– Broc Romanek, CompensationStandards.com
As noted in its Form 8-K, Navistar International is the first company holding its annual meeting in 2013 to fail to gain majority support for its say-on-pay with only 17% voting in favor since abstentions count as “against.” Lower than anything we saw last year, although perhaps not surprising since nearly 50% of Navistar is held by just 3 investors, including Carl Icahn, who has blasted them for poor governance. Hat tip to Karla Bos of ING Funds for pointing this out!
– Brink Dickerson and David Meyers, Troutman Sanders
We suggest inclusion of the language below in insider trading policies as a possible response to the new ISS voting guidelines for pledging and hedging. Companies will need to decide whether to narrow the language to just “executive” officers (ISS uses the term “executives”) and whether to define “significant” (ISS does not). Also, a few companies already prohibit all pledging, and not just significant pledging, and companies may want to consider that approach as well, although we view that approach as a bit harsh.
Board members and officers are prohibited from, directly or indirectly, [pledging and hedging any of the Company’s equity securities] [(1) pledging a significant number of the Company’s equity securities, or (2) hedging with respect to any of the Company’s equity securities]. For these purposes, [(a)] “pledging” includes the intentional creation of any form of pledge, security interest, deposit, lien or other hypothecation, including the holding of shares in a margin account, that entitles a third-party to foreclose against, or otherwise sell, any equity securities, whether with or without notice, consent, default or otherwise, but does not include either the involuntary imposition of liens, such as tax liens or liens arising from legal proceedings, or customary purchase and sale agreements, such as Rule 10b5-1 plans[, and (2) “significant” means [the lesser of] 1% of the Company’s outstanding equity securities [and 50% of the equity securities of the Company owned by the board member or officer]]. Also for these purposes, “hedging” includes any instrument or transaction, including put options and forward-sale contracts, through which the board member or officer offsets or reduces exposure to the risk of price fluctuations in a corresponding equity security.
“Equity securities” include common stock, voting preferred stock and options and other securities exercisable for, or convertible into, settled in, or measured by reference to, any other equity security determined on an as-exercised and as-converted basis.
The equity securities attributable to a board member or officer for these purposes shall include equity securities attributable to the board member or officer under either Section 13 or Section 16 of the Securities Exchange Act of 1934. [Equity securities that are pledged shall not be counted toward board member and officer ownership requirements.]
– Broc Romanek, CompensationStandards.com
From this Bloomberg article:
Swiss company chief executive officers, including Roche Holding AG’s Severin Schwan and Nestle SA’s Paul Bulcke, earn some of the world’s highest salaries. That may soon change. With more than 100,000 Swiss citizens having signed a petition to limit “fat-cat” pay, voters will decide at a March 3 referendum whether top executives should have their compensation set by shareholders. While a poll shows a majority may vote yes, the industry’s lobby group warns that it will drive out tax-paying companies and is campaigning for a softer counter proposal. “If you have this kind of limitation on executive pay, why should an American company put their European headquarters into Switzerland,” Philip Mosimann, CEO of Bucher Industries AG, a Swiss maker of street sweepers with a market valuation of 2.1 billion francs ($2.3 billion), said in an interview. “They would leave. I’m certain of that.”
The vote is the brainchild of Thomas Minder, a Swiss lawmaker and managing director of herbal toothpaste business Trybol AG, whose petition blames highly-paid “fat cats” — “Abzocker” in German — for the financial crisis. If successful, the proposal will give shareholders an annual ballot on executives’ pay and block big payouts for new hires and for managers when they leave companies.
Schaffhausen to Fordham
“Shameless executive payouts have very clearly come from the U.S.,” said Brigitta Moser-Harder, an activist shareholder, who owns shares of the country’s biggest bank UBS AG and largest engineering company ABB Ltd. and regularly speaks on the subject at annual shareholder meetings and on Swiss TV. “People have been outraged about high earners for years.” Minder, 53, has led a five-year campaign after collecting the signatures needed for a referendum. The businessman, who has an MBA from New York’s Fordham University and runs his family’s 113-year-old company, grew up near Schaffhausen, a small city bordering Germany that’s home to Swiss companies such as automobile parts-maker Georg Fischer AG.
The former Swiss army company commander wants to curb what he sees as a culture of chiefs who only stay for a short time and are still rewarded with high salaries, according to his campaign website. Minder plans to eliminate sign-on bonuses, as well as severance packages and extra incentives for completing merger transactions. He proposes to punish executives who violate the terms with as long as three years in jail.
Swiss Referendums
A survey conducted in January by researcher gfs.bern showed 65 percent of 1,217 voters supported Minder’s proposal. Switzerland holds regular referendums for issues that are able to draw the required 100,000 signatures. In 1989, an initiative to get rid of the Swiss army was rejected by the Swiss people. “I hope it doesn’t pass, I don’t think it’s good for Switzerland at all,” ABB CEO Joe Hogan said in an interview today. “For multinational companies like ABB, we have to attract and retain the best talent in the world. If that inhibits us, and I think this initiative could, that’s a problem.”
Opposition to excessive executive pay has been building in Switzerland, even though the country has the highest average monthly wage in Europe. Minder and Moser-Harder say payouts such as the 71 million francs of shares that Dougan, Credit Suisse’s CEO, received in 2010 under an incentive program created five years earlier show how executive compensation has become disconnected from average salaries.
Top Salaries
At least five of Europe’s 20 highest-paid CEOs work for Swiss companies, according to data compiled by Bloomberg. The list includes three Americans, Dougan, Hogan and Joe Jimenez of Novartis AG, as well as Roche’s Austrian chief Schwan and Nestle’s Bulcke of Belgium. Jimenez, Switzerland’s highest earning CEO, got 13.2 million Swiss francs in 2012 and Schwan received 12.5 million francs. That compares with an average of about 2.7 million euros (3.3 million francs) for CEOs of companies in Europe’s Stoxx 600 Index which have disclosed 2012 executive salaries, according to data compiled by Bloomberg.
Minder’s supporters see swollen salaries as an “Americanization” imported by investment bankers in the 1990s. The proposal has broad support among low- and middle-income earners and also among those with vocational training, Susanne Leutenegger Oberholzer, a Social Democratic Party lawmaker, said at a Jan. 31 press conference in Bern.
Liberal Laws
The plan would result in one of the world’s strictest laws on executive pay, according to Robert Kuipers, a partner in charge of remuneration services in PriceWaterhouseCoopers’ Zurich office. The U.K., by comparison, has instituted a non- binding “say on pay” rules. Switzerland would become less attractive to foreign multinationals such as offshore drilling contractor Transocean Ltd. and oilfield service company Weatherford International Ltd., which relocated because of liberal corporation laws, taxes and infrastructure, said Meinrad Vetter, an official at Economiesuisse, a lobby group for Swiss companies. Economiesuisse has budgeted as much as 8 million francs on a campaign to block the initiative and backs a counter proposal from the government, which would automatically come into force next year if the Swiss people reject Minder’s law.
Switzerland’s largest corporations such as Novartis, Credit Suisse, Syngenta AG and UBS back the counter proposal, which omit Minder’s demands for a binding shareholder vote, prison sentences and a sign-on bonus ban. At the same time, the government plan would allow shareholders of individual companies to decide if they want to introduce a binding vote.
Social Cohesion
Economiesuisse’s Vetter said it was necessary to address the concerns of enraged voters. “It’s more a question about social cohesion,” he said. “We need an answer to the Minder initiative and an answer to the anger of Swiss people about executive salaries.” Switzerland’s ranking as the world’s most competitive country in the World Economic Forum’s annual index won’t be affected by the vote’s outcome, at least in the short term, because executive pay isn’t part of the overall assessment, said Margareta Drzeniek, who is part of the team that covers Switzerland at the WEF. It may even be a positive in the long term, assuming such a change improves social cohesion, she said.
Novartis’s Jimenez has said voters shouldn’t ignore the negative consequences of Minder’s initiative for some of the country’s biggest employers. “From a competitive standpoint, it’s very difficult for me as a CEO to hire outside talent if any offer I make is contingent on a shareholder vote,” Jimenez said last month. “I think it puts Novartis or any Swiss company at a competitive disadvantage.”
– Broc Romanek, CompensationStandards.com
In a blog entitled “Moody’s Warns Jeffries on ‘Excessive’ Pay,” Paul Hastings’ Mark Poerio notes:
This article from the New York Times begins: “To Moody’s, the high pay [of $78 million for top executives] is a reminder of ‘excessive compensation’ among Wall Street firms, potentially leading investment banks to take excessive risks and irritating critics on Capitol Hill and among regulators.” Fast forward to the proxy statement disclosure implications: How will the company handle its discussion of the riskiness of its executive compensation structures? Going to the design of the firm’s executive compensation, Moody’s has apparently expressed concern that “the firm has not put in place measures like longer award vesting periods and more expansive powers to claw back compensation . . . to ensure that employees will not suffer consequences from excessive risk-taking.” It will be interesting to see how the firm’s shareholders and proxy advisory firms react to the Moody’s report, and whether the firm’s compensation committee acts preemptively beforehand.
I can’t recall a rating agency ever making a concern over excessive executive pay public? Maybe the NY Times sleuthed this out. Or maybe it’s a new trend…
– Subodh Mishra, ISS Governance Exchange
Two compensation-related proposals are making the rounds this year in numbers equal to or greater than in 2012. The first, calling on executives to retain a significant portion of their equity awards until reaching retirement age, has been filed at more than 30 companies, according to ISS data, the bulk of which remain pending at companies including Apple, Hewlett-Packard, and others. Two resolutions have been withdrawn–including an AFSCME filing at Express Scripts Holding Company–and one has gone to a vote. At heavy truck manufacturer Oshkosh, the resolution drew 22.4 percent of votes cast “for” and “against,” slightly less than last year’s average of 24.5 percent spread across 31 proposals voted.
Stock retention filings topped out at 38 last year with more than two-thirds of those voted receiving support in the 20-30 percent range.
ISS is tracking a jump in the number of resolutions seeking to bar the accelerated vesting of equity awards upon a change-in-control. Roughly a dozen of these proposals came to a vote in 2012 with average support touching nearly 40 percent of votes cast “for” and “against” out of 13 resolutions filed. This year, the number of filings has doubled to more than 28 disclosed as of Feb. 1, thanks to a stepped up campaign by retail investors, though companies have responded to the campaign by seeking omission at the SEC.
Notably, more than one-quarter of the resolutions have been omitted at the SEC for reasons including “vague and misleading” resolved clauses, as well as being substantially duplicative of proposals being put forward by management. The SEC continues to deliberate on another four filings, suggesting the final tally of those going to a vote may mirror last year, despite a marked uptick in the volume of filings.
Meanwhile, a proposal filed by the United Brotherhood of Carpenters and Joiners of America calling on companies to change the frequency of the say-on-pay vote from annual to triennial failed to gain traction, with a number of issuers seeking to omit the resolution. The proposals, expected to number in the dozens for 2013, were challenged at the SEC by companies including PNC Financial Services Group, Occidental Petroleum, Abbott Laboratories, and Verizon Communications, with a number of companies arguing the Carpenters’ proposal would conflict with their own say-on-pay resolution and that the labor fund’s call had already been implemented though previous say-on-pay frequency votes. The Carpenters’ ultimately withdrew the resolutions, acknowledging its decision to do so was “based on its recognition that there is little interest among [p]roposal recipients to allow a new say-on-pay frequency vote at this time.”