Yesterday, the SEC adopted amendments to the rules governing proxy advisors and it also issued supplemental guidance concerning proxy voting responsibilities of investment advisers – many have been waiting for rules on proxy advisors for years. Mike Melbinger provides some initial thoughts in his blog and Liz blogged about the amendments on TheCorporateCounsel.net.
We’ll be posting memos – likely lots of them – in our “Proxy Advisors” Practice Area. And, we’ll be covering the rule amendments and discussing impacts of the amendments at our upcoming “Proxy Disclosure” & “Executive Pay” Conferences – which will be held entirely virtually over three days – September 21 – 23. We’ve offered a Live Nationwide Video Webcast for our conferences for years – one of the only events to do so – and we’re excited to build on that platform and make your digital experience better than ever. Here’s the registration information.
We recently received the following question from a member on TheCorporateCounsel.net Q&A Forum (Topic #10382):
Prior to proxy statement filing a company timely filed its Form 10-K, which included all Part III information.
After the Form 10-K was filed, the company awarded NEO cash bonuses for last year. These bonuses were entirely discretionary and there was no expectation of, or contractual right to, bonuses by the NEOs at the time the Form 10-K was filed.
The Company is now filing its annual meeting proxy statement. The proxy statement will reflect the NEO cash bonuses in the compensation table. Does the company also need to amend its Form 10-K to reflect the bonuses for last year so that the compensation sections of the Form 10-K and proxy statement are identical?
Here was John’s response:
Legally, I think the answer is no. There is nothing in the rules to suggest that a company has an obligation to amend an Exchange Act report that was accurate when it was filed merely because some significant development occurs subsequent to filing. There may be a business issue about whether it is advisable to file an amendment or highlight the updated disclosure in a Form 8-K based on the company’s assessment of the potential for shareholder confusion.
You may want to refer to the article “When, Why & How to Amend an Exchange Act Report” that appeared in the May-June 2019 issue of “The Corporate Counsel.”
A recent Mercer report shows 2020 proxy season say-on-pay votes results have been pretty stable – with support averaging about 91%. Even though the average vote result has been stable, the number of failed say-on-pay votes at S&P 500 companies has ticked up – 9 through May 2020 compared to 7 failed votes for all of 2019 and also exceeding all but one of the prior years.
I blogged earlier this spring about the ISS impact on say-on-pay vote outcomes, which can play a significant part in vote results. The report says ISS has recommended shareholders vote “against” fewer say-on-pay proposals in 2020 when compared to last year and then lists the following factors contributing to say-on-pay failures this year:
– Modification of performance targets to make them easier to achieve
– Lack of quantifiable (vs qualitative) performance metrics
– Lack of transparency around performance goals, lack of goal rigor, and/or use of discretion
– One-off equity grants, especially when not sufficiently performance-based
– Mega grants covering current and future years
– Payment of cash severance on retirement in lieu of forfeited equity
A recent Exequity report explores the usage of relative total shareholder return (RTSR) within long-term incentive plans across S&P 500 companies. The report’s introduction says that comp committees may increasingly turn to RTSR as fallout from Covid-19 makes reliable goal-setting hard to come by. The report includes charts showing the prevalence of RTSR and design elements showing whether RTSR is used as a metric or modifier…
Today’s headline is based on an article from The Deal (subscription required) – which highlights that negative say-on-pay votes send a signal to activists that shareholders are willing to vote against management. Therefore, the thinking goes, they may be receptive to activist campaigns. Here’s an excerpt:
Chipotle Mexican Grill Inc. (CMG) is one of the highest-profile examples of a big negative vote on pay that drove an activist into the fold.
In 2014, only 23% of shares backed Chipotle’s executive compensation package. The Mexican-themed fast-food chain at the time had co-CEOs, a rare situation that typically is a red flag for investors. By 2016 — when investor sentiment around executive pay was still not great — Bill Ackman’s Pershing Square Capital Management LP swooped in with a campaign and ultimately a settlement to add dissident directors.
Elbaum noted that companies that wait too long to examine the root cause of negative shareholder votes could soon be targeted by activists, who often will try to paint boards as tone deaf to shareholder feedback.
As this Semler Brossy memo points out (pg. 2), 33% of the S&P 500 has gotten a “low” say-on-pay result at some point since 2011. The crisis environment might amplify this risk next year, so it’s time to start planning ahead.
We’ve blogged a few times about disclosure of EEOC data, in response to growing calls for transparency on diversity & pay equity. As Lynn blogged last week on our “Proxy Season Blog” on TheCorporateCounsel.net, here’s one of the most recent examples of a shareholder calling for this information:
The NYC Comptroller and three NYC retirement systems announced that they sent a letter to the CEOs of 67 S&P 100 companies requesting they back up statements calling for racial justice by disclosing EEO-1 report data. In support of the request, the announcement says disclosure of EEO-1 data will allow investors to evaluate a company’s diversity workforce practices while also facilitating board oversight of human capital management practices. Here’s an excerpt about the Comptroller’s expectations for companies receiving the latest letter:
Companies receiving the letter were asked to provide a written commitment by August 30, 2020 to publicly disclose their EEO-1 Report effective upon its next submission to the U.S. Equal Employment Opportunity Commission (EEOC) in 2021 or risk potential submission of shareholder proposals or opposition to the election of director nominees standing for re-election at the next annual shareholder meeting.
Diversity has been an ongoing focus for the NYC Comptroller’s office, although boardroom diversity seemed to garner most of the attention. Earlier this year, we blogged about results from the NYC Comptroller’s Boardroom Accountability 3.0 project that involved a version of the NFL’s “Rooney Rule.” Although the NYC Comptroller’s office has submitted shareholder proposals calling for EEO-1 data disclosure previously, it wasn’t done with a “splash” like it did this time around – the Comptroller’s 2019 postseason report shows it only submitted two proposals that year calling for EEO-1 data disclosures.
Lynn blogged a few months ago that peer groups might shift more this year due to the pandemic and resulting economic fallout. So although there’s no requirement to do so, there may be more reason this year to give input to ISS on what that group will look like. For companies that have meetings between September 16th & January 31st, the window to give input is open until this Friday – specifically, 8pm ET. Here’s more info from this Davis Polk blog:
As one input in its peer group selection methodology, ISS will generally look to the peer group disclosed in the company’s last proxy and utilized by the company in determining CEO pay. However, ISS will also consider modifications or changes the company has made to the peer group since the last proxy disclosure or if the company anticipates making changes to the group in connection with the next proxy disclosure. Particularly given the COVID-19 pandemic and the ensuing stock market dislocation, companies may be considering changes to their self-selected peer groups and, if so, these companies should consider submitting any appropriate peer group updates prior to the July 17 deadline.
Tune in tomorrow for the webcast – “Executive Compensation Planning in a Down Market” – to hear Tony Eppert of Hunton Andrews Kurth, Richard Harris of Aon and Jamin Koslowe of Simpson Thacher & Bartlett discuss emerging disclosure practices and how companies and compensation committees should approach executive compensation planning in a turbulent environment.
Off-season shareholder engagement is always important but this year it may be even more so with attention focused on social issues, company responses to the pandemic and related matters. As proxy seasons seem to be rolling from one right into the next, Teneo recently issued a memo titled “20 Imperatives for Fall 2020 Shareholder Engagement” to help companies prepare for upcoming off-season shareholder engagement and the 2021 proxy season.
The memo lists 20 topics and questions, primarily focused on diversity and executive compensation and suggests companies prepare for Fall engagement by asking themselves those questions. Here are a few:
– Strategy: How are we reassessing and resetting our strategy, business, brand, and reputation to align with the new normal? Over the medium and long term, the new normal may call for a different strategy, brand changes that mitigate inclusiveness concerns, or a reprioritization of business lines. Stakeholders will view the strategy through a new lens and expect companies to do the same.
– Diversity Goals: Should we set and disclose concrete diversity goals? The evolution of sustainability reporting has led to the practice of companies setting and disclosing concrete goals, typically relating to the environment. It is less common for companies to set and disclose any goals relating to social issues. However, the current environment could prompt investor calls for goal setting on this issue as well.
– Consistent Grant Values: How will our year-over-year grant values be perceived by investors? Maintaining year-over-year grant values during periods of extreme stock price volatility poses a unique set of challenges. While lowering annual grant values may raise retention and motivation concerns, proxy advisors and many shareholders expect lower grant date values when the stock price is low, as granting more shares has a dilutive effect. The recent stock market rally has only increased the scrutiny of significant gains from equity awards at the height of the pandemic.
Back in May, I blogged about ClearBridge Compensation Group’s report analyzing trends in non-employee director compensation. ClearBridge recently issued a second report, this time addressing trends in mid-cap non-employee director compensation – the previous report addressed large-cap. The latest report looks at compensation for directors among 100 S&P MidCap 400 companies from 2009 – 2019. Some high-level findings relating to board service include:
– Standard board compensation levels have homogenized around the median as fewer companies have maintained programs that are significantly above or below market, resulting in a narrower spread of values
– Average mix of cash and equity compensation for board service was weighted more heavily toward equity (41% cash and 59% equity), an increase from 2009 (49% cash and 51% equity)
– Use of meeting fees has declined markedly, falling from 66% of companies in 2009 to only 23% in 2019