The Advisors' Blog

– Broc Romanek, CompensationStandards.com

Here’s an excerpt from a blog by Kevin LaCroix:

A shareholder of Symantec had filed a putative class action on behalf of Symantec shareholders alleging that the compensation-related disclosures in the company’s proxy statement were inadequate to permit the shareholders to cast their advisory “say on pay” vote at the company’s 2012 shareholders’ meeting. The shareholder plaintiff had sought a preliminary injunction to require further disclosure. The court denied the motion for a preliminary injunction. The vote took place in October 2012.

After further proceedings, the Court allowed the plaintiff leave to file her complaint. In her amended complaint, the plaintiff continued to seek supplemental disclosure and also sought to have the court require the company to have another say on pay vote following the supplemental disclosure, asserting that that would allow the “informed shareholders to voice their opinions on Symantec’s executive compensation.”

The defendants filed a demurrer to the plaintiff’s amended complaint. The defendants argued that the plaintiffs amended allegations should be dismissed, among other reasons because the claims plaintiff asserted represented derivative claims, not direct claims.

In an August 2, 2013 ruling (here, refer to “Line 3”) California (Santa Clara County) Superior Court Judge James P. Kleinberg sustained the defendants’ demurrer with prejudice. Judge Kleinberg found that the alleged harm that the plaintiff claimed had occurred or that would occur all represented an alleged injury to Symantec, not to the shareholders, and that any benefit that would be produced by the relief the plaintiff sought would inure to the benefits of Symantec. Judge Kleinberg noted that the plaintiff “does not allege how any of the purported omissions caused injury to the Symantec shareholders, and only alleges possible harm to Symantec.” He concluded that the plaintiff’s action therefore was a derivative suit, not a direct action.

However, Judge Kleinberg went on to say that even if the plaintiff has adequately alleged a direct disclosure claim, the plaintiff has failed to sufficiently allege the materiality of the allegedly omitted information. Both with respect to supposedly omitted performance metrics comparing the Symantec executives’ compensation scheme to the peer group and with respect to the summary of peer benchmarking analyses the board’s compensation committee used, Judge Kleinberg concluded, after a detailed review of the allegedly omitted information, that “none of the compensation related information [in the Proxy statement] is rendered misleading by omission of information.” He held that it is “not substantially likely” that the addition of the allegedly omitted information would have “altered the total mix of information available.”

It should be noted that Judge Kleinberg’s decision is in the form of a “tentative ruling.” Under the California procedural practice that I have always found a little puzzling, the parties have the option of contacting the court to “contest” the tentative ruling, which potentially could lead to further proceedings with respect to the demurrer, including among other things, oral argument or further briefing. I note the following assuming that the demurrer in the Symantec case will stand.

– Broc Romanek, CompensationStandards.com

Here’s a blurb from Paul Hasting’s Mark Poerio on ExecutiveLoyalty.org:

The 8th Circuit’s decision begins ominously for the former CFO whom a jury had convicted of various securities violations relating to fraud and false records: “From frequent private-jet travel to payments and upkeep for the American Princess, his 80-foot yacht, infoUSA reimbursed [its CEO] for a wide variety of expenditures.” In SEC v. Dean, the 8th Circuit upheld the convictions, and remanded for reconsideration of the $50,000 penalty and 3-year bar on public-company service that the district court imposed on the former CFO.

– Broc Romanek, CompensationStandards.com

Here’s a blog from Allen Matkin’s Keith Bishop:

In enacting the Dodd-Frank Act, Congress made it clear to everyone, other than the plaintiffs’ bar, that say-on-pay votes were advisory only, did not create or imply any change in fiduciary duties of directors, or create or imply any additional fiduciary duties of directors. 15 USCS § 78n-1. In the eyes of the plaintiffs’ bar, failed advisory votes have become the basis of lawsuits. The question then is whether the federal statute mandating say-on-pay votes confers jurisdiction on the federal courts.

In an opinion issued last week, a panel of the Ninth Circuit Court of Appeals held that the argument that Congress did not intend to create additional liability for failed votes did not create a significant federal question conferring jurisdiction. Dennis v. Hart, 2013 U.S. App. LEXIS 15648 (9th Cir. July 31, 2013) As a result, the Court of Appeals instructed the District Court to remand the case to the California Superior Court.

The ruling represents a set-back for the defendants who evidently preferred to have the case tried in federal court.

– Broc Romanek, CompensationStandards.com

A few weeks ago, I blogged about a rumor that the SEC is close to proposing pay disparity rules. This rumor appears to be confirmed, as noted in this article, when new SEC Chair White testified on Tuesday before the Senate Banking Committee that a pay disparity rule proposal will be coming in the next month or two.

So we don’t know the exact timing of a proposal – but we do know that it will be soon. Likely before our combined conferences, where it would be covered by Corp Fin Director Keith Higgins and other panels…

Registrations for our combined pair of conferences – in DC and via video webcast – are strong and for good reason. The full agendas for the Conferences are posted – but the panels include:

– Keynote: “Keith Higgins, Director, SEC’s Division of Corporation Finance”
– Keynote: “Former Congressman Mike Oxley”
– Q&A with ISS
– Q&A with Glass Lewis
– Say-on-Pay Shareholder Engagement: The Investors Speak
– Compensation Committees & Advisors: The NYSE & Nasdaq Speak
– Realizable Pay Disclosure: How to Do It
– How to Improve Pay-for-Performance Disclosure
– We Don’t Have a Good Pay Story: What Do We Disclose?
– How to Avoid Executive Pay Disclosure Litigation
– Peer Group Disclosures: What to Do Now
– In-House Perspective: Strategies for Effective Solicitations
– Creating Effective Clawbacks (and Disclosures)
– Pledging & Hedging Disclosures
– The Executive Summary
– The Art of Supplemental Materials
– Dealing with the Complexities of Perks
– Say-on-Parachute & Post-Deal Disclosure Developments
– Compensation Accounting, Tax & Risk Assessment Disclosures
– Shareholder Proposals & Executive Pay
– The Rise of Political Contribution Disclosures

– Broc Romanek, CompensationStandards.com

As noted in this Gibson Dunn blog, ISS has posted its policy survey to solicit comments ahead of announcing its 2014 voting policies – the comment period ends September 13th. ISS intends to announce its final policies about 1-2 weeks earlier than in previous years – in early November.

This is your opportunity to make yourself heard. As well as during the 75-minute panel entitled “Q&A with ISS” during our conference – if you have questions that you want asked, please email them to me – you will be kept anonymous.

– Broc Romanek, CompensationStandards.com

As noted in this press release, over 80 board members, senior executives and investment professionals from 40 pension organizations in 12 different countries gathered at the University of Toronto’s Rotman School of Management to examine and discuss five action steps they could take for the good of their own beneficiaries that would at the same time promote “the greater good” by fostering a more sustainable form of capitalism – culminating in this “Ten Strategies for Pension Funds to Better Serve Their Beneficiaries.” This is a “must read” document…

– Broc Romanek, CompensationStandards.com

In this article, Farient’s Robin Ferracone has some practical observations about comp committee members:

In the second year of Dodd-Frank, executive compensation continues to be top of mind as proxies roll off the presses and say-on-pay votes are cast. As part of the season, there is no shortage of director conferences to attend to hone our director skills, particularly in the area of executive compensation. This is a good thing.

Recently, a prominent individual at an investment company was going to speak on a panel at one such conference. In preparation for the panel, he asked my opinion on two governance policy questions:

1) Should compensation committees include at least one compensation expert as a member of the committee?

2) Should compensation committee members be rotated on and off of the committee?

As a business person who currently serves on boards and chairs a compensation committee, and as an executive compensation consultant who has served a myriad of compensation committees over the years, I have not surprisingly formed some opinions on these two topics.

I am always amazed when boards treat compensation, like human resources (HR) in general, as an area that should be intuitively obvious. However, just like audit committee members are most effective when they are financially literate, compensation committee members are most effective when they have a certain amount of compensation literacy and expertise. It helps when people on the compensation committee have a generally familiarity with both the strategic and technical aspects of compensation. It helps when compensation committee members have a feel for the issues based on real experience with the subject matter, not just as a line executive or onlooker.

The good news is that board directors can either come to the table with compensation experience or obtain such experience “on the job.” Take Laurie Siegel, for example, who chairs the compensation committee at CenturyLink, a $15B telephone company. Laurie is a seasoned HR executive and early in her career worked with me as an executive compensation consultant.

Obviously, she comes to the table with ready-made skills and can be immediately effective as a compensation committee member. But board directors without this deep knowledge also can gain expertise by engaging in educational programs, and insisting on getting a tutorial from the company’s internal staff and/or consultant that includes both Compensation 101 (i.e., executive compensation in general), and the compensation philosophy, programs, and processes for the specific company at hand.

These learning opportunities, coupled with about a year of service on the compensation committee, can give directors who are new to the compensation committee the experience and skills they need to become highly effective compensation committee members. I’d also suggest that those on the nominating and governance committee put compensation expertise on the list of qualifications for new board members.

As for the second issue, whether or not board members should be rotated on and off of the compensation committee, my view is that rotation is a good thing, but in measured doses. I would roll members on or off the compensation committee one at a time. My experience is that new blood can bring fresh thinking, which is healthy, but institutional knowledge on the committee also provides needed stability and a deeper understanding of the company’s culture.

Further, compensation committee members should serve on that committee for a minimum of three years before rotating off. Similarly, compensation committee chairs should stay in their role for at least three years. Too much turnover in either compensation committee membership or the chair role can create too much disruption, which can be bad for the organization. Clearly, these are board governance decisions, and board qualifications and rotational policies should not be dictated by investors or the government.

Finally, expertise and a certain amount of stability in the compensation committee membership help avoid one of the biggest mistakes that new compensation committee members make, which is to import their experience from a very different environment, such as academics or private equity, to the company at hand. Not that experience in a different environment isn’t useful, it is. But compensation is a delicate cultural issue and must be tailored to the unique circumstances of the organization at hand. This means that what works in one environment often won’t in another, particularly when crossing industries or ownership structures (e.g., private to public).

To sum up, my experience is that compensation committees function best when the people sitting on these committees, and certainly the chair of these committees, have some expertise that is directly relevant, either through background or experience, and that rotating people on and off the committee in measured doses can bring new thinking to the table without the downside effect of wholesale disruption. Aligning executives with investor interests can best be achieved when the right directors, with the right experience, training, and resources, and are in the right seats at the right time.

– Broc Romanek, CompensationStandards.com

Here’s an interesting article entitled “Can Huge CEO Golden Parachutes Hurt You?”…

– Broc Romanek, CompensationStandards.com

The title of this piece from the Huffington Post says it all: “Bankers Explain How They Cannot Possibly Live On $1 Million Pay.” Does the same apply to those CEOs who have grown accustomed to having huge piles of money thrown at them?

– Broc Romanek, CompensationStandards.com

Over the past few months – presumably in response to the Jana Partners situation – several companies have filed Form 8-Ks under Item 5.03 to report by-law amendments that disqualify someone from serving as a director if they receive compensation for such service from someone other than the company. In late May, Marathon Oil filed this Form 8-K. In late June, McGraw Hill filed this Form 8-K.

Then last week, Halliburton filed this Form 8-K, refining the concept and requiring new director candidates to actually sign an agreement and representation. And then a few days ago, Air Products & Chemicals filed this Form 8-K, which also requires new candidates to sign a representation that the candidate “is not, and will not become a party to, any agreement, arrangement or understanding with any person other than the Corporation with respect to any direct or indirect compensation, reimbursement or indemnification in connection with service or action as a director of the Corporation that has not been fully disclosed to the Corporation.”

Thanks to footnoted’s Michelle Leder and Katten Muchin’s Claudia Allen for the tips!