1st Annual Practical ESG Conference” for even more valuable information about ESG programs, risks & opportunities that could affect this new form of metrics. The Conferences can be bundled together for a discounted rate. Sign up online, email sales@ccrcorp.com, or call 1-800-737-1271.
Coming off of the pandemic, corporate and executive aircraft use is back in the spotlight in a big way. Demand for private travel is high, but continues to be scrutinized. Deals are moving faster than ever. In this 22-minute podcast, I talk with Cooley’s Brad Goldberg and Jet Counsel’s Stewart Lapayowker about:
1. The effect of COVID-19 pandemic on the demand for business aircraft – and what the market looks like today.
2. Two steps that companies, directors and officers can take to make sure they’re not running afoul of FAA, tax or disclosure regulations for business versus personal use.
3. The consequences of misclassifying business versus personal use.
4. How business aviation counsel and SEC disclosure counsel can best work together to make sure that board minutes and public disclosures are accurate.
5. The typical timeframe for aircraft deals today.
6. What companies can say (or not say) to reassure shareholders that private travel is in the company’s best interest.
7. How to increase security around tracking corporate flights, to prevent competitors and media from tracking whether a company is working on a transaction or acquisition.
8. Key advice that they always give to public companies that are considering an aircraft deal.
When it comes to perquisites, there is always something new to know – and perennial issues to remember! That’s part of the reason that our “Dealing with the Complexities of Perks” session with Compensia’s Mark Borges and Hogan Lovells’ Alan Dye is always one of the most popular discussions at our “Proxy Disclosure & Executive Compensation Conferences.” Don’t miss out on this year’s edition. Our “Early Bird” rate for the Conferences expires this Friday, June 10th – so register today for the best price. Sign up online, email sales@ccrcorp.com, or call 1-800-737-1271.
Liz previously blogged about how the SEC’s proposed insider trading rules can affect your option grant policies & practices. If you’re re-examining your option grant practices now, take a look at Foley’s short and sweet article outlining best practices on stock option grants for both private & public companies. The article gives a brief overview of the tax & regulatory considerations on grant timing and setting the exercise price, required approvals and other checklist items that companies sometimes overlook. One of these checklist items is to remember checking that the proposed option grants comply with the applicable equity plan’s terms – before the plaintiffs do it for you.
Here’s the latest Semler Brossy memo on say-on-pay results as of May 19, showing that 26 Russell 3000 companies have failed thus far (with 17 failures added since Semler’s last report, including Intel & PacWest Bancorp) – which brings the failure rate to 2.7%. The Russell 3000 failure rate is still lower than the failure rate Semler Brossy saw at this time last year (at 3.1%), but it’s above the average failure rate in 2020 (2.3%). Below are some additional excerpted stats:
– The current Russell 3000 average vote result of 90.4% is similar to the index’s average vote at this time last year (90.4%); the current S&P 500 average vote result of 88.3% is below the index’s average at this time last year (89.6%), and is consistent with the year-end vote result in 2021.
– The failure rates for the Russell 3000 and S&P 500 are lower than the failure rates at this time last year: the Russell 3000 is 40 basis points lower at 2.7% and the S&P 500 is 100 basis points lower at 3.4%.
– 10.0% of Russell 3000 and 10.8% of S&P 500 companies have received an ISS “Against” recommendation thus far in 2022.
You may also want to check out the chart on pg. 3 showing the likely causes of say-on-pay votes under 50% in 2022. The largest likely causes are problematic pay practices and mega-grants/special awards.