As our colleague John Jenkins blogged today on TheCorporateCounsel.net – and as noted yesterday on its blog – Glass Lewis has posted its 2020 Voting Guidelines. As always, page 1 of the Guidelines summarizes the policy changes – and we’ll be posting memos in our “Proxy Advisors” Practice Area. Compensation-related changes include:
1. Compensation Committee Responsiveness: Glass Lewis codified additional factors we will consider when evaluating the performance of compensation committee members. Specifically, they’ll recommend against all members of the compensation committee when the board adopts a frequency for its advisory vote on executive compensation other than the frequency approved by a plurality of shareholders.
2. Severance & Change-in-Control: Glass Lewis clarified its approach to analyzing both ongoing and new contractual payments and executive entitlements. It typically disfavors contractual agreements that are “excessively restrictive in favor of the executive” – including excessive severance payments, new or renewed single-trigger change-in-control arrangements, excise tax gross ups and multi-year guaranteed awards. The extension of these provisions through renewed or revised employment agreements is also frowned upon.
3. Say-on-Pay Engagement: Glass Lewis expanded its discussion of what it considers to be an appropriate response following low shareholder support for say-on-pay – including differing levels of responsiveness depending on the severity & persistence of shareholder opposition. They expect robust disclosure of engagement activities and specific changes made in response to shareholder feedback. Absent such disclosure, Glass Lewis may consider recommending against the upcoming say-on-pay proposal.
4. Gender Pay Equity: Glass Lewis will review on a case-by-case basis proposals that request that companies disclose their median gender pay ratios (as opposed to proposals asking that such information be adjusted based on factors such as job title, tenure, and geography). In instances where companies have provided sufficient information concerning their diversity initiatives – as well as information concerning how they are ensuring that women and men are paid equally for equal work – it will typically recommend against these resolutions.
5. Other Clarifications: The Guidelines define situations where Glass Lewis reports on post-fiscal year end compensation decisions (pg. 31), sets expectations for disclosure of mid-year adjustments to STI plans (pg. 33-34) and enhances the discussion of excessively broad definitions of “change in control” in employment agreements (pg. 36).
Last spring, I blogged that CalPERS was considering a change to its proxy voting guidelines that would result in it voting “against” compensation committee members in the same year that it votes against say-on-pay or compensation plans. Its recently updated Proxy Voting Guidelines confirm that policy – and as Broc has blogged, the pension fund voted against 53% of say-on-pay proposals last year! So that could translate into a lot of “no” votes for directors in the coming season.
This Proxy Insight memo (pg. 7) points out that CalPERS isn’t even close to being the most “aggressive” public pension fund out there when it comes to say-on-pay votes. The Minnesota State Board of Investment voted against 69% of say-on-pay proposals in the Russell 3000, followed by the Florida State Board of Administration – which voted against 64% of proposals – and Calvert Research & Management – which voted against 57%. This MSCI blog points out that negative votes are becoming more common among other pension funds too.
Conversely, the opposite end of the spectrum is dominated by fund houses, including giants like BlackRock, Vanguard and State Street – who supported 97%, 94% and 89% of say-on-pay proposals. Proxy Insight notes that while there are exceptions in both directions, it seems that pension funds are the ones most likely to take a hard line.
Here’s something that Liz just blogged over on TheCorporateCounsel.net: The gloves are off. Yesterday, ISS announced that it had filed this lawsuit against the SEC – which challenges the Commission-level guidance that was issued back in August. As Broc blogged earlier this week, CII had already sent a couple of comment letters to the SEC to complain about that guidance. This lawsuit also comes on the heels of the SEC announcing that it will hold an open Commission meeting next week to propose rule changes for proxy advisors.
These are the ISS allegations (also see this Cooley blog – and this Twitter thread from Wharton Prof David Zaring that speculates this case may be used as part of the bigger picture pushback on regulatory guidance that we’ve been seeing):
– The guidance exceeds the SEC’s statutory authority under Section 14(a) of The Securities Exchange Act of 1934 and is contrary to the plain language of the statute; the provision of proxy advice is not a proxy solicitation and cannot be regulated as such
– The guidance is procedurally improper because it is a substantive rule that the SEC failed to promulgate pursuant to the notice-and-comment procedures of the Administrative Procedure Act
– The guidance is arbitrary and capricious because, even though it marks a significant change in the regulatory regime applicable to proxy advice, the SEC has denied that it is changing its position at all. The agency has thus flouted the basic requirement of reasoned decision-making that it at least display awareness that it is changing its position
Here’s the intro from this piece by Semler Brossy’s Seamus O’Toole and Olivia Tay:
When Actavis PLC (now Allergan Inc.) compensation committee members voted in 2014 to award the company’s named executive officers (NEOs) with a front-loaded long-term equity incentive, they had a convincing rationale (Actavis 2015). The company was in the midst of executing a new transformational strategy focused on growth, as well as absorbing the recent $28 billion acquisition of Forest Laboratories Inc. The complex and multifaceted strategy would take several years to execute, so the new compensation plan aimed to focus executives on just one set of goals for the next three years.
The long-term incentive — and the strategy — was a big bet. Executives would forgo annual equity awards for three years. But if they delivered the transformation and achieved an annual total shareholder return (TSR) of at least 10%, they would earn awards ranging from a grant-date fair value of $5.6 million to $34.5 million — the top figure for CEO Brent Saunders. The equity, in the form of performance stock units and options, would fully vest in 2019.
Front-loaded awards typically lump into one sum the expected value of grants that will be made over the ensuing three to five years. Instead of an annual grant schedule, the full award is made upfront (see Figure 1). Oftentimes, companies will design these awards to have a higher-than-normal risk profile as well, but that isn’t always the case.
Last night, the SEC posted this Sunshine Act notice to announce it will hold an open meeting next Tuesday, November 5th to propose rule changes for proxy advisors & shareholder proposal thresholds. My blog yesterday included an excerpt from an FT article about what may be in the proposals. Check that out for a possible preview.
We’ll be covering the SEC’s Rule 14a-8 proposal during our upcoming TheCorporateCounsel.net webcast – “Shareholder Proposals: What Now” – on Thursday, November 21st. In that program, Davis Polk’s Ning Chiu, Morrison & Foerster’s Marty Dunn and Gibson Dunn’s Beth Ising will also be discussing Corp Fin’s new approach for processing shareholder proposal no-action requests and the expected impact of Staff Legal Bulletin No. 14K.
Here’s something that Liz just blogged over on TheCorporateCounsel.net: Although we haven’t yet seen a Sunshine Act notice from the SEC, the Financial Times is reporting that the SEC could propose new rules for proxy advisors & shareholder proposal thresholds as soon as next Tuesday. For now, here’s what’s being reported as part of the proposal:
– Proxy advisors would be required to give companies two chances to review proxy voting materials before they are sent to shareholders
– Shareholder proposal resubmission threshold would increase to 6% approval in year one, 15% in year two and 30% in year three – if a shareholder proposal doesn’t hit those thresholds, companies would be able to exclude proposals on the same subject matter for the next three years
These things are always very speculative – both the substance & timing could change, and nothing’s certain till we see the proposal. The FT article emphasizes that too:
The Commission is expected to vote to put the changes out for comment on November 5, according to the people, who cautioned that the plans and the timing were still in flux and could change before the vote next month.
If the proposal is issued, you can bet we’ll be covering it during our upcoming TheCorporateCounsel.net webcast – “Shareholder Proposals: What Now” – on Thursday, November 21st. In that program, Davis Polk’s Ning Chiu, Morrison & Foerster’s Marty Dunn and Gibson Dunn’s Beth Ising will also be discussing Corp Fin’s new approach for processing shareholder proposal no-action requests and the expected impact of Staff Legal Bulletin 14K.
This memo from Fisher Phillips is pretty practical as far as what things the board should make sure management is considering when it comes to gender pay equity – it points out that some states have a safe harbor if you conduct an equal pay audit. But obviously there are risks to that too. Note the memo’s “pay equity interactive map” that shows only two states haven’t adopted some form of equal pay law…
This memo from Willis Towers Watson says that compensation committee names & charters are starting to reflect issues that investors say they care about. Here’s some stats:
– Nearly 40% of the S&P 500 (192 companies) currently refer to the committee responsible for executive compensation oversight as something beyond just the “compensation committee”
– Over half of the companies require committees to maintain oversight of broad-based compensation programs and benefits
– One-third of the companies have given the committee diversity and inclusion program oversight
– Only 14% of the sample had oversight of employee culture, employee relations and engagement, but when the compensation committee’s name was broadened toinclude additional responsibilities, these charges are included in charters at a rate six times higher than at companies using the traditional term of compensationcommittee (24% versus 4%)
The memo goes on to note that in the last 10 years, only 9% of companies have changed their name to reflect oversight of human capital issues. However, the rate of change is accelerating: 26 companies changed their name from 2016 to 2019, compared to 11 from 2012 to 2015. We have lots of resources about committee responsibilities & trends in our “Compensation Committees” Practice Area.
The annual “Corporate Governance & Executive Compensation Survey” of the 100 largest companies from Shearman & Sterling is always a “hot ticket” item, perhaps because it’s one of the oldest. Here’s a few key takeaways about clawback policies, from page 92:
– 88 of the Top 100 Companies expressly disclose that the maintain a financial-related clawback policy
– 45 of the clawback policies are triggered by a finding fraud or misconduct related to the financial statement – 40 don’t require fraud or misconduct
– 26 of the clawback policies use multiple trigger events
We just wrapped up the latest edition of “Lynn, Borges & Romanek’s Executive Compensation Disclosure Treatise” — and it’s been sent to the printers. The 2020 Edition includes updates to disclosure examples, info about the evolving link between ESG topics & executive pay, and a brand new chapter on hedging policy disclosure. All of the chapters have been posted in our “Treatise Portal” on this site.
How to Order a Hard-Copy: Remember that a hard copy of the 2020 Treatise is not part of a CompensationStandards.com membership – so it must be purchased separately. Act now to ensure delivery of this 1710-page comprehensive Treatise as soon as it’s done being printed. Here’s the “Detailed Table of Contents” listing the topics so you can get a sense of the Treatise’s practical nature. Order Now.