Here’s a blog with the latest news on Nasdaq’s proposal by Davis Polk’s Ning Chiu:
The SEC has extended to July 4, 2016, as the deadline for taking action on NASDAQ’s proposal requiring its listed companies to disclose any third-party compensation payments related to candidacy or service as directors on the companies’ boards.
We previously discussed the rule proposal. Last week, NASDAQ amended the rule filing so that the disclosure must be made in the proxy statement for any shareholder meeting that elects directors, not just at annual meetings. Alternatively, the disclosure could be posted on a company’s website.
The amendment also explicitly identifies indemnification arrangements under the rule proposal’s already broad definition of compensation. As we noted in our prior post, the rules would capture any additional compensation paid to an employee of a private equity, venture capital or another firm for serving on a board, but only as to the amount of the increased payments related to that service.
Once the rule becomes effective, which was previously set to occur at the end of June, a NASDAQ-listed company must disclose all applicable agreements and arrangements no later than the date when it files a proxy statement for a meeting to elect directors. The initial disclosure mandate is met if the information was disclosed previously in another proxy solicitation or an 8-K. Thereafter, the disclosure requirement continues annually until either the director resigns or one year after the agreement terminates. A company that discovers it has failed to make the disclosure must remedy the defect by an 8-K or 6-K if SEC rules require it, or through a press release.
The Exchange Act provides that the Commission must by July 4th either approve, disapprove or institute proceedings to determine whether the proposed rule changes should be disapproved.
As I have blogged many times (here’s one), the SEC’s Reg Flex Agendas tend to be “aspirational” – and experience bears that out as the SEC often misses its “target” deadlines. I actually loathe blogging when a new Reg Flex Agenda comes out – because some folks read too much into it. In fact, I’m only blogging about it now to try to stave off more misinformation (until just the last few years, the Reg Flex Agenda was completely ignored by everyone)!
Anyway, the latest edition is out – and the following proposed & final rulemaking projects are listed with a April 2017 timeframe:
– Finalize the outstanding compensation proposals (clawbacks/P4P/hedging & pledging/institutional investment manager filing of Form N-PX to disclose their proxy voting- this one has been on the Reg Flex Agenda since 2010!)
– Propose the S-K & S-X changes arising out of the disclosure effectiveness concept releases
– Propose universal proxy
– Propose additional board & nominee diversity disclosures
– Propose changes arising out of the Item 407 audit committee disclosures concept release
– Propose changes to “smaller reporting company” definitions
– Propose changes to Guide 3 (bank holding companies) & Guide 7 (mining)
– Propose the ridiculous 10-K Summary Page, as required by the FAST Act
There are numerous other rulemakings listed. Given the Presidential election, which often increases the likelihood of a change in who is serving as the SEC Chair, this April 2017 timeframe is even more dubious than usual. A new SEC Chair would take time to be confirmed – and then it takes a while for a new Chair to decide their rulemaking priorities and get the ball rolling…
Drilling Down: What is the “Regulatory Flexible Agenda?”
Given that there is so much misinformation out there, let me lay out what the Reg Flex Agenda is – and isn’t. The Regulatory Flexibility Act requires each federal agency – in April and October – to publish an agenda in the Federal Register identifying rules that the agency expects to consider in the next 12 months that are likely to have a significant economic impact on a substantial number of small entities.
The Regulatory Flexibility Act specifically provides that publication of the agenda does not preclude an agency from considering or acting on any matter not included in the agenda – and in fact, an agency is not required to consider on any matter that is actually included in the agenda. As a result, the target dates in the Reg Flex Agenda are fairly meaningless. The SEC may act sooner or later – or even never!
And since the Reg Flex Agenda is not an “official” agenda of what the SEC really will do, all kinds of whacky and aspirational stuff makes it into each Reg Flex Agenda. For example, an SEC Commissioner might have a pet project that gets listed – but the SEC Chair might not have any intention of letting that idea see the light of day.
This bizarre “fictional” stature of the Reg Flex Agenda can cause challenges for the SEC if they get called down to Congress to testify and a member of Congress asks why the agency hasn’t hit a target date. It’s tough to testify that “Yes, Senator, I know we listed that rulemaking as being completed ‘in the Fall’ – but you should ignore the Reg Flex Agenda.” But this is reality…
Check out this report – “Incentive Plans: How Leading Companies Pay for Performance” – from Equilar & E*TRADE Corporate Services. This is the first time they have run this particular analysis, which covers how the S&P 500 has awarded performance pay to executives over the period of 2012 to 2015. In addition, the report includes an extensive look at S&P 100 performance awards in 2015.
The usually close-mouthed Capital Group is speaking up on executive pay – throwing more brickbats than bouquets. In a recent interview, leaders of the $1.4 trillion Los Angeles-based investment manager said they worry about the magnitude of pay for chief executives and question whether corporate boards are using the right benchmarks to determine compensation. “There has been this continued escalation where everybody wants to be in the upper quartile,” Alan Berro, senior portfolio manager at Capital Group, told Reuters. “Once one guy raises it, they all want those raises, and we are willing to say no,” he said.
Berro’s comments are important because Capital Group, which oversees the big American Funds mutual fund family, is one of the largest holders of U.S. stocks and is emerging as one of the toughest critics of corporate compensation. A measure is its voting record on what are known as “say-on-pay” resolutions – non-binding measures which let shareholders vote on whether to approve compensation for top executives. Last year, big mutual fund providers including BlackRock Inc and Vanguard Group voted in support of say-on-pay resolutions of S&P 500 companies at least 96 percent of the time, according to research firm Proxy Insight. Capital Group, however, was less generous in its support, with its funds supporting the pay 86 percent of the time, one of the lowest rates among big U.S. fund managers.
Executive pay, which has been a source of controversy for some time, has drawn more scrutiny amid stagnant U.S. wages for the typical worker. Median pay among S&P 500 CEOs rose to $11.3 million in 2014 from $9.4 million in 2010, according to pay consultant Farient Advisors. Capital Group has rarely spoken about its proxy voting before, but decided to offer more explanation because of growing interest in the area, including from financial advisers and institutional investors, executives said. Like other asset managers, Capital Group says executive pay should be linked to performance. But proxy voting principles Capital recently posted online also have an unusual caveat about “preventing excess” pay. In making pay judgments, Berro said, “We always come back to fairness, and what makes sense in the given circumstances.”
Berro and others at Capital declined to single out individual companies whose pay packages they view as problematic. A securities filing shows the $140 billion Growth Fund of America mutual fund voted “against” pay at two of the fund’s 10 largest holdings last year: Broadcom Corp and Oracle Corp, historically among the higher-paying technology firms. (Broadcom is now part of Broadcom Ltd.) Top holdings of its Capital World Investors unit include Microsoft Corp, Amazon Inc and Home Depot Inc, according to securities filings tracked by edgar-online.com. Capital World has a stake of at least 4.5 percent in each of those companies, and other Capital Group units hold additional shares.
Lately, the firm has been building up a database to track topics like how companies’ executive pay compares to peers, and to what extent stock grants to executives have diluted outside shareholders, Berro said. Berro helps oversee investment selection among a wide range of blue-chip companies that are now entering the season for annual meetings.
Not all of Capital Groups’ votes will please corporate critics. Its funds opposed nearly all proposals calling for companies to report on climate change, for instance. Berro said regulators are better-positioned than shareholders to oversee such matters. Capital Group has also gained a reputation in some quarters as being activist-friendly – for instance, backing some dissident nominees to DuPont’s board last spring. But Capital Group senior counsel Walt Burkley said his firm does not recruit activists to target companies for changes. “There is no call to activism from us,” he said.
Here are the agendas – 20 panels over two days. You’ll notice that many panels have a new novel feature – a post-panel commentary by different experts than the experts on the panel. For example, after Corp Fin Director Keith Higgins speaks, Meredith Cross & Mark Borges will kibitz on what we just heard from Keith. Think of it as being akin to post-debate analysis on the cable networks. The panels include:
1. Keith Higgins Speaks: The Latest from the SEC
2. SEC Speaks: Post-Panel Commentary
3. The SEC All-Stars: The Bleeding Edge
4. The Proxy Designers Speak: How to Make Disclosure Usable
5. Navigating ISS & Glass Lewis
6. Hot Topics: 50 Practical Nuggets in 60 Minutes
7. Pay-for-Performance Disclosure: Now What
8. P4P: Post-Panel Commentary
9. Creating Effective Clawbacks (& Disclosures)
10. Clawbacks: Post-Panel Commentary
11. Pay Ratio: Now What
12. Pay Ratio: Post-Panel Commentary
13. Pay Ratio: The In-House Perspective
14. Pay-for-Performance: How to Do The Proper Messaging
15. Proxy Access: Tackling the Challenges
16. Proxy Access: Post-Panel Commentary
17. Pledging & Hedging Disclosures: What to Do Now
18. Pledging & Hedging Disclosures: Post-Panel Commentary
19. Dealing with the Complexities of Perks
20. The Big Kahuna: Your Burning Questions Answered
Early Bird Rates – Act by May 20th: Huge changes are afoot for executive compensation practices with pay ratio disclosures on the horizon. We are doing our part to help you address all these changes – and avoid costly pitfalls – by offering a special early bird discount rate to help you attend these critical conferences (both of the Conferences are bundled together with a single price). So register by the end of this Friday, May 20th to take advantage of the 20% discount.
This memo from Willis Towers Watson covers research about whether similar pay programs was influenced by “network connections” – mainly board interlocks and the use of the same pay advisors. The memo then goes on to analyze whether larger compensation consultant firms are able to throw off the yoke of this potential problem. Interesting stuff…
Tune in tomorrow for the webcast – “The Top Compensation Consultants Speak” – to hear Mike Kesner of Deloitte Consulting, Blair Jones of Semler Brossy and Ira Kay of Pay Governance “tell it like it is. . . and like it should be.”
There has been an uptick in shareholder lawsuits targeting director compensation, putting companies on notice that investors are closely scrutinizing how boards set their own pay. According to a March 28 National Association of Corporate Directors report, there has been a significant amount of litigation over director pay over the last 18 months. “After simmering on the back burner for several years, the issue of director pay administration and governance has been or soon will be appearing on the radar screen at most companies due to various court cases and lawsuits,” said the report, authored by compensation consultant Pearl Meyer.
Companies that are litigating actions over their director pay packages include Chipotle Mexican Grill Inc. and Goldman Sachs Group Inc.
Our analysis of the first 50 FTSE 150 remuneration reports to be published in 2016 reveals more negative voting guidance than last year from the U.K. proxy advisors. And we’ve now seen a handful of U.K. companies fail to gain the support of at least 50% of the votes cast in early 2016 say-on-pay votes.
When compared to the first 50 last year, both Institutional Shareholder Services (ISS) and Institutional Voting Information Service (IVIS) have issued five times more negative voting recommendations:
– ISS “against” recommendations increased from 4% of the first 50 last year to 29% this year.
– IVIS “red” recommendations increased from 3% to 14%.
The top three areas of contention mentioned in negative voting guidance were:
– Unexplained or seemingly unjustified reductions in long-term incentive plan performance targets
– Misalignment of pay and performance in pay outcomes
– Insufficient disclosure of retrospective bonus targets.