Here’s more from McGuireWoods’ Steven Kittrell from this blog: In our prior blog, we discussed the case for eliminating the Section 162(m) disclosures in proxy statements. Here is an alternative view of the subject:
It is worth looking back at the reasons for virtually every CD&A having a Section 162(m) disclosure. Here is a brief history:
– Before the 2006 revamp of the rules, the SEC had required discussion of a company’s Section 162(m) policy.
– The CD&A rules give as an example of possibly material information: “the impact of the accounting and tax treatments of the particular form of compensation”.
– In the adopting release, the SEC stated:
Regarding the example noting the impact of accounting and tax treatments of a particular form of compensation, some commenters urged that companies be required to continue to disclose their Internal Revenue Code Section 162(m) policy. The adoption of this example should not be construed to eliminate this discussion. Rather, this example indicates more broadly that any tax or accounting treatment, including but not limited to Section 162(m), that is material to the company’s compensation policy or decisions with respect to a named executive officer is covered by Compensation Discussion and Analysis. Tax consequences to the named executive officers, as well as tax consequences to the company, may fall within this example.
Most companies interpreted the CD&A rules to apply the prior “presumption” of materiality to the Section 162(m) disclosure and continued their prior practice of making a disclosure. What is the right approach now? If a company wants to eliminate the disclosure, the question is materiality. As with most materiality questions, there are different ways to look at it.
Virtually all companies where the deduction may be in question will adopt Section 162(m)-compliant compensation plans and then follow the Section 162(m) requirements in paying some compensation. The potentially most material aspects of Section 162(m) from a disclosure perspective are the requirement to use preapproved performance goals and the limits on grant sizes and types. Also, most companies will not give up a deduction without Section 162(m) being a part of the decision process. Does this mean that Section 162(m) was material in the decisions?
On the other hand, the actual tax savings from Section 162(m) as a number is not material for most companies. And it is difficult to maintain that the disclosure continues to be useful to shareholders, particularly given shareholder complaints about the growing length of the CD&A and the SEC’s past statements that the CD&A should avoid boilerplate disclosures.
If a company determines that the Section 162(m) disclosure should be maintained, it is worthwhile to look at the disclosure in light of the shareholder litigation. There may be tweaks to the disclosure that would reduce the likelihood of a Section 162(m) disclosure-related shareholder claim.
Any prior polls of this nature would have revealed that most folks believed that the SEC would have acted long ago. The latest group thinking was that it would happen this month based on the SEC’s Reg Flex Agenda issued in June (even though I blogged that the SEC’s statements were merely aspirational). So what is the new thinking? SEC Chair White recently testified that it was her “hope and expectation” that the SEC would adopt the pay ratio rules by the end of this year. Do you think that will happen? This site has a poll for you to weigh in…
We just wrapped up the 2015 edition of the Lynn, Borges & Romanek’s “Executive Compensation Disclosure Treatise & Reporting Guide.” For those that want to access it online, it’s now posted on this site. For those that want a hard copy, it was just sent to the printers.
How to Order a Hard-Copy: Remember that a hard copy of the 2015 Treatise is not part of a CompensationStandards.com membership so it must be purchased separately – however, CompensationStandards.com members can obtain a 40% discount by trying a no-risk trial to the hard copy now. This will ensure delivery of this 1350 page comprehensive Treatise soon after it’s done being printed in about a month.
From our conference last week, here are some statistics about clawback proposals:
– 13 proposals submitted; 1 excluded through the no-action process (company submitted a conflicting proposal), 3 voted on and 9 withdrawn through negotiations
– Most of these proposals were to enhance existing clawback policies
– Most submitted by New York City or UAW Pension Fund, but Chevedden submitted at one company
– Obtained >30% vote at the two companies that the proposals argued did not have a strong clawback
Some other things that practitioners have been doing related to clawbacks are:
– Adopting ones for those companies that did not have them
– In light of the success of John Chevedden’s “hold til retirement” shareholder proposal (the most common executive compensation shareholder proposal in 2014), considering whether share deferrals should be used as a means to satisfy this and to serve as a recoupment/clawback
– Reviewing existing and proposed new executive compensation programs to identify which ones clearly are, may be or clearly are not likely to be subject to the SEC’s rules.
– Bimal Patel, Head of ISS’ Policy Steering Committee
Investors indicate little tolerance for unilateral boardroom adoption of fee-shifting, dissident director compensation, and other bylaw amendments that diminish shareholder rights, according to results of ISS’ recently released annual global policy survey. ISS received more than 370 total responses to this year’s survey, of which 105 were institutional investors, nearly one-third of whom manage assets in excess of $100 billion. Roughly 70 percent of these respondents were based in the U.S., with the remainder divided between the U.K., Continental Europe, Canada, and the Asia-Pacific region.
ISS also received responses from 255 members of the corporate issuer community (including corporations, consultants/advisers to issuers, and other organizations representing issuers), nearly 90 percent of whom were located in the U.S. The survey, conducted between July 17 and Sept. 5, covered a range of issues, including: pay for performance; board accountability; boardroom diversity; equity plan evaluation; risk oversight and audit; cross-market listings; and environmental and social performance goals.
“The aim of our yearly survey is to ensure that ISS’ policies reflect local best practices, create dialogue around important issues, and serve the proxy voting needs of our institutional clients worldwide,” said Dr. Martha Carter, ISS’ Global Head of Research & Policy. “We’re extremely pleased at the breadth, depth, and diversity of responses in this the 10th year that ISS has solicited the opinion of governance market constituents in formulating its benchmark voting policies.”
Key findings from this year’s survey include:
– Investors indicate little tolerance for unilateral boardroom adoption of bylaw amendments that diminish shareholder rights. With regard to evaluating board accountability where a board adopts without shareholder approval a material bylaw amendment that diminishes shareholders’ rights, 72 percent of investors indicate the board should never adopt bylaw/charter amendments that negatively impact investors’ rights without shareholder approval, while 20 percent choose “it depends.” Nearly one-half (44 percent) of issuer respondents, meanwhile, indicate the board should be free to unilaterally adopt any bylaw/charter amendment(s) subject to applicable law.
– ISS plans to implement a “balanced scorecard” approach to evaluating plan proposals for U.S. companies that gives weight to various factors under three broad categories related to the proposal: (1) cost, (2) plan features, and (3) company grant practices. With respect to how the plan cost category should be weighed in a scorecard, 70 percent of investors indicate weights ranging from 30 to 50 percent, with a 40 percent weighting cited most often. Sixty-two percent of investors suggest weightings from 25 to 35 percent for plan features; and 64 percent indicate weights ranging from 20 to 35 percent for grant practices. Weightings suggested by issuers were also quite dispersed, but generally skewed somewhat higher with respect to cost, and somewhat lower for plan features and grant practices compared to investors.
– Although a quarter of investor respondents do not focus on pay magnitude, most appear to be concerned about this issue in addition to how CEO pay is determined. When asked whether there is a threshold at which the magnitude of CEO pay warrants concern even if the company’s performance is positive (e.g., outperforming peer group), 60 percent of investor respondents answer in the affirmative. Notably, 50 percent of issuer respondents selected the response “No, my organization does not consider the magnitude of CEO compensation when evaluating pay practices; other aspects (such as company performance and pay structure) are considered more important.”
– For European markets where shareholders are offered say-on-pay proposals or other executive compensation related items, 83 percent of investors indicate that a European pay for performance quantitative methodology, including the use of peer group comparisons, would be useful as a factor in such evaluations. Of investor respondents answering in the affirmative on the use of peer groups as a factor in evaluating a company’s compensation practices, 87 percent indicate that they would like to see a comparison to cross-market industry sector peer groups.
– A majority of all respondents (60 percent of investors and 75 percent of issuers) indicate that they consider overall diversity (including but not limited to gender) on the board when evaluating boards. Notably, 17 percent of investor respondents and 7 percent of issuer respondents indicate that they do not consider gender diversity at all when evaluating boards.
– Investors focus on boardroom oversight subsequent to incidents when evaluating the board’s role in risk oversight. Over the past few years, shareholders’ investments have been impacted by a number of well publicized failures of boardroom risk oversight. When evaluating the board’s risk oversight role, a majority of shareholders indicate that the role of the company’s relevant risk oversight committee(s), the board’s risk oversight policies and procedures, boardroom oversight actions prior to incident(s), boardroom oversight actions subsequent to incident(s), and changes in senior management are all either “very” or “somewhat” important to their voting decision on directors. Boardroom oversight action subsequent to an incident garners the highest percentage (85 percent) as a “very important” factor whereas only 46 percent indicate that changes in senior management are “very important.”
– Investors and issuers differ on the appropriateness of quantitative E&S performance goals. When asked when it is appropriate for a company to utilize quantitative E&S performance goals, a majority of both investor and issuer respondents, 57 percent and 75 percent, respectively, indicate a preference for case-by-case analysis (“it depends”). Of those investor respondents who choose “it depends,” a significant majority indicate that it considers if a company’s performance on a given environmental or social issue shows a negative trend or if the company has experienced significant controversies (89 percent); if the company has operations with significant exposure to potential regulatory or financial impacts (92 percent); and if the practice has become an industry norm (90 percent). A slight majority (51 percent) indicate that it depends only if/when the quantitative goals are required by government regulations. Notably, 39 percent of investor respondents indicate that it is appropriate for a company to always utilize quantitative E&S performance goals compared with only 7 percent of issuer respondents.
ISS’ survey marks the commencement of its annual policy formulation process, which typically culminates in November with the release of final policies applicable to global shareholder meetings occurring on or after Feb. 1 of the following year. In October, ISS is expected to release draft policies that will be subject to a public consultation period before they are finalized.
A few days ago, ISS released its 2014-2015 policy survey results. 21 pages of interesting data (ie. key findings and detailed survey responses). Here’s analysis from Davis Polk’s Ning Chiu…
Back in May, I blogged about a flap over Coca-Cola’s equity compensation plan. Showing how shareholder engagement works, the company announced this morning that its Compensation Committee has adopted “Equity Stewardship Guidelines” for the company’s equity plan.
Perhaps just as interesting is that the Compensation Committee Chair pushed out a blog on the company’s “Unbottled” blog about the announcement.
This looks to be a pretty innovative approach to explaining how shares under the equity plan will be used responsibly, while addressing the criticism about the plan. In addition to including a burn rate commitment that is expected to make the plan last its full term of 10 years, the Guidelines provide that Coca-Cola will include information on actual dilution, burn rate and overhang in their proxy statement each year. Plus they will continue to minimize dilution through share repurchases and encourage an open dialogue with shareholders about compensation. I look forward to seeing what they do in their next proxy statement…
All of the video archives from our two days of executive pay conferences are now posted…
Today is the “Say-on-Pay Workshop: 11th Annual Executive Compensation Conference”; yesterday was the “Annual Proxy Disclosure Conference” – and the video archive of that Conference is already posted. Note you can still register to watch online by using your credit card and getting an ID/pw kicked out automatically to you without having to interface with our staff. Both Conferences are paired together; two Conferences for the price of one.
– How to Attend by Video Webcast: If you are registered to attend online, just go to the home page of TheCorporateCounsel.net or CompensationStandards.com to watch it live or by archive (note that it will take about a day to post the video archives after it’s shown live). A prominent link called “Enter the Conference Here” – on the home pages of those sites – will take you directly to today’s Conference (and on the top of that Conference page, you will select a link matching the video player on your computer: Windows Media or Flash Player). Here are the “Course Materials,” filled with talking points and practice pointers.
Remember to use the ID and password that you received for the Conferences (which may not be your normal ID/password for TheCorporateCounsel.net or CompensationStandards.com). If you are experiencing technical problems, follow these webcast troubleshooting tips. Here is today’s conference agenda; times are Pacific.
– How to Earn CLE Online: Please read these FAQs about Earning CLE carefully to see if that is possible for you to earn CLE for watching online – and if so, how to accomplish that. Remember you will first need to input your bar number(s) and that you will need to click on the periodic “prompts” all throughout each Conference to earn credit. Both Conferences will be available for CLE credit in all states except for a few – but hours for each state vary; see the CLE list.
Today is the “Tackling Your 2015 Compensation Disclosures: Annual Proxy Disclosure Conference”; tomorrow is the “Say-on-Pay Workshop: 11th Annual Executive Compensation Conference.” Note you can still register to watch online by using your credit card and getting an ID/pw kicked out automatically to you without having to interface with our staff. Both Conferences are paired together; two Conferences for the price of one.
– How to Attend by Video Webcast: If you are registered to attend online, just go to the home page of TheCorporateCounsel.net or CompensationStandards.com to watch it live or by archive (note that it will take about a day to post the video archives after it’s shown live). A prominent link called “Enter the Conference Here” – on the home pages of those sites – will take you directly to today’s Conference (and on the top of that Conference page, you will select a link matching the video player on your computer: Windows Media or Flash Player). Here are the “Course Materials,” filled with talking points and practice pointers.
Remember to use the ID and password that you received for the Conferences (which may not be your normal ID/password for TheCorporateCounsel.net or CompensationStandards.com). If you are experiencing technical problems, follow these webcast troubleshooting tips. Here is today’s conference agenda; times are Pacific.
– How to Earn CLE Online: Please read these FAQs about Earning CLE carefully to see if that is possible for you to earn CLE for watching online – and if so, how to accomplish that. Remember you will first need to input your bar number(s) and that you will need to click on the periodic “prompts” all throughout each Conference to earn credit. Both Conferences will be available for CLE credit in all states except for a few – but hours for each state vary; see the CLE list.
The 2014 proxy season opened amid substantial investor criticism of one flavor of bylaw amendment that caught both investors and companies, as well as their advisers, flat-footed and led many boards to repeal the amendment prior to their annual meetings. Most states, including Delaware, allow boards to amend company bylaws without obtaining shareholder approval. Boards often exercise this prerogative to approve minor or administrative changes to the bylaws. However, others have used it to approve amendments that diminish shareholder rights, including, for example, those creating staggered boards or weakening of (or altogether eliminating) shareholders’ right to call special meetings.
Beginning in May 2013, a number of companies amended their bylaws to adopt a new director qualification provision. Although several variations were observed, all excluded from board service individuals who agreed to receive compensation from third parties in connection with board service or candidacy. The amendments appeared to be in response to post-candidacy compensation arrangements offered to unaffiliated nominees in the 2013 proxy contests at Hess Corp. and Agrium Inc. Market reaction to the agreements was mixed. Ultimately, dissident nominees at Hess declined to receive such payments and dissident nominees at Agrium were not elected by shareholders, which suggested investors are capable of factoring such arrangements into their consideration of board candidates. The new bylaw provisions, however, would have precluded investors from doing so.
In addition to the substance of the amendments, the ubiquitously unilateral nature of adoption concerned investors. Filed disclosures lacked company-specific rationales and did not indicate whether investor input was sought or obtained prior to the board’s approval of the amendments. Additionally, there was no indication that companies would seek shareholder ratification of the bylaws. Further, a substantial number of the companies in question had supermajority vote thresholds for shareholder initiatives to amend or rescind the bylaws, or precluded shareholders from amending the bylaws altogether.
By the end of 2013, 35 companies had adopted such bylaws. The first to hold an annual meeting following adoption was Provident Financial Holdings, which held its annual meeting on Nov. 26, 2013. Each nominee received “withhold” votes from approximately one-third of votes cast, a stinging rebuke given that the company’s insiders and its ESOP collectively controlled nearly 25 percent of shares outstanding.
Issuers took notice of the vote results. By the end of January 2014, two companies had repealed the bylaw. After board nominees of Rockwell Automation received substantial opposition at the company’s Feb. 4, annual meeting, the floodgates opened, as companies rushed to repeal the bylaw prior to their annual meetings. The number of repeals reached 16 by the end of February and 23 by the end of March. Some companies did not repeal the bylaw in its entirety but made substantial changes. CST Brands and WPX Energy amended the bylaw to require only that such compensatory agreements be disclosed, a far less onerous provision for a potential dissident nominee. Wynn Resorts, Ltd. sponsored an advisory vote on its bylaw provision at its May 16 meeting. After shareholders failed to approve the proposal, the board repealed the bylaw. Another company that chose to hold an advisory proposal on its new bylaw was First Reliance Bancshares, where the proposal was approved.
Just a handful of companies kept the bylaw in place through their annual meetings. At Entropic Communications, the two nominees on the ballot received support of 69.4 percent and 70.4 percent, while the three nominees at Chatham Lodging Trust received support of 49.8 percent, 55.2 percent, and 55.2 percent of votes cast. Directors fared better at companies with high levels of officer and director ownership. At Penn National Gaming, where insiders hold approximately 12 percent of shares outstanding, the two nominees received 74.5 percent support and 78.4 percent. The two nominees of Gaming & Leisure Properties, whose officers and directors hold approximately 24 percent of shares outstanding, received support of 81.4 percent and 84.6 percent.,/
By the end of the 2014 proxy season, 28 companies had repealed or amended the controversial bylaws. This does not include National Fuel Gas Co., which repealed the ban on candidate payments and will hold an advisory vote on director payments in 2015. The number of new adoptions of the exclusionary bylaw has slowed, but has not stopped: a handful of companies adopted such provisions following their respective annual meetings. Additionally, the provision is found in the governing documents of companies that have yet to conduct their initial public offering or have recently gone public but have not yet held an annual meeting.