Is executive pay becoming a hot button issue for activist hedge funds? While executive pay has long been under scrutiny from standard-issue corporate governance activists, such as union pension funds, the interest of some hedge fund activists in executive compensation issues has the potential to introduce a more disquieting note to the compensation conversation.
This article by Jeremy Goldstein from the HLS Forum on Corporate Governance and Financial Regulation argues that “activists will not hesitate to use pay as a wedge issue, even if there is nothing wrong with a company’s pay program.” But when pay issues have been identified, compensation can assume greater prominence, and, in some cases, can appear to be the principal concern. The article identifies some considerations regarding executive compensation for companies intent on deterring hedge fund activists as well as for those hoping to avoid unintended consequences in the event of an activist strike.
The author first observes that low levels of support for a company’s say-on-pay proposal could signal that shareholders have identified performance issues at the company and make the company particularly vulnerable to an activist attack “because a failed vote can result in tension between managements and boards.”
With the comment letter deadline for the SEC’s recent release of additional economic analysis looming – this Monday, July 6th – the SEC’s Division of Economic and Risk Analysis posted another memo on Tuesday about the potential effects on the accuracy of the proposed pay ratio rule calculation of excluding different percentages of certain categories of employees.
It sure looks like the rumor of August 5th being an adoption date might come true as the SEC seems to be getting its ducks in a row to minimize the risk of losing a court battle if rules do indeed become final…
Today, the SEC voted to approve – by the now-norm 3-2 vote – this 198-page proposing release to direct the stock exchanges to adopt clawback listing standards, as required by Section 954 of Dodd-Frank. Comments are due 60 days from publication in the Federal Register – so the beginning of September. We’re posting memos in our “Clawbacks” Practice Area. All five SEC Commissioners issued a written statement.
Given that the rumor that the SEC would propose these clawback rules on July 1st held true – the rumor of the SEC adopting pay ratio rules on August 5th might also prove worthy…
The SEC’s new clawback, pay-for-performance & hedging proposals – not to mention the coming pay ratio rules – are causing a stir – and you should prepare now. These rules will be among many topics that Corp Fin Director Keith Higgins & other experts will be talking about at our popular Conferences — “Tackling Your 2016 Compensation Disclosures” — to be held October 27-28th in San Diego and via Live Nationwide Video Webcast on TheCorporateCounsel.net. Act by August 7th for the phased-in rate to get 10% off.
The full agendas for the Conferences are posted — and include the following panels:
– Keith Higgins Speaks: The Latest from the SEC
– The SEC’s Pay-for-Performance Proposal: What to Do Now
– Creating Effective Clawbacks (& Disclosures)
– Pledging & Hedging Disclosures
– Pay Ratio: What Now
– Proxy Access: Tackling the Challenges
– Disclosure Effectiveness: What Investors Really Want to See
– Peer Group Disclosures: The In-House Perspective
– The Executive Summary
– The Art of Communication
– Dave & Marty: Smashmouth
– Dealing with the Complexities of Perks
– The Big Kahuna: Your Burning Questions Answered
– The SEC All-Stars: The Bleeding Edge
– The Investors Speak
– Navigating ISS & Glass Lewis
– Hot Topics: 50 Practical Nuggets in 75 Minutes
The archived video webcast from the CFA Institute about performance metrics, executive incentives and CEO succession that drivers shareholder value may be of interest. The panelists included:
– Michelle Edkins, BlackRock
– Tim Koeller, McKinsey
– Meredith Miller, UAW Medical Trust
– Glen Welling, Engaged Capital
– Mark Van Clieaf, Organizational Capital Partners
Today, the SEC will be proposing its clawback rules finally. For those in law firms, get ready to rumble with your memo writing skills…
Last week, Delaware enacted amendments to its corporation law – effective August 1st – that will permit grants of restricted stock to be made by a corporate officer who has been delegated that authority by the board (within parameters). Prior to this change, the granting of options could be delegated to officers pursuant to DGCL Section 157(c), but not so for stock. Under the old law, some companies worked around this limitation by creating a board committee of one person (typically, the CEO-director). The law change presents the opportunity for delegation without using a “committee of one,” allowing the CEO (in a non-director capacity) or other delegated officers to make grants of stock. Of course, accurate and timely records must be kept and plans also would need to permit such administration.
The 2015 legislation amends Section 152 of the DGCL to clarify that the board of directors may authorize stock to be issued in one or more transactions in such numbers and at such times as is determined by a person or body other than the board of directors or a committee of the board, so long as the resolution of the board or committee, as applicable, authorizing the issuance fixes the maximum number of shares that may be issued as well as the time frame during which such shares may be issued and establishes a minimum amount of consideration for which such shares may be issued.
The minimum amount of consideration cannot be less than the consideration required pursuant to Section 153 of the DGCL, which, as a general matter, means that shares with par value may not be issued for consideration having a value less than the par value of the shares. The legislation clarifies that a formula by which the consideration for stock is determined may include reference to or be made dependent upon the operation of extrinsic facts, thereby confirming that the consideration may be based on, among other things, market prices on one or more dates or averages of market prices on one or more dates.
Among other things, the legislation clarifies that the board (or duly empowered committee) may authorize stock to be issued pursuant to “at the market” programs without separately authorizing each individual stock issuance pursuant to the program. In addition, the legislation allows the board to delegate to officers the ability to issue restricted stock on the same basis that the board may delegate to officers the ability to issue rights or options under Section 157(c) of the DGCL.
We’ve had false start rumors before about when the SEC will adopt pay ratio rules – but this time it feels different given the heightened political attacks against the SEC. The latest is this Bloomberg article indicating the rules will be adopted by August 5th, which the article notes was not confirmed by the SEC. It’s according to “two people familiar with the matter who asked not to be named.”
That’s right before our August 7th deadline for our last discounted rate for our big “Executive Pay Conference” in San Diego and by video webcast. Act now!
Many are talking about this New Yorker piece by James Surowiecki (for example, see this Cooley blog). Here’s an excerpt:
At root, the unstoppable rise of C.E.O. pay involves an ideological shift. Just about everyone involved now assumes that talent is rarer than ever, and that only outsize rewards can lure suitable candidates and insure stellar performance. Yet the evidence for these propositions is sketchy at best, as Michael Dorff, a professor of corporate law at Southwestern Law School, shows in his new book, “Indispensable and Other Myths.” Dorff told me that, with large, established companies, “it’s very hard to show that picking one well-qualified C.E.O. over another has a major impact on corporate performance.” Indeed, a major study by the economists Xavier Gabaix and Augustin Landier, who happen to believe that current compensation levels are economically efficient, found that if the company with the two-hundred-and-fiftieth-most-talented C.E.O. suddenly managed to hire the most talented C.E.O. its value would increase by a mere 0.016 per cent.