Hat tip to Ed Hauder of Exequity for notifying us of this development:
– ISS recently posted its whitepaper detailing its pay for performance (P4P) methodology:
The Evaluating Pay for Performance white paper provides an overview of ISS’ approach in evaluating Pay for Performance alignment. Originally published prior to the 2012 proxy season [Note: a revised version of the whitepaper was published in February 2012], the document incorporates further updates for 2013 that describe ISS’ new peer selection methodology and approach to measuring realizable pay.
Here’s news from this memo by Wachtell Lipton’s Paul Rowe & Jeremy Goldstein:
Recently, the Delaware Supreme Court upheld a Chancery Court determination that a board did not commit waste by consciously deciding to pay bonuses that were non-deductible under Section 162(m) of the Internal Revenue Code (Freedman v. Adams, Del. Supr., __ A.2d __, No. 230, 2012, Berger J. (Jan 14, 2013)). Unlike claims of gross negligence, claims of waste are not subject to exculpation or indemnification by the company and therefore have the potential for personal liability of directors.
The original suit was brought in 2008 by a shareholder of XTO Energy (later acquired by ExxonMobil) as a derivative claim. The suit alleged that XTO’s board committed waste by failing to adopt a plan that could have made $130 million in bonus payments to senior executives tax deductible. The board was aware that, under a plan that qualifies for the “performance based compensation” exception of Section 162(m), the company could have deducted its bonus payments, but, as the company disclosed in its annual proxy statement, the board did not believe that its compensation decisions should be constrained by such a plan. The Chancery Court held that the shareholder failed to state a claim. The Supreme Court agreed, holding that the decision to sacrifice some tax savings in order to retain flexibility in compensation decisions is a classic exercise of business judgment.
Like other recent Section 162(m) suits about which we have written, this suit serves as a reminder that careful attention must be paid to the design and administration of plans intended to comply with Section 162(m) and that disclosure relating to tax deductibility must be carefully drafted. Helpful in this case was the fact that the board was aware of Section 162(m), made a conscious decision not to avail itself of Section 162(m) and disclosed its reasons for so deciding. Moreover, this case serves as a reminder that aspirational “best practices” are not synonymous with legal requirements that may result in liability. Indeed, the Supreme Court expressly stated that “even if the decision was a poor one for the reasons alleged by Freedman, it was not unconscionable or irrational.”
Thus once again, the Delaware courts have demonstrated that directors need not be deterred from paying executives in amounts and forms that they deem necessary or advisable to attract, retain and incentivize executives. Indeed, doing this effectively is one of the highest priorities for any board of directors.
Yesterday, the SEC finalized the NYSE & Nasdaq listing standards related to compensation committees and their advisors (here’s the NYSE order & Nasdaq order). Last Friday, both exchanges amended their listing standards, as noted in this blog. Here are the effectiveness timetables, as noted in this Cooley news brief:
– NYSE companies will have until the earlier of their first annual meeting after January 15, 2014, or October 31, 2014, to comply with the new standards for compensation committee director independence. All other provisions will become effective on July 1, 2013 for NYSE companies (e.g., provisions relating to the authority of a compensation committee to retain and fund compensation consultants, legal counsel and other compensation advisers and the responsibility of the committee to consider independence factors before selecting or receiving advice from these advisers).
– Nasdaq companies will be required to establish the committee’s authority and responsibility under Rule 5605(d)(3) in the committee charter, resolutions or other board action by July 1, 2013. Nasdaq companies will have until the earlier of their first annual meeting after January 15, 2014, or October 31, 2014, to comply with the remaining provisions (including a mandatory charter amendment to establish the authority noted above).
Tune in tomorrow for the webcast – “The Latest Developments: Your Upcoming Proxy Disclosures – What You Need to Do Now!” – to hear Mark Borges of Compensia, Alan Dye of Hogan Lovells and Section16.net, Robbi Fox of Exequity, Dave Lynn of CompensationStandards.com and Morrison & Foerster and Ron Mueller of Gibson Dunn discuss all the latest guidance about how to overhaul your upcoming disclosures including these topics:
– Overview of key lessons from the 2012 proxy season
– The rise of the proxy summary
– Developments with CD&A and executive summaries – including realized/realizable pay
– The impact of the compensation committee and advisor independence rules in 2013
– Hedging and pledging policies in the wake of the 2013 ISS policy change
– Engagement strategies for 2013
– Compensation and governance shareholder proposals
As you know, a new SEC rule (Item 407(e)(3)(iv) of Regulation S-K) requires disclosure if a conflict of interest has arisen in connection with the work of a compensation consultant (whether selected by management or the compensation committee). To satisfy this disclosure requirement, companies will need to conduct a conflicts of interest assessment. This raises the question of whether companies will include voluntary disclosure (so-called “negative disclosure”) in their proxy statement when a determination of “no conflict” has been made. Here are the results from our recent survey regarding what companies are preparing to do:
1. For our next proxy statement, when it comes to the newly required conflicts of interest disclosure about compensation consultants (ie., Item 407(e)(3)(iv) of Regulation S-K), assuming that no conflict of interest is identified, our company:
– Has made a decision, at least at the staff level, whether to make voluntary negative disclosure (eg., as an anticipatory “best practice” or simply to signal to the SEC Staff and our shareholders that we were aware of the new disclosure requirement) – 62%
– Hasn’t yet figured out whether it will make any voluntary negative disclosure – 35%
– I hadn’t realized that there is a new conflicts of interest disclosure (and assessment) requirement! – 3%
2. For those of you who know which approach your company will take, our company intends to:
– Only provide disclosure if a conflict of interest is identified – and not provide any voluntary negative disclosure – 25%
– Provide voluntary disclosure that a conflicts of interest assessment was conducted and that no conflict of interest was identified – 67%
– Provide voluntary negative disclosure that works through one or more of the six non-exclusive factors supporting a “no conflict of interest” conclusion – 8%
With the SEC staring at yesterday’s deadline for its extension to approve the NYSE & Nasdaq proposals to comply with Rule 10C-1 under the Exchange Act comes this news from Davis Polk’s Ning Chiu on Friday:
Both the NYSE and Nasdaq have filed further amendments to their proposed listing standards on compensation committees and their advisers. The amendments copy directly from the exception in Item 407(e)(3)(iii) of Regulation S-K with respect to the proxy disclosure rules for compensation consultants.
The amendments clarify that a compensation committee is not required to conduct the independence assessment of an adviser whose role is limited to (a) consulting on any broad-based plan that does not discriminate in scope, terms, or operation, in favor of executive officers or directors, and that is available generally to all salaried employees or (b) providing information that either is not customized or that is customized based on parameters that are not developed by the adviser, and about which the adviser does not provide advice.
The SEC enhanced proxy disclosure rules in December 2009 permitted these exceptions in response to commentators who suggested that broad-based, non-discriminatory plans and the provision of information, such as surveys, that are not customized, should not be treated as compensation consulting services that would raise conflict of interest concerns.
The NYSE amendment also added language indicating that nothing in the section requiring a compensation committee to consider the specific adviser independence factors is intended to limit compensation committees from selecting or receiving advice from any adviser that they prefer, including ones that are not independent. NASDAQ already had a similar statement.
My ten cents: Given that the SEC’s deadline to act was yesterday – and a statement is in both the exchange’s latest amendments saying they don’t consent to an additional extension for the SEC to act – maybe the SEC will approve the amendments today or soon enough. Since a portion of the new rules will be effective July 1st, they have to give companies time to comply…
Although over 100 companies faced the grim prospect of a “second strike”, only 13 companies actually received a “second strike” in the recently completed Australian proxy season (and only 2 had their board spill resolution approved). This seems to indicate that shareholders are taking this newly-granted responsibility quite seriously. Furthermore, companies are as well , as indicated by the increased dialogue and subsequent policy and design reform.
CGI Glass Lewis has found that “first strike” companies have been more proactive in consultations with, and feedback from, institutional shareholders, proxy advisors and remuneration advisors. As a result, their remuneration reports tend to be well explained with feedback from shareholders incorporated in those companies’ remuneration policy reviews.
Some companies, such as Bluescope Steel Limited, implemented remuneration freezes for executives until financial year 2013. Others, such as Crown Limited, undertook major efforts to improve their disclosure and explanation of remuneration practices. Some companies, such as Dexus Property Group, revamped their executive remuneration structures by introducing a deferred short-term incentive and a new long-term incentive plan, each of which, in our view, better align that company’s remuneration framework with shareholders’ long-term interests.
As previously mentioned, only 13 companies received a “second strike”. Of these, only two companies had their board spill resolution approved at their AGM. Subject to majority approval of a separate resolution (the “board spill resolution”) at the AGM, companies that receive two strikes (two consecutive votes of 25% or more against the remuneration report proposal) may face a board spill, where directors (except the managing director) would need to be re-elected to maintain their board seats.
This of course means that the two companies with majority-supported spill motions (Penrice Soda and Globe International) need to hold an extraordinary general meeting within 90 days to re-elect the board.
Last week, the Canadian Coalition for Good Governance (CCGG) updated its Executive Compensation Principles, whose 46 members manage nearly $2 trillion in assets on behalf of Canadian investors, to focus on approaches to aligning pay with performance as well as integrating “risk management functions into the executive compensation philosophy and structure.” The principles were last updated in ’09. Broadly, the document comprises six principles covering the following:
– A significant component of executive compensation should be “at risk” and based on performance;
– “Performance” should be based on key business metrics that are aligned with corporate strategy and the period during which risks are being assumed;
– Executives should build equity in the company to align their interests with those of shareholders;
– A company may choose to offer pensions, benefits and severance and change-of-control entitlements. When such perquisites are offered, the company should ensure that the benefit entitlements are not excessive;
– Compensation structure should be simple and easily understood by management, the board and shareholders; and
– Boards and shareholders should actively engage with each other and consider each other’s perspective on executive compensation matters.
There has been so much going on with the wave of “Say-on-Pay Litigation 2.0” (although the lawsuits are more than just say-on-pay related) that I have been tempted to blog about it daily (see this Mark Borges’ blog and this D&O Diary Blog – as well as this list of cases posted by Faruqi & Faruqi and our own list & memos in the “Executive Compensation Litigation Portal“).
But I have held off blogging because I knew you could tune in tomorrow for the comprehensive webcast – “The Litigation Explosion in Executive Compensation” – to hear Orrick Herrington’s Rick Gallagher, Simpson Thacher’s Joe McLaughlin and Paul Hastings’ Mark Poerio discuss what is involved in the rash of new executive compensation-related lawsuits, as well as how to handle them. Please print off these “Course Materials” in advance.
Just like ISS did during the end of December, Glass Lewis – via Equilar – seeks input from companies on the peer groups they should use by January 18th. Under new methodology used by Glass Lewis, peer groups are constructed using a “market-based” approach developed by Equilar that uses a company’s self-disclosed peers and the peers of those peers. Input should be provided using this online form…