The Advisors' Blog

– Broc Romanek

Here’s a piece from Willis Towers Watson about private companies & LTIPs. Here’s an excerpt:

These are the core LTI-related questions that should be addressed by companies that plan to stay private:

– Is the company willing to use real stock to compensate its executives? If so, securities law (i.e., registration exemption) must be considered. But most private companies, especially family-owned businesses, are not willing to offer such LTIs. Our data indicate that about 80% of these “permanent private” firms do not use real equity in their lLTI programs.

– How important is long-term value creation to the company’s owners? Long-term value creation frequently isn’t paramount to owners who don’t plan to sell in the near future. While value is certainly important, many private companies, notably family- and founder-owned businesses, tend to emphasize consistent long-term growth, profitability, cash flow and dividends over long-term value creation.

– How do business owners define and measure long-term success? When defining and measuring long-term objectives, private companies tend to emphasize growth, profitability, cash flow, sustainability, liquidity and risk level. They may also focus on reinvestment of cash in the business versus paid as dividends to shareholders. Moreover, several studies have shown that private companies are more likely to focus on mission-based objectives related to employees, community, customers and the environment.

– How long is “long term?” Not surprisingly, private businesses tend to think of the long term as 5 to 10 years versus the 2- to 3-year time horizons of public companies. In line with this, private companies are more likely to emphasize loyalty and longevity with regard to employees, customers, suppliers and other stakeholders. This longer-term time horizon is often reflected in LTI design.

– How important is long-term retention of employees and wealth creation? In private companies, LTI often plays a dual role of performance-reward and retirement-funding vehicle, which must be figured into incentive plans.

– How and when will the LTI plan be paid out or monetized? This is particularly important for a value-based plan where there is no market for the stock or phantom stock. In particular, monetization presents thorny tax code issues, including fairly rigid requirements around the timing of vesting and payment.

– Is the LTI plan affordable over the long term? It’s critical to model the LTI plan over at least 5 to 10 years to assess its accounting and cash costs to the enterprise.

– Broc Romanek

Here’s an excerpt from this European article entitled “Why It’s Right to Be Mad About Executive Pay”:

The critics are right and the defenders of CEO pay are wrong, according to a study for Handelsblatt Global Magazine by Zurich-based economist Gerhard Fehr. There is, on average, no discernible relationship between executive pay and company performance – suggesting that executives generally reward themselves regardless of whether they succeed or fail. Digging into the data for 70 leading companies in Germany, Switzerland and Austria – and comparing board members’ compensation with shareholder returns relative to other companies – Fehr found no pattern at all. “The idea that executive pay is generally based on performance is post-factual,” he says. Fehr is the founder and CEO of Fehr Advice, a consultancy and research group based on his work in behavioral economics.

If the idea were true that executives’ lavish pay checks were a reward for performance, then the data should show higher pay at companies producing higher shareholder returns – and vice versa. But in reality, Fehr and his researchers found no such connection, no matter how they sliced and diced the data. Pay goes up regardless of how companies perform.

Fehr’s study does not mean that there aren’t individual companies that reward their management for good performance, or cut pay when they do worse. What it does show, clearly, is that there is no such trend across all companies. For every company that rewards its executives for good performance, there is another where paychecks go up when times are bad. Many show little variation at all, signaling that these executives have managed to insulate themselves from the effects of their actions.

Unlike many company bonus systems, Fehr measures executives’ performance by looking at shareholder returns in relation to a company’s peers – what he calls a market-adjusted performance index. Executives shouldn’t be rewarded, he says, for share prices moving up or down with the general market.

– Broc Romanek

Here’s a few articles about how pay levels look this year based on this season’s proxy statements:

– WSJ’s “It’s Good to Be a CEO, Again: Stocks Rise, and So Does Pay”
– ISS Analytics’ “As 2017 Filings Pour in, U.S. CEO Pay Hits Record Levels”
– Equilar’s “Highest-Paid CEOs at the Largest Companies by Revenue”
– IR Magazine’s “CEO pay rises despite companies’ performance, study finds”
– Willis Towers Watson’s “Closer look at the findings of our 2017 proxy analysis”
– Willis Towers Watson’s “Total CEO pay in U.S. companies rose 6% in 2016”

– Broc Romanek

Here’s a piece from Willis Towers Watson about pay disclosures in the UK. Here’s an excerpt:

Interestingly, only 35 of the first 50 companies to report (70%) have put their remuneration policies to a vote, reflecting the significant minority that have conducted binding remuneration policy votes (which must be held at least every three years) since 2014. Looking at the new proposed policies, we see three clear themes:

– More reductions in pay levels than ever before
– A strong move toward increased long-term alignment in the form of more deferrals, holding periods and increased shareholding guidelines
– Many moves to align pension contributions with those of the wider workforce.

– Broc Romanek

As noted in this blog, the SEC brought an enforcement action against MDC Partners back in January for not disclosing perks for a former CEO adequately. At that time, the company agreed to pay a $1.5 million penalty.

Yesterday, the SEC announced it had settled with the former CEO himself – and that he paid $5.5 million ($1.85 million in disgorgement, $150k in interest and a $3.5 million penalty). That’s big money!

Here’s an excerpt from the SEC’s press release:

According to the SEC’s order, shareholders were informed in annual filings that Miles S. Nadal received an annual perquisite allowance of $500,000 in addition to other benefits as the chairman and CEO of MDC Partners. But the SEC’s investigation found that without disclosing information to investors as required, MDC Partners paid for Nadal’s personal use of private airplanes as well as charitable donations in his name, yacht and sports car expenses, cosmetic surgery, and a wide range of other perks. All total, Nadal improperly obtained an additional $11.285 million in perks beyond his disclosed benefits and $500,000 annual allowances. He has since resigned and returned $11.285 million to the company.

– Broc Romanek

Yesterday, the FASB issued “Accounting Standards Update No. 2017-09, Stock Compensation (Topic 718).” The ASU is effective for annual periods – and interim periods within those annual periods – beginning after December 15, 2017.

Here’s the intro from this “Accounting Today” article:

The Financial Accounting Standards Board has released an accounting standards update containing guidance on which changes to the terms or conditions of a share-based payment award require companies to apply modification accounting. The new standards update aims to give accountants more clarity on the guidance FASB provided in an earlier stock compensation accounting standard, known as Topic 718. FASB wants to reduce the differences in practice in applying the standard, along with the cost and complexity of applying it, to a change to the terms or conditions of a share-based payment award.

Companies can change the terms or conditions of a share-based payment award for a variety of different reasons, and the nature and effect of the change can vary significantly. FASB currently defines the term “modification” as “a change in any of the terms or conditions of a share-based payment award,” but some of its constituents have pointed out that the definition of the term modification is broad and its interpretation results in diversity in practice.

Some companies evaluate whether a change to the terms or conditions of an award is substantive. When they decide the change is substantive, they apply modification accounting in Topic 718. But when they conclude a change isn’t substantive, they don’t apply modification accounting. Topic 718 doesn’t include guidance about what changes are considered “substantive.”

– Broc Romanek

Here’s an excerpt from this “Proxy Insights” article (pg. 6):

Using data from Proxy Insight, it is possible to compare the policies of investors with their actual voting record. While investors typically oppose the priciple of golden parachutes, caveats in their policies often result in much higher support for the issue than might be expected. This is highlighted in Table 1, where 8 out of 10 investors supported more than half of all golden parachute resolutions they voted on, indicating that there are at least some investors paying lip service to good governance through their policies, yet taking a very different approach in practice.

This could help to explain the fact that, despite their divisive nature and tendency to provoke a fair amount of shareholder opposition, golden parachute proposals still rarely fail. Of the 438 golden parachute proposals that Proxy Insight has collected, all but 30 proved to be successful with the average level of support for these being 83%.

– Broc Romanek

Here’s a teaser from this Shearman & Sterling memo:

The Delaware Chancery Court recently dismissed the shareholder class action suit – In re Columbia Pipeline Group, Inc. Stockholder Litigation, C.A. No. 12152-VCL (Del. Ch. Mar. 7, 2017) – reaffirming that a fully-informed vote of a company’s disinterested stockholders will result in application of the business judgment rule. However, in a recently filed transcript of the proceedings, the Court made some noteworthy remarks regarding equity acceleration in the context of change of control transactions.

– Broc Romanek

Here’s the key findings from this study of share utilization by Willis Towers Watson:

– A continuing trend of reduced run rate overall, although there is some growth among companies with the highest run rates
– A continuing increase in the fair value of LTI awards (e.g., the typical S&P 1500 company awarded $23.1 million in LTIs in 2015, up from a median of $17.5 million two years ago), even as share usage has declined
– Growing use of full-value (time- or performance-lapsing) shares, while the use of stock options continues to wane.

– Broc Romanek

Just landed, coming back from a nice holiday in Japan & Hong Kong (see my pics on Instagram). Today marks my 15th anniversary – 15 years! – of my blither & bother on “TheCorporateCounsel.net Blog” (note this blog is 9 years old – and the “DealLawyers.com Blog” is nearly 14 years old – not shabby!). It’s the one time of year that I feel entitled to toot my own horn – as it takes stamina and boldness to blog for so long. A hearty “thanks” to all those that read this blog for putting up with my personality. I’m sure I won’t get more refined with age…

Cap’n Cashbags: 15 Years of Blogging

Cap’n Cashbags – a CEO – tries to convince his director friend that 15 years of blogging is worth celebrating…