The messy story of McDonald’s Corporation’s decision to terminate its former CEO Stephen Easterbrook added another chapter yesterday, when the SEC announced that it had initiated settled enforcement proceedings against the former CEO and the company arising out of his departure.  This excerpt from the SEC’s press release explains its allegations:

According to the SEC’s order, McDonald’s terminated Easterbrook for exercising poor judgment and engaging in an inappropriate personal relationship with a McDonald’s employee in violation of company policy. However, McDonald’s and Easterbrook entered into a separation agreement that concluded his termination was without cause, which allowed him to retain substantial equity compensation that otherwise would have been forfeited. In making this conclusion, McDonald’s exercised discretion that was not disclosed to investors.

Subsequently, in July 2020, McDonald’s discovered through an internal investigation that Easterbrook had engaged in other undisclosed, improper relationships with additional McDonald’s employees. According to the SEC’s order, Easterbrook knew or was reckless in not knowing that his failure to disclose these additional violations of company policy prior to his termination would influence McDonald’s disclosures to investors related to his departure and compensation.

Without admitting or denying the SEC’s allegations, Easterbrook consented to a cease & desist order prohibiting future violations of the antifraud provisions of the federal securities laws, and imposing a $400,000 fine and a five-year officer and director bar.  The company consented to a cease & desist order prohibiting future violations of Section 14(a) of the 1934 Act and Rule 14a-3 thereunder.

As Liz blogged last year, the company sued the former CEO and reached a settlement under which it “clawed back” over $100 million in equity awards and cash based on the company’s claims that the board wouldn’t have approved a separation agreement characterizing his termination as “without cause” if it had been aware of his dishonesty and additional misconduct.  The company’s efforts to claw back that compensation, together with its other efforts to cooperate with the SEC’s investigation, resulted in the agency’s decision not to impose a financial penalty on the company.

Commissioners Peirce and Uyeda dissented from the SEC’s decision with respect to the company. In their dissenting statement, they expressed their view that the SEC was rewriting the disclosure requirements of Item 402 of Reg S-K through an enforcement proceeding. Here’s an excerpt:

We are unaware of prior Commission or staff actions or positions applying Item 402 in the way that the Order does.  Additionally, the Order can be read to suggest that the underlying reasons for why the company decided to terminate a named executive officer “without cause” instead of “with cause,” and vice versa, need to be disclosed under Item 402.  Such “hiring and firing discussion and analysis,” however, is beyond the rule’s scope.

The statement went on to note that industry practice for complying with Item 402 has developed over many years, and that an enforcement action is not “a reasonable regulatory approach” for announcing a novel interpretation.

It seems to me that the dissenters make a good point – executive termination disclosures tend to be terse, often for sound business and legal reasons. Imposing a requirement that companies must disclose the reasons why they opted to treat a particular termination as being “without cause” adds another layer of complexity to an already challenging process, without in most cases providing a significant benefit to investors.

– John Jenkins

On December 16th, ISS issued a new set of Equity Plan FAQs and a new set of Compensation Policies FAQs.  This Edward Hauder Blog summarizes the changes.  Here are a couple of excerpts from the blog that provide an overview of the changes:

Equity Compensation Plan FAQs.  ISS announced several changes, including how it will determine the common shares outstanding (CSO) when there are economic proposals such as mergers or acquisitions that are on the agenda, how burn rate will be considered (including the new Value Adjusted Burn Rate methodology), implications of a change in index membership or GICS classification within the last three years, and changes with respect to the Equity Plan Scorecard (EPSC) model.

Compensation Policies FAQs.  ISS indicates that there will be no changes to any of the quantitative pay-for-performance (P4P) screens for 2023 used to inform its Say-on-Pay (SOP) vote recommendations. However, ISS did change how it will use its Financial Performance Assessment (FPA) measure in 2023 by expanding the number of situations that it can be used to change the ultimate P4P concern level. Starting February 1, 2023, ISS can use FPA result to not only move a low bordering medium concern company to a medium concern or a medium concern company to a low concern, ISS will be able to move concern down to medium for certain high concern companies and up to high concern for certain medium concern companies.

The blog points out an additional point worth noting concerning how ISS will use the FPA result – since FPA is a proprietary ISS and it has not fully disclosed how it calculates these amounts, companies will have a very difficult time determining their FPA score and how it will impact ISS’s assessment of their P4P concern level.  In turn, that’s going to make it harder for these companies to assess what recommendation ISS will make on their say-on-pay proposal.

– John Jenkins

Liz’s change in status has prompted us to rethink how we email our blogs to you each morning. At the end of the month, we’re going to change over from our current practice of having our blogs come from the email address of one of our editors. Going forward, all of our blogs will be sent from Editorial@TheCorporateCounsel.net. Our objective is to establish a sender address that won’t need to be changed every time there’s a change on the editorial masthead, which hopefully means that this will be the last time we have to ask you to take the time to whitelist our email addresses.

We know that whitelisting is kind of a pain in the neck, so we’ve put together this whitelisting instruction page to help you and your IT department understand what actions you may need to take in order to ensure there’s no disruption in delivery. We’re going to begin to send blogs from the Editorial@TheCorporateCounsel.net address over the course of the next several weeks, so please be sure to whitelist the new address at your earliest convenience.  We’re going to do this incrementally across our sites, and we’ll keep you apprised of when we plan to make the change for a specific site.

There are a couple of things that I also want to mention about this change. First, the name of the author of a blog will always appear in the email, so if you want to respond to the author, you can just click on the author’s name and their email address will pop up. Second, Editorial@TheCorporateCounsel.net isn’t a black hole. If you hit reply, your message will go to a folder that I’ll have access to. I’ll check that every few days and forward your email to the appropriate editor. Finally, thanks for your patience and cooperation.

– John Jenkins

Here’s a guest blog from J.T. Ho and Bobby Bee of Orrick, which passes along some helpful informal Staff guidance on the level of detail required in PvP footnote disclosure of “compensation actually paid”:

“A common question we have received from issuers as they prepare their new pay versus performance disclosures relates to just how much footnote detail is required to explain the calculation of “compensation actually paid.” Item 402(v)(3) of Regulation S-K requires (emphasis added):

“(3) For each amount disclosed in columns (c) [Compensation actually paid to PEO] and (e) [Average compensation actually paid to non-PEO named executive officers] of the table required by paragraph (v)(1) of this section, disclose in footnotes to the table each of the amounts deducted and added pursuant to paragraph (v)(2)(iii) of this section, the name of each named executive officer included as a PEO or in the calculation of the average remaining named executive officer compensation, and the fiscal years in which such persons are included. For disclosure of the executive compensation actually paid to named executive officers other than the PEO, provide the amounts required under this paragraph as averages.”

The question is whether the footnotes, as they relate to the pension value adjustments and equity award adjustments required by Item 402(v)(2)(iii)(B)(1) and Item 402(v)(2)(iii)(C)(1), could be limited to disclosing solely the aggregate amount calculated for pension value adjustments and equity award adjustments, respectively. This would be in lieu of having the footnotes disclose each of the amounts deducted and added, pursuant to sub-Items 402(v)(2)(iii)(B)(1)(i) – (ii) and sub-Items 402(v)(2)(iii)(C)(1)(i)-(vi), to arrive at such aggregate amounts, as presented in the “Model Pay Versus Performance Disclosure” from the Compensation Standards.com Special Session: “Tackling Your Pay Vs. Performance Disclosures.”

See an excerpt of the sample footnotes below, with the crux of the question whether issuers could disclose just the final adjustment columns, for each year, in their footnote disclosures:

Pension Value Adjustment Sample Footnote:

(x)….The amounts deducted or added in calculating the pension benefit adjustments are as follows:

Equity Award Adjustment Sample Footnote:

(y)…The amounts deducted or added in calculating the equity award adjustments are as follows:

We spoke with a representative from the SEC’s Office of Small Business Policy in the Division of Corporation Finance, who confirmed the SEC expects each of the amounts identified in the tables above to be included as part of the footnotes.

Issuers and service providers alike should take note of this expectation in connection with preparing and reviewing the pay versus performance disclosures.”

I apologize for the funky formatting of the tables. I wasn’t trying to pay tribute to Wonder Woman’s invisible jet – there are supposed to be row and column lines in the tables. In fact, they’re on my draft. Your guess is as good as mine as to why those lines don’t show up in published version of the tables, although I can’t rule out my own lamentable lack of skill as a cause.  For the record, the Word document that J.T. and Bobby sent was perfectly formatted.  Also, this kind of thing never happened when Liz was in charge. . .

– John Jenkins

FW Cook recently issued its annual Director Compensation Report, which reviewed director comp at 300 companies in order assess market practices in pay levels and the structure of compensation programs. This excerpt provides an overview of some of its key findings:

At the median, 2022 total compensation increased modestly among mid-cap and large-cap companies compared to small-cap companies, where compensation increased slightly more: the small-cap median increased 4.9% from $185,833 to $195,000, the mid-cap median increased by +1.1% from $236,000 to $238,500, and the large-cap median increased +2.0% from $294,167 to $300,000.

Director compensation structure remains consistent with prior years, with an average mix of 60% equity and 40% cash compensation, across the entire sample. Small-cap companies tend to have the highest cash weighting (average of 44%) while large-cap companies tend to have the lowest (average of 36%).

Most companies have continued to simplify cash payments by replacing meetings fees with larger board annual cash retainers (only 8% of the total sample pay meeting fees). Most companies continue to use fixed-value equity award guidelines, with full-value stock awards remaining the most common form of equity compensation and providing the most consistent means to align director pay with shareholder interests. Equity grants most commonly vest immediately, or cliff-vest after one year.

– John Jenkins

The SEC’s adoption of the Dodd-Frank clawback rules triggered a process that will ultimately result in the adoption of new clawback listing standards by the NYSE & Nasdaq. That process may take up to a year, but this Bryan Cave blog provides some key dates that companies should keep in mind as they work to implement clawback policies that comply with the listing standards ultimately adopted by the exchanges:

The new Clawback Rules apply broadly to most companies with securities listed on a national securities exchange, including smaller reporting companies, emerging growth companies, foreign private issuers, controlled companies and debt‑only issuers. Issuers should consider the below dates when considering modification of existing clawback policies to conform to the rules, or in adopting initial clawback policies.

– January 27, 2023 (i.e., 60 days following Federal Register publication): Effective date of SEC’s Clawback Rules.

– February 24, 2023 (i.e., the last business day before the 90th day post-Federal Register publication): Deadline for NYSE, Nasdaq and other national securities exchanges (the “Exchanges”) to file with the SEC proposed listing standards that will require their listed companies to develop and implement compensation recovery policies that comply with the Clawback Rules.

– November 28, 2023 (i.e., one year following the Federal Register publication): Latest date by which the listing standards of an Exchange must become effective. Any incentive-based compensation that is granted, earned, or vested wholly or in part on or after such effective date must be subject to a compliant clawback policy. Moreover, the disclosure requirements under the Clawback Rules must appear in all of a company’s proxy statements, information statements, and annual reports filed on or after the effective date.

– January 27, 2024 (i.e., 60 days following the latest date on which the Exchanges’ listing standards may become effective): Latest possible date for a listed company to adopt a compliant clawback policy if the listing standards of the applicable Exchange were to become effective on the latest possible date (i.e., November 28, 2023); note that the deadline could be significantly earlier depending on exactly when the applicable listing standards become effective.

The blog recommends that companies without clawback policies begin preparing policies that conform the requirements laid out in the SEC’s rules and that those with clawback policies review them with a view to identifying necessary changes. In addition, employment agreements and compensation arrangements should be evaluated in order to determine whether adjustments are necessary, and the impact of clawback rules on the structure of existing compensation programs should be assessed.

– John Jenkins