The Advisors' Blog

– Broc Romanek, CompensationStandards.com

Things continue to be afoot in Europe – with the latest on Germany’s Prime Minister’s views in this article…

– by Broc Romanek

It’s worth highlighting this excerpt from Davis Polk’s blog:

It is also worth noting that, while all the reports on the recent lawsuit against Apple’s proxy statement in the Southern District of New York focused on the unbundling claim made by Greenlight for the charter amendment proposal, as we previously discussed, little known is that the judge in that case also dismissed efforts by another plaintiff to enjoin the say-on-pay proposal. That plaintiff had claimed that Apple’s use of terms like “experiences,” “input” and “peer group data,” when describing the compensation committee’s judgment in granting long-term equity, failed to provide sufficient information. The judge found, however, that since the plaintiff did not identify any material omission in the proxy and since the compensation discussion and analysis section included in the proxy statement was compliant with the SEC rules, the plaintiff was unlikely to succeed on the merits.

Nonetheless, the Symantec and, in the say-on-pay preliminary injunction context, Apple successes do not mean that U.S. public companies should relax and assume that the plaintiffs’ bar will be deterred. At least one law firm that has been particularly active in filing these types of lawsuits has recently identified several more companies which it is investigating for potential breaches of directors’ fiduciary duties in connection with say-on-pay proposals. Given that the proxy season is upon us, we continue to recommend that companies pay extra attention to their executive compensation disclosure.

Also see this Wachtell Lipton memo …

– Broc Romanek, CompensationStandards.com

Dynasil – a Delaware corporation – recently filed its Form 8-K regarding its say-on-pay vote revealing the following results:

– 48% For
– 14% Against
– 38% Abstain
– 0% Broker Non-Votes

Despite the lack of majority support, the company counts its SOP as passing due to this statement in its proxy statement:

The proposal will be considered approved at the annual meeting if more votes are cast in favor than against. Abstentions and broker non-votes will not count
as votes cast for or against this proposal.

Thanks to Steve Hall of Steven Hall & Partners for the heads up!

– Subodh Mishra, ISS Governance Exchange

European Commission Internal Markets Head Michel Barnier says he will push for European Union-wide legislation mandating say-on-pay, Reuters reported. The public announcement follows a March 3 vote by Swiss citizens backing a measure to radically curb executive pay, and a provisional agreement last week between EU regulators and lawmakers to limit bank bonuses at no more than two times salary.

According to the report, the EC, which writes the first draft of EU law known as directives, will propose a mandatory say-on-pay vote applicable across all 27 member states by year’s end. “I am in favor of making shareholders more responsible on pay. I am currently working on EU legislation that would give shareholders a mandatory say on remuneration,” Barnier told Reuters March 6.

A spokesman for the Commission said Barnier’s proposal would aim to empower shareholders rather than to limit pay, Reuters reported. Any legislation is also likely to be part of a broader “action plan” as laid out by the EC in December. Action plan goals include improving transparency on remuneration policies and individual remuneration of directors alongside granting shareholders the right to vote on the remuneration policy. The past week’s developments may prompt consideration of a binding vote on forward looking pay policies, which is now in the works for U.K. companies, pending passage of related legislation later in the year. The March 3 Swiss referendum, backed by more than two-thirds of voters, put in place some of the most rigorous pay curbs globally while empowering shareholders on various elements of Swiss executive remuneration.

– Broc Romanek, CompensationStandards.com

Tune in tomorrow for the webcast – “What the Top Compensation Consultants Are NOW Telling Compensation Committees” – to hear Mike Kesner of Deloitte Consulting, Jan Koors of Pearl Meyer & Partners, Blair Jones of Semler Brossy and Eric Marquardt of Pay Governance “tell it like it is. . . and like it should be.” The topics include:

– What is ISS QuickScore & How Relates to SOP
– Weaknesses in ISS’ Pay-for-Performance Assessments
– How ISS Overvalues Options
– The Use of Peer Groups
– How to Demonstrate Pay-for-Performance Alignment
– Severance and Pay-for-Performance
– Fighting ISS Recommendations
– Moving Away From a Relative TSR Program
– Clawbacks

– Broc Romanek, CompensationStandards.com

What can I say about this Crain’s article? It piggybacks off a paper by a U. of Illinois professor who claims that CEOs who adopt good governance frameworks ingratiate themselves with their board and wind up with a larger pay package.

Just thinking out loud here: do you think this academic has ever talked to a director or someone who has actually been in a boardroom? There certainly are better ways to kiss the bottom of a director than adopt good governance! One of the first stories I heard when I got in this field many moons ago – crisp $100 bills were placed under the dinner plates for each director, the dinner being held the night before a board meeting…

– Broc Romanek, CompensationStandards.com

Last chance to take advantage of the 33% early bird discount for our popular conferences – “Tackling Your 2014 Compensation Disclosures: The Proxy Disclosure Conference” & “Say-on-Pay Workshop: 10th Annual Executive Compensation Conference” – to be held September 23-24th in Washington DC and via Live Nationwide Video Webcast. Here are the agendas for the Conferences.

Early Bird Rates – Act by End of Friday, March 8th: Act now for the early bird discount rate (both of the Conferences are bundled together with a single price). So register by end of this Friday to take advantage of the 33% discount.

– Broc Romanek, CompensationStandards.com

Yesterday, Senator Richard Shelby (R-AL) introduced two Dodd-Frank bills. One bill is labeled a technical corrections bill but it includes exemptive authority for Section 953 – ie. pay versus performance and pay disparity – so that the SEC could adopt a rule exempting “small issuers” (see Section 11.3.c).

The other bill is called the “Financial Regulatory Responsibility Act of 2013” (guess “Even More JOBS Act” was already taken). Based on a quick read, it appears to impose such stringent cost-benefit hurdles that I doubt any rulemaking would ever get off the ground. Remember that GAO recently reported that over half of the required rulemaking under Dodd-Frank has yet to be conducted.

Under Section 3, the bill requires a complete an extensive cost-benefit analysis – before an agency can even propose a rule! Normally, conducting a cost-benefit analysis is part of the proposal process and during that process, the agencies asks for input from the public and those affected, as to what the costs and benefits would be from the proposed rule. In addition, the bill requires agencies to compare quantified benefits with quantified costs – and if quantified costs outweigh the quantified benefits, the bill in essence stops the proposal before it is proposed. Bear in mind that the benefits of legislation often cannot be readily quantified.

The bill also requires agencies to provide all of its data & analysis to the public so that they can perform the cost-benefit analysis themselves (Section 5). And under Section 8, it makes challenges easier to bring in the US Court of Appeals for the DC District (which is the court that has been quite unfriendly to the SEC over the past decade). Plus it makes it harder for agencies to withstand such challenges (ie. if an agency is found to have not complied with this law, the rule is overturned unless the agency provides “clear and convincing evidence that vacating the rule would result in irreparable harm”). I believe this overturns decades of legal precedent about how agency rules are judicially reviewed.

The bill requires the SEC to adopt similar cost-benefit tests for agencies under its oversight, such as the PCAOB (Section 11). The bill also requires agencies to examine rules five years after adoption to see if they are achieving desired results (Section 6). A Chief Economists Council is established under Section 9.

How do you read Section 7? I believe it requires the SEC to develop a plan one year from adoption of this law – and then every five years thereafter – “to modify, streamline, expand, or repeal existing regulations so as to make the regulatory program of the agency more effective or less burdensome in achieving the regulatory objectives.” Wow! All of its laws? Not just the Dodd-Frank ones? Let me know if you read that Section differently.

Here is Senator Shelby’s press release, noting various GOP co-sponsors and the support of the Chamber of Commerce…

Personally, I like to be straight-forward and honest. If you want to stop Dodd-Frank in its tracks, do it – but don’t call it something else. But unfortunately, that is not the Congressional way. Not surprisingly, the mass media has overlooked this bill completely so far. I can only find this The Hill article, whose title infers that these bills just “tweak” Dodd-Frank.

– Broc Romanek, CompensationStandards.com

I’ve been following the Swiss saga pretty closely – but now that the people have spoken and passed new laws on Sunday, I’m still amazed and all I can say is “wow.” People here are worried about misreading what a SEC Commissioner recommended about a compensation risk disclosure? Buck up. That’s very small potatoes.

Here’s a slew of articles about the Switzerland development so you can read what happened for yourself:

– WSJ’s “Swiss Back Executive-Pay Controls”
– BBC’s “Will new rules on executive pay damage Swiss business?”
– NY Times’ “Swiss Voters Approve a Plan to Severely Limit Executive Compensation”
– The Telegraph’s “Switzerland backs curbs on executive pay”
– Reuter’s “Swiss pay curbs find support in Germany, France”
– Bloomberg’s “Swiss Limits on Executive Pay: Less Than Meets the Eye”
– Bloomberg’s “Swiss Pay Curbs Leave Government to Struggle With Details”
– SwissInfo.com’s “Fueled by public ire, alone against the world”
– Huffington Post’s “Swiss Voters Approve ‘Rip-Off Initiative,’ Putting Tough Limits On Executive Pay”
– Forbes’ “With Help From Novartis, Switzerland Moves On C-Suite Ripoffs“

– Subodh Mishra, ISS Governance Exchange

European Union lawmakers and regulators provisionally agreed late on Wednesday to controversial limits on bankers’ bonuses that would cap awards at one year’s salary or double that amount if approved by shareholders. The agreement, still to be approved by member states and the full European Parliament, has served to deepen a schism between Brussels and London over regulation of pay across Europe’s financial services industry.

Under the plan, bonuses would be capped at one times salary, unless approval by 65 percent of shareholders owning one-half the company’s outstanding stock is secured (or a 75 percent supermajority if a one-half quorum is not reached). In such cases, the maximum bonus could be two times salary, though bankers would have to defer one-quarter of any awards above the one times multiple for at least five years.

Proponents of the proposed rules argue they will “encourage bankers to take a long-term view” and will curb excessive risk-taking. If approved, the caps would be the most rigorous, globally, and would apply to all staff of European banks whether based inside or outside the EU, while staff of foreign-domiciled banks based in the EU would also be subject to the caps. “We have achieved the most comprehensive bank regulation package in the EU,” said Othmar Karas, an Austrian member of the European Parliament who sits on its Committee on Economic and Monetary Affairs, in a statement announcing the proposed measures. “Banks will be stabilized and more resistant to crises.”

Rules in place for Europe’s financial services industry since late 2010 have limited the amount of bonuses paid in cash to under one-third of the full award, and have required the deferral of some portion of total reward for up to five years. The proposed rules also include new provisions to raise the threshold of “high-quality,” Tier-1 capital banks must maintain to 8 percent effective Jan. 1, 2014. New disclosure rules will also force banks to report to the European Commission and, beginning in 2015, the broader public, details including profits made, taxes paid, country by country subsidies received, turnover, and the number of employees.

U.K. Dissent
British politicians, business groups, and bankers are voicing deep consternation over the EU proposal, with some suggesting shareholders will suffer, arguing banks’ ability to align pay and performance will be weakened. London, Europe’s financial center and home to many of world’s largest banks, stands to lose considerably under the provisional deal. An analysis of bonuses paid in 2012 for the 2011 fiscal year by the London-based Centre for Economics and Business Research found that of 4.2 billion pounds ($6.4 billion) in bonuses paid to banking staff in London, more than half the amount–2.5 billion pounds ($3.8 billion)–went to the U.K. Treasury in taxes. Moreover, roughly 27 billion pounds ($41 billion) of bonuses were spent over the past decade on real estate in London, according to data compiled for Reuters by property firm Savills.

British officials have for years fought to maintain leeway over bankers’ remuneration in a bid to preserve London as a financial center and prevent the flight of top-earners and their firms to other jurisdictions. This week’s proposal is the latest salvo in a row between London and Brussels over regulations with the potential to harm Britain’s economic interests, though U.K. politicians appear more critical of this week’s agreement compared with past measures.

“This is possibly the most deluded measure to come from Europe since Diocletian tried to fix the price of groceries across the Roman Empire,” London Mayor Boris Johnson said in a Feb. 28 statement. “Brussels cannot control the global market for banking talent. Brussels cannot set pay for bankers around the world.” Johnson, like many of those in the private sector, suggested the move to curb bonuses will backfire on Brussels by retarding EU capital markets’ growth prospects. “The most this measure can hope to achieve is a boost for Zurich and Singapore and New York at the expense of a struggling EU,” he said.

Meanwhile, the Confederation of British Industry blasted the proposal for its potential to damage jobs and growth, while also flying “in the face of efforts to align pay and performance.” The proposed rules “would significantly constrain shareholders’ ability to hold companies to account by voting on pay policy and implementation, and to select board members,” warned Matthew Fell, the confederation’s director for competitive markets, in a Feb. 28 statement. Caps “will also make it harder for companies to respond to a downturn by adjusting pay, which undermines financial stability.”

One of a few options available to opponents to block the proposal may be through the courts. Under the 2007 Lisbon Treaty, provisions regarding the EU’s ability to modify or give effect to social policy are limited and cannot cover remuneration, the BBC reported. Article 153, Section 5, states that the European Parliament and the Council’s ability to modify policy in this area “shall not apply to pay.”

In comments to the BBC, Robin Chater, secretary-general of the London-based Federation of European Employers, argued that “what EU negotiators have failed to appreciate is that such an action is beyond the powers vested in the European Union under the EU Treaty.”

Next Steps, Eyes on Switzerland
In the absence of judicial rescission, approval of the rules is virtually guaranteed, observers suggest. The provisional agreement must be approved by a majority of the EU’s 27 member states and then a majority of the European Parliament. Britain has no veto, and few continental European parliamentarians have come out against the draft regulations. Parliament is expected to vote on the proposal come middle April.
More immediately, Swiss voters passed a referendum yesterday on executive remuneration that will have implications for banking and other sectors’ pay across Europe. The referendum, spearheaded by politician Thomas Minder, includes a mandate for binding say-on-pay vote for both directors and executives and bans all forms of severance payments as well as “golden handshakes.” In addition, Minder’s plan requires directors to be elected annually and force pension funds to vote shares held and publicly disclose their votes.