Glass Lewis recognizes that unequal compensation arrangements–like that proposed by the Hess shareholder–among directors can harm shareholders by impeding board cohesion and by creating conflicts of interests for directors who have received supplemental pay from a shareholder in consideration for their board service. However, given that a proxy contest can require an extensive time commitment from a dissident director nominee–and expose him or her to public criticism and negative attacks–these restrictive bylaws could hamper the ability of shareholders to recruit attractive candidates for board service.
We believe that shareholder board nominations can provide an important mechanism for shareholders to effect change at a company that suffers from poor management or where the board has acted contrary to shareholder interests. Thus, in some cases, these restrictions on compensation for dissident board nominees may deter beneficial shareholder activism. Further, many companies’ bylaws already require disclosure of any compensation arrangements maintained by director nominees. So if a nominee is party to a problematic deal, shareholders can render judgment on it by voting against the nominee in the director election.
In light of these considerations, we think the best governance practice for boards wishing to implement a restriction on dissident nominee pay is to allow shareholders to vote upon the ratification of such a bylaw. As such, we will recommend that shareholders vote against members of the corporate governance committee at annual meetings if the board has adopted a bylaw that disqualifies director nominees with outside compensation arrangements and has done so without seeking shareholder approval.
To date, no board has put such a proposal to the shareholders. However, at least two companies that have adopted these bylaws appear to have had second thoughts, as the boards of both International Game Technology (which held a contested election at its last shareholder meeting) and Schnitzer Steel Industries have repealed similar provisions just months after inserting them into their bylaws. IGT stated that its deletion of the bylaw was motivated by concerns voiced by shareholders that it could promote board entrenchment.
More evidence that shareholders don’t like these provisions occurred last week when the board at Rockwell Automation, following conversations with shareholders regarding their version of the bylaw–and perhaps in anticipation of a significant level of negative votes at its shareholder meeting held February 4-stated that it would put the provision up for vote at the 2015 annual meeting.
Glass Lewis also wrote this blog about the wild & woolly proxy season on tap for us…
Intel Corp. unveiled a series of changes to its executive compensation structure Monday, including boosting the number of management employees required to own stock. The chip giant, whose new chief executive has been trying to more closely align the financial interests of employees and shareholders, said 350 senior leaders will be required to own Intel shares beginning in 2014. Only 50 managers were previously required to hold company stock.
Intel said there will no longer be a “floor” to protect the value of performance-based equity awards for its senior executives, which can now fall to zero. It added that 50% of the company’s annual cash bonus payout for all employees will be based on performance, up from 33% in 2013. The company’s profit-sharing plan now will pay out quarterly as opposed to semiannually, allowing for incentive-based compensation to be paid out more frequently.
Intel made the disclosures in a letter to shareholders that was part of a filing with the Securities and Exchange Commission. It attributed the moves to new compensation policies of Brian Krzanich, who became Intel’s chief executive last May 2013 after predecessor Paul Otellini announced plans to step down in November 2012.
The surprise shift, Intel has said, caused the company to issue retention grants to Mr. Krzanich and other senior staff members to remain at Intel during the transition. The grants, in the form of restricted stock units, were valued by the company last year at about $10 million each. Mr. Krzanich’s total compensation for 2012 was about $15.7 million, but declined to about $9,139,597 in 2013, according to the Intel filing. His 2013 compensation included a base salary of $887,500 and a $1.75 million bonus, with the rest composed of equity compensation.
Intel, which said Monday it doesn’t see the need for other retention grants for the foreseeable future, reiterated that Mr. Krzanich’s is roughly the 25th percentile relative to CEOs at peer companies.
Intel, known for supplying chips that serve as calculating engines in personal computers, has suffered as customer dollars have shifted from those devices to tablets and smartphones. The company said last month that sales of chips for the ailing personal-computer market improved in the fourth quarter, but demand for larger systems was weaker than expected. Intel forecast flat revenue for 2014, while analysts had been expecting slight growth.
Corporate board members and institutional investors are divided on the state of executive pay in the U.S., according to a survey by Towers Watson and proxy solicitor Alliance Advisors. The survey, released Jan. 16, finds a stark divergence of opinion between the two groups on what has given rise to “excessive” CEO pay and whether pay is closely linked to company strategy. Indeed, just 20 percent of directors said the executive pay model in the U.S. has led to excessive CEO pay levels, while 72 percent of investors surveyed say the model has led to excessive pay levels. The figure for directors represents a sharp drop over the past five years, moreover, Towers noted in a statement.
Meanwhile, 70 percent of directors surveyed said the executive pay model at most companies is closely linked to company strategy, compared with just 34 percent of investors. Additionally, roughly one-fourth of directors say executive pay is “overly influenced” by management, compared with just under two-thirds of investors surveyed.
“These disconnects may stem from the fact that many investors aren’t fully informed about what goes into the pay decision-making process at many companies,” said Reid Pearson, executive vice president at Alliance Advisors, in a Jan. 16 statement. “This suggests that companies need to do more to help investors understand the challenges boards face in aligning pay with performance and setting appropriate pay levels, reinforcing the need for greater transparency and engagement.” The survey, conducted in October and November 2013, gauged responses of more than 120 corporate directors and 30 institutional investors with combined assets under management exceeding $12 trillion.
Other areas where an incongruence of opinion is evidenced include the value of engagement, with more than two-thirds of investors believing more frequent shareholder engagement would enhance the pay-setting process, compared with just 13 percent of directors. More than twice as many investors as directors say enhanced pay disclosure would help, as would more restraint in pay setting by boards and management, according to survey findings. Notably, the poll of both groups found neither directors nor investors think the Dodd-Frank CEO pay ratio disclosure rule “will help improve the [pay] model,” according to a statement announcing the findings.
With regard to say-on-pay, the survey found a significant variance in how directors and investors view the efficacy of say-on-pay votes, first adopted marketwide in 2011. Just one-fourth of directors believe such votes have been a “key driver” of pay decisions by boards, compared with 63 percent of investors.
Meanwhile, seven in 10 directors believe say-on-pay has “affirmed the alignment” of executive pay and company performance, compared with just four in 10 investors. Finally, 35 percent of surveyed directors say they view say-on-pay “as a waste of time and resources,” compared with 13 percent of investors.
The study did find noteworthy areas of agreement between the respondent groups. A majority of both groups “see the need for more disciplined target setting” and for greater consideration of strategic, nonfinancial performance measures in annual and long-term incentives. The survey found that more than 90 percent of both directors and shareholders believe the executive pay model “has either stayed the same or changed for the better” since say-on-pay votes were required. Additionally, the percentage of directors (89 percent) and investors (59 percent) who believe executive pay is sensitive to corporate performance has increased by roughly 50 percent since 2008, when a similar survey was conducted.
Here’s news from this blog by Davis Polk’s Ning Chiu & Alan Denenberg:
At the recent Securities Regulation Institute, Keith Higgins, the head of the SEC Division of Corporation Finance, indicated that the SEC staff will be looking for less detailed disclosure in the S-1 regarding a company’s historical practice and grant by grant valuation description for establishing the fair value of the company’s common stock in connection with stock-based compensation in IPO registration statements.
Currently, companies provide lengthy discussions of how stock was valued and ultimately the difference between the estimated IPO price and the historical fair value of stock at various points in time as private companies. Companies disclose in MD&A the analysis to support their judgments and estimates regarding the valuations. Staff comments often request a description of significant intervening events within the company and changes in assumptions as well as weighting and selection of valuation methodologies employed that explain the changes in the fair value of common stock up to the filing of the registration statement. The questionable value of the disclosure was raised in the SEC’s own report examining its disclosure requirement, which we discussed here, noting that commenters recommended eliminating or reducing this disclosure, arguing the information is not significant to investors.
It appears that going forward, the SEC staff will no longer require or expect the level of detail that companies have been providing, and instead a few paragraphs describing the historical valuation methodology and what it will be post-IPO will be considered sufficient. However, the SEC staff will still expect a more thorough discussion in the comment letter in order to help the staff ensure that it agrees that the accounting is correct.
With income inequality in the news due to last night’s State of the Union address, I thought I would note some of the reactions to this WSJ op-ed by Tom Perkins, co-founder of top Silicon Valley VC firm Kleiner Perkins (his former firm has disavowed the remarks). One reaction is captured beautifully in this blog by Mark Suster – and here’s a another one from NY Times’ Paul Krugman. Comparing the woes of the top 1% earners to the killing of Jews by the Nazis? I can’t believe the WSJ ran that tone deaf piece.
In fact, Perkins himself can’t believe it as he apologized afterwards (for his Nazi comparison, not his”don’t vilify the 1%” remarks). As this article notes, Perkins is no stranger to drama – he supported Murdoch as a director on News Corp’s board during the UK phone-hacking scandal.
In comparison, this NY Times op-ed by a former Wall Street banker is great. Here’s the opening paragraph:
In my last year on Wall Street my bonus was $3.6 million — and I was angry because it wasn’t big enough. I was 30 years old, had no children to raise, no debts to pay, no philanthropic goal in mind. I wanted more money for exactly the same reason an alcoholic needs another drink: I was addicted.
But then the NY Times ran this column about a bankrupt NYC law firm partner who ‘only’ makes $375k per year. I can’t imagine a whole lot of people shed tears over that one…
Last week, there were numerous front page articles about how JPMorgan CEO Jamie Dimon’s pay went up after a tough year for the company. Perhaps most interesting is the description of how the compensation committee meetings have gone down – pretty wild that this type of information is being leaked to the press! How does that happen?
This NY Times article notes “hashing out the pay package after a series of meetings that turned heated at times, according to several executives briefed on the matter.” The article also noted: “The debate pitted a vocal minority of directors who wanted to keep his compensation largely flat, citing the approximately $20 billion in penalties JPMorgan has paid in the last year to federal authorities, against directors who argued that Mr. Dimon should be rewarded for his stewardship of the bank during such a difficult period. During the meetings, some board members left the conference room to pace up and down the 50th-floor corridor.”
Also check out the video on Sallie Krawcheck on JPMorgan’s billions in fines: “A Real Cost of Doing Business.”