Britain’s 2012 annual meeting season, when a wave of investor protest votes on directors’ remuneration swept through U.K. boardrooms, was in the estimation of some a non-event, with dissent levels largely reflecting that evidenced in past years and just four large capital companies seeing majority opposition. For example, an ISS analysis of U.K. remuneration report voting in 2009 found the same number of failed votes–four–and average dissent levels just 0.5 percentage points less than the 10.9 percent evidenced at 216 FTSE 250 companies in 2012.
Still, the impact of what the media dubbed Britain’s “shareholder spring” has been far more profound, lending cover to the government of Prime Minister David Cameron’s plan to introduce binding pay votes for U.K. companies and, arguably, paving the way for tougher pay curbs in continental Europe in the succeeding months. In light of direct and tangential consequences of last year’s voting, a recent paper explores the state of voting on U.K. director pay vis-a-vis that of 2012 to identify trends in support and dissent by company size and business. Key findings include:
– The 2013 U.K. annual meeting season has been far quieter than last year, with most companies seeing gains in shareholder support levels for their remuneration reports over 2012, the year of the so-called “shareholder spring.”
– Fifty-six percent of companies studied this year saw remuneration report support levels rise from 2012.
– While support levels rose for FTSE 100 companies by 2.4 percentage points, they nudged up by a more modest 0.4 points for FTSE 250 firms.
– By sector, Energy companies, including Cairn Energy, Tullow Oil, and BP, saw the greatest gains in overall support levels compared with 2012 at seven percentage points.
– Meanwhile, Materials firms, such as Lonmin, Anglo American, and Glencore International, saw the largest overall decline in average support tallying 1.7 points.
– The U.K.’s Information Technology sector has seen the highest level of support from shareholders on pay practices thus far in 2013 at 93.6 percent on average.
– At the other end, Materials companies netted just 90.3 percent average support.
– Companies seeking to boost support from 2012 have taken to reforming service contract agreements, improving disclosures, addressing concerns over pension benefits, and other steps to successfully mitigate concerns evidenced last year.
The paper also provides a high-level look at how and why some companies fared better this year compared with 2012.
Tune in tomorrow for the webcast – “Proxy Season Post-Mortem: The Latest Compensation Disclosures” – to hear Mark Borges of Compensia, Dave Lynn of CompensationStandards.com and Morrison & Foerster and Ron Mueller of Gibson Dunn analyze what was (and what was not) disclosed this proxy season.
Personally, I take these types of studies with a grain of salt – but this American Accounting Association press release notes that companies which adopt clawback provisions enjoy a “significantly positive capital market response” when the policy is disclosed.
New York State agencies have recently adopted final regulations to implement the new restrictions on executive compensation and administrative costs at state-funded not-for-profit and for-profit service providers, effective July 1, 2013. In general, the final rules make no significant changes in the regulatory framework proposed earlier this year. The limits will apply to reporting periods commencing on or after the effective date. In other words, for organizations that report on a calendar-year basis, the rules become effective January 1, 2014.
Among other provisions, the rules bar covered service providers from using more than $199,000 in state funds to pay executive compensation, with certain exceptions. Providers can pay executives more than $199,000 in total compensation from a combination of New York State and other funding sources if they meet conditions such as ensuring that the executive’s compensation doesn’t exceed the 75th percentile of that provided to comparable executives in comparable organizations, based on approved compensation surveys.
There have been 10 more failures during the past few days, including three more companies that have failed two years in a row – and another with that has failed three years in a row! Here are the latest failures:
– Big Lots – Form 8-K (31%; also failed in 2012 with 31%)
– East West Bancorp – Form 8-K (42%)
– Tutor Perini – Form 8-K (38%; the 3-peat with 38% in 2012, 49% in 2011)
– The Children’s Place Retail Stores – Form 8-K (17%)
– Gleacher & Company – Form 8-K (39%)
– Insite Vision – Form 8-K (38%; also failed in 2012 at 49%)
– Radioshack – Form 8-K (46%)
– Delcath Systems – Form 8-K (49% support)
– Equal Energy – Form 8-K (44% support)
– Healthways – Form 8-K (32% support; failed in 2012 with 33% support)
– Hercules Technology Growth Capital – Form 8-K (49%)
Thanks to Karla Bos of ING for the heads up on these! Also check out this Towers Watson article entitled “Smaller Companies Seeing More Say-on-Pay Failures.”
I told you that I could blog about this topic every day (hence this upcoming webcast – “Law Firms & Independence: What to Do Now“). Here’s a note that I received from a member:
As the July 1st deadline approaches, advisers to companies, particularly outside legal counsel, and board compensation committees have been focusing on what it means to “provide advice” as contemplated by the Instruction to Rule 10C-1(b)(4). The Securities Law Committee of the Society of Corporate Secretaries and Governance Professionals reported in a Society Alert that this question was discussed recently at its regular meeting with the Staff of the SEC’s Division of Corporation Finance.
At this meeting, Tom Kim, the Division’s Chief Counsel, clarified an informal Staff response to a question raised at the beginning of the month on how to determine whether a company’s outside legal counsel (or other outside adviser) was indirectly “providing advice” to a compensation committee. He indicated that, while the question does not lend itself to a “bright line” test, in-house legal counsel should be in the best position to make the determination and control the vetting process. For example, if in-house legal counsel has a lawyer outside the door of the compensation committee meeting and goes out and gets advice and then comes back in and transmits that advice, then obviously that adviser should have been vetted. He called this the “ventriloquist” scenario.
On the other hand, if in-house legal counsel speaks to several outside legal counsel as a matter of course and then is in a compensation committee meeting giving advice based on what he or she has heard and formulated in his or her own mind, this situation would not require that these counsel be vetted.
For everything else – including the more realistic scenario of in-house legal counsel talking to one outside law firm on a regular basis – it is up to the company to use its judgment as to whether, based on the relevant facts and circumstances, a party is providing advice to the compensation committee and, thus, an independence assessment is required.
Here’s an interesting piece from Towers Watson’s Marshall Scott and Steve Seelig about the current state of pledging in the wake of ISS’ latest policy on the topic. Here is an excerpt:
Many of our clients are working to respond to the proxy voting policies of Institutional Shareholder Services, which for many companies has included an outright ban on stock pledging by executives. ISS policy states that “[p]ledging of company stock in any amount as collateral for a loan is not a responsible use of equity,” adding that pledging may have a detrimental impact on shareholders if the officer is forced to sell (such as to meet a margin call) (italics added).
While we understand the ISS concern that executive sales of large quantities of company stock may depress the market value of the shares, particularly in situations where other events already have created downward pressure on the stock price, we believe the circumstances where this might take place are rare, and we could argue that these companies would have continued on a downward spiral despite the executive sales. In fact, it’s possible the ISS policy will have an unintended consequence that negatively affects shareholders if anti-pledging policies discourage executives from holding company stock.
Academic research continues to find a direct correlation between the level of CEO stock ownership and favorable return to shareholders. The most recent of these studies1 finds that CEOs who receive large blocks of their company’s stock as part of their compensation package tend to spearhead fewer but superior deals that maximize shareholder value and produce better returns. This study references a long line of prior research that similarly ties higher levels of CEO stock ownership to better shareholder returns.
Given the number of emails I have received in the past two weeks, I could blog about this topic every day. As I blogged recently, there is some confusion about how the new independence of advisors requirement as many law firms have taken different approaches so far – thus, I have calendared this upcoming webcast – “Law Firms & Independence: What to Do Now” – to which I just added two new speakers – Skadden’s Joe Yaffe and Gibson Dunn’s Ron Mueller – to the existing duo of Troutman Sanders’ Brink Dickerson and Bryan Cave’s Randy Wang.
As discussed in our April 26th blog, under recently amended NYSE Rule 303A.05 and NASDAQ Rule 5605(d), board compensation committees cannot select or receive advice from a compensation consultant, legal counsel or other adviser without first taking into consideration that adviser’s independence, including consideration of the factors enumerated in the rules. As compensation committees and their advisers are preparing for the July 1 effective date of these new listing standards, three observations are important:
First, a critical issue is what triggers the requirement. While it will be apparent when a compensation committee has “selected” an adviser, a more difficult issue is determining when a compensation committee will be deemed to have received advice from an outside adviser. Because the NYSE and NASDAQ listing standards were mandated by Exchange Act Rule 10C-1(b)(4), the SEC staff has been providing informal commentary on the application of the rules. The staff’s most recent commentary, presented by the chief counsel of the Division of Corporation Finance at a meeting this week with representatives from the Society of Corporate Secretaries and Governance Professionals, reiterated that outside counsel and other advisers may be deemed to provide advice to a compensation committee indirectly–even if the adviser is not meeting with or speaking directly to the compensation committee. As an example, if in-house counsel reports what outside counsel has advised, that can constitute “receiving advice” from outside counsel. However, the fact that in-house counsel may have consulted with a number of outside lawyers in developing a recommendation or advice for the compensation committee does not mean that the compensation committee will be deemed to have received advice from each of those outside lawyers. In other situations, it will be a facts-and-circumstances determination.
In considering these issues, companies should consider the purpose of the listing standards, which is for compensation committees to be aware of and consider factors that could be viewed as affecting the objectivity of advice they receive. When that advice is effectively coming from outside counsel, or outside counsel is being invoked as the source for particular advice, the requirements of these new listing standards should be borne in mind. As we have previously noted, because of the requirement that compensation committees consider an adviser’s independence in advance of receiving advice from the adviser, companies should consider which consultants, outside counsel and other advisers work regularly with the committee or with management on matters that fall within the committee’s areas of responsibility and whether advice from those advisers will be presented to the compensation committee. If so, those advisers should be requested to provide information on the various factors specified in the listing standards so that the information may be presented for the committee’s consideration. While this information does not have to be presented to the compensation committee before the July 1 effective date of these new listing standards, it should precede the first post-July 1 instance of the adviser’s advice being presented to the compensation committee. After the initial assessment, compensation committees should conduct a similar assessment at least annually.
Second, companies should bear in mind that the independence consideration applies to any compensation consultant, outside counsel or other adviser whose advice is received by the compensation committee, regardless of the nature or subject of that advice. In other words, the listing standards are not limited to advisers addressing executive compensation matters, but could also apply to advisers addressing director compensation, management succession or other issues that are handled by a board compensation committee.
Finally, the listing standards do not require that a board compensation committee use only independent advisers. Moreover, the listing standards do not state that the committee must make a formal determination about whether an adviser is independent, but instead require the compensation committee to consider the adviser’s independence, taking into account certain factors. We expect that, in connection with conducting the assessment required under the listing standards, many compensation committees will continue the practice of making a formal determination as to whether a compensation consultant that is retained by or provides advice to the compensation committee is independent, and that companies will continue to voluntarily disclose in their proxy statements that a particular compensation consultant has been determined to be independent. We expect, however, that it will continue to be less common for companies to provide voluntary disclosure addressing other advisers.