The Advisors' Blog

– Broc Romanek, CompensationStandards.com

Here’s something from “The Atlantic” if you are following the inequality debate…

– Broc Romanek, CompensationStandards.com

In reading this blog, I came across this interesting paper – entitled “Executive Compensation: A New View from a Long-Term Perspective, 1936-2005” – by Prof. Carola Frydman and Raven Saks of the Fed Reserve. I’m always curious about papers that attempt to estimate what executives were paid before the SEC began requiring detailed pay disclosures in the early ’90s…

– Broc Romanek, CompensationStandards.com

Towers Watson’s Steve Seeling recently blogged about this restatement study that I blogged about last month:

As we wait for the SEC to propose regulations (still on the SEC agenda for the first half of this year), there’s been a lot of discussion about how the SEC might answer many of the open questions about Dodd-Frank clawbacks. But relatively few compensation professionals have yet focused on the reality of how often financial restatements triggering clawbacks might actually arise. Two recent reports from Audit Analytics found there are more restatements taking place each year than you may have thought.

In a report entitled A Restatement Analysis of the Russell 1000 Companies, Audit Analytics found that from 2006 to 2011, 291 of the 1,355 companies that were part of the Russell 1000 during those years disclosed an annual restatement, defined as a restatement with a restated period of greater than 368 days.That would mean that for each year, an average of almost 4% of companies in the Russell 1000 (48.5 per year) decided a restatement of financials was in order. The data does not mention the percentage of companies that had restatements in different years or those that had to revisit the same issue in a later year, but the sobering possibility is that over the six years of analysis, the percentage of companies with restatements was somewhere in the teens.

In a separate report entitled 2010 Financial Restatements: A Ten Year Comparison, Audit Analytics found that for over 7,000 SEC public registrants, the trend has been for a decline in the number of restatements, from 1,566 in 2006 down to 699 in 2010 (almost 10% of companies). Of course, the salient issue for companies faced with a Dodd-Frank clawback will be how often these restatements rise to the level of meeting the statutory requirement: “an accounting restatement due to the material noncompliance of the issuer with any financial reporting requirement under the securities laws.”

Taken at face value, this could encompass all of those restatements detailed in the Audit Analytics research, or some higher threshold to be determined by the SEC. For example, it might be possible that the SEC could define a “material misstatement” to include only those that had an impact on earnings. The Audit Analytics report on 2010 restatements found that, for companies trading on Amex, NASDAQ or NYSE, approximately 40% of the restatements disclosed had no impact on earnings, so this higher threshold would reduce the number of companies potentially subject to clawbacks.

On the other hand, the SEC might decide to leave the question of “material noncompliance” to companies and their audit firms. If the SEC takes this path, the number of companies subject to clawbacks might be larger than if the SEC chooses the standard. The theory would be that if “material noncompliance” was determined to be the same standard as used by auditors when requiring an annual restatement, this standard would mean more restatements would prompt a clawback.

While the issue of when companies must restate financials is one that will be out of the hands of those who design corporate executive compensation programs, this does not mean that a restatement’s impact on the financials themselves can be ignored. Continuing the above example, if only restatements that impact earnings are deemed material, would this mean companies would turn away from earnings metrics in their annual and long-term incentive plans on the theory that non-earnings-based metrics might not trigger clawbacks? Similarly, if the data suggest that most restatements take place within, say, two years of the original financials, will this make companies more likely to hold back bonus payments until that period has passed?

Whichever direction the SEC takes, the wager here is that the forthcoming Dodd-Frank clawback rules will factor into ongoing discussions about whether incentive compensation program metrics are appropriate to support company business strategies, balanced against the risk that clawbacks may be invoked.

– Broc Romanek, CompensationStandards.com

We are very excited to announce that Corp Fin Director Meredith Cross will be part of our “7th Annual Proxy Disclosure Conference” on October 8th in New Orleans (and by video webcast). Just look at this beautiful baker’s dozen of panels for this Conference:

1. An Interview with Meredith Cross, Director of the SEC’s Division of Corporation Finance
2. Say-on-Pay Disclosures: The Proxy Advisors Speak
3. The Executive Summary & Other Ways for Disclosure to Facilitate Solicitation
4. The Latest SEC Actions & CD&A Developments: Compensation Advisors, Clawbacks, Pay Disparity & More
5. Refining Your Pay-for-Performance Message & Addressing the Impact of Your Vote
6. Getting the Vote In: The Proxy Solicitors Speak
7. Dealing with the Complexities of Perks
8. Conducting – and Disclosing – Pay Risk Assessments
9. Overcoming Form 8-K Challenges
10 Handling the Golden Parachute Requirement
11. Challenges for Smaller Companies: Their First Year
12. How to Handle Preliminary Proxy Statements
13. How to Handle the ‘Non-Compensation’ Proxy Disclosure Items

Register Now for Early Bird Rates – Act by May 31st: For the early bird discount rate, register by May 31st. This Conference is paired with “Say-on-Pay Workshop: 9th Annual Executive Compensation Conference” and they will be held October 8-9th in New Orleans and via Live Nationwide Video Webcast.

– Broc Romanek, CompensationStandards.com

Mark Poerio of Paul Hastings gives us this news: In affirming the dismissal of shareholder derivative litigation against officers and directors of Goldman Sachs, Delaware’s Supreme Court issued a terse ruling, stating that “To the extent: … the issues raised on appeal are legal, they are controlled by settled Delaware law, which was properly applied.” Overall, Delaware’s business judgement rule continues to solidly protect corporate directors with respect to their executive compensation decisions. Unhappy shareholders are likely to continue their trend toward seeking friendlier judges and law in other states.

Meanwhile, Mike Melbinger blogs that the Delaware Chancery has dismissed a lawsuit involving Section 162(m) claims and denied that plaintiff’s request for fees in Freedman v. Adams.

– Broc Romanek, CompensationStandards.com

In my opinion, the biggest development of this proxy season is the emergence of the near routine practice of companies that receive a negative recommendation from ISS or Glass Lewis filing additional soliciting material (commonly referred to as “supplemental materials”). This was a trend that arose last year but has really taken off this year with roughly 85% of the companies receiving negative recommendations taking this route.

In contrast, check out this blog from Ning Chiu of Davis Polk about the flip-side – shareholders filing their own soliciting materials. My annual failed prediction of annual meetings becoming real campaigns is coming true – the only part missing is better leverage of the Web and social media in this arena. Anyways, here is Ning’s blog repeated below:

An increasing number of shareholders are filing solicitation materials advocating for a particular position on a voting matter at annual meetings, the flip-side to our recent discussion of companies filing additional soliciting materials to support management proposals. Some companies that are not accustomed to the practice may be surprised that the shareholder materials are filed under the company’s EDGAR record, as a Notice of Exempt Solicitation. As permissible under Rule 14a-6(g)(1) and Rule 14a-2(b)(1), the solicitation is exempt from requiring the proponents to file accompanying proxy statements.

Since March 1st, shareholders have made over 30 such filings. More than half were filed by the proponents that submitted shareholder proposals being voted on at the meeting. The others generally focus on voting against director nominees. Recently, a coalition of state pension funds, including CalPERS and CALSTRS, urged shareholders to vote against the two directors up for re-election at Hospitality Properties Trust. Their letter states that they are taking this “extraordinary action” for several reasons, including the adoption of a poison pill by the company without shareholder approval and the absence of efforts to declassify its board after receiving more than majority support for shareholder proposals seeking annual elections for three consecutive years. Yesterday, the company announced that one of the directors received only 42% in support and resigned as a result. However, as the board determined that the low vote was not due to the director’s “personal failings” but rather the board’s disagreement with CalPERS, the board re-appointed the same director to the vacancy that his resignation created, and the director accepted. The composition of the board remained the same.

At Wellpoint, CtW Investment Group filed three separate letters to shareholders asking them to withhold support for two director nominees because of perceived lack of oversight for political spending. The most recent criticizes not only the company but also takes issue with ISS’ support for the election of those directors and the advisory firm’s recommendation to vote against a shareholder proposal on political contributions disclosure. CtW also asked Sotheby’s shareholders to vote against its nominating and governance committee for their “failure to take decisive action and break with James Murdoch,” a former board member. In another action directed at board members, the Comptroller of the City of New York encourages shareholders to vote against several director nominees at Wal-Mart for independence and compliance issues related to recent allegations of bribery at the company.

Proponents who submitted shareholder proposals are using these materials as another way to hype their proposals, without being restricted by the 500-word limit imposed on supporting statements. They also use them to rebut the company’s opposition statement in the proxy statement. The most prolific shareholders include Trillium Asset Management, urging support for their proposals asking that boards of directors adopt policies prohibiting the use of corporate funds for political purposes at 3M and Bank of America as well as proposals at Verizon and AT&T to commit to operate its network consistent with principles of network neutrality, which at 10 pages (with footnotes) was one of the longest. Most soliciting materials are from advocates of environmental and social issues, with a few covering executive compensation proposals. In addition, Amalgamated Bank filed a letter urging shareholders of Chevron to vote for its proposal to repeal an exclusive forum bylaw.

In early April, Norges Bank Investment Management filed a presentation on the proxy access proposals that it had submitted to six companies, including Wells Fargo. Norges had taken part in a Glass Lewis-sponsored proxy talk. Besides explaining the terms of the proposal, the presentation provides the reasons why it focused on these particular companies, citing issues ranging from stock price performance to governance matters such as combined CEO and chair positions, the absence of the right to call special meetings or the adoption of the right to call special meetings at higher thresholds than the 10% supported by a majority of shareholders, the existence of classified boards or the boards’ rights to amend bylaws without shareholder approval. The claims are sufficiently wide-ranging as to make it difficult to predict what companies would not be targets.

The results at Hospitality Properties Trust is likely due to its fairly unusual fact pattern, and the ability of these shareholder soliciting materials to affect vote results is probably not meaningful for the most part. However, as a relatively simple and inexpensive means of shareholder communication, the use of these exempt filings could continue to appeal to these types of shareholder activists.

– Broc Romanek, CompensationStandards.com

I’ve added five more companies to our failed say-on-pay list for 2012: Manitowoc – 48%; Mylan – 48%; Tower Group – 30%; Cenveo – 40%; and Sterling Bancorp – 41% (results disclosed in 10-Q rather than 8-K). As noted in this article, Knight Capital Group lost its SOP vote yesterday.

As Europe faces upheaval, so do the voting results on pay in the United Kingdom and Switzerland – even going so far as to cost the CEO of Aviva his job, as noted in this WSJ article! Barclays, Credit Suisse and UBS. And check out this Reuters article, repeated below:

The Telegraph has dubbed it Shareholder Spring: in the UK, these days, CEOs are falling left and right after shareholders complain about their pay. First came David Brennan, the CEO of pharmaceutical company AstraZeneca, who decided to spend more time with his family after shareholders made it clear they wanted him out. Next up was Sly Bailey at publisher Trinity Mirror, who was also facing a shareholder revolt. Now it’s the turn of Andrew Moss, the head of insurer Aviva, who waited until after shareholders voted against his pay package before handing in his resignation.

Mark Kleinman notes something very interesting about the Aviva vote: while a majority of shareholders voted against Moss’s pay package, less than 5% actually voted against him staying on as chief executive.* The former vote, on pay, was non-binding, while the latter vote was binding — and clearly almost no shareholders had the appetite to actually fire Moss, even if that was what they ultimately ended up doing. In the UK, says Kleinman, “the effect of the pay vote was to leave Moss in an untenable position”. At the same time, says Helia Ebrahimi, “Man Group chief executive Peter Clarke is currently hanging by a gossamer thread after shareholders turned on his remuneration package”.

In the US, of course, none of this is true: Citigroup CEO Vikram Pandit is still comfortably ensconced in his position, despite clear shareholder rejection of his compensation package.

I suspect that what’s going on in the UK is a harbinger of what will happen, eventually, in the US. One can’t expect a perennially tone-deaf company like Citigroup to set the tone for corporate America as a whole — this is a firm, remember, which honestly thought the Fed would allow it to buy back $8 billion of its own precious equity. And if you don’t listen carefully to your regulators, you’re definitely not going to listen to your shareholders.

But as we see more pay package rejections in the US, I think that CEOs with cleaner ears will prove themselves capable of understanding the message being sent. After all, few shareholders vote no on pay with the thought process “I think you would be a great CEO, just as long as you earn a little bit less money”. These votes are a clear rejection of cronyism at the board level, and it behooves boards to start listening.

I might be dreaming, here, but in the age of Occupy, there’s a case to be made that boards are just a little bit more aware than they used to be that they answer to shareholders, and that the biggest shareholders — pension plans, mutual funds, that kind of thing — are ultimately representing the interests of the 99%. So long as the masses stand idly by, the plutocrats will happily award themselves ever more obscene quantities of money. But when shareholders notice and object, CEOs like Andrew Moss know that the gig is up.

*Update: Originally I said that more than 95% of votes were cast for Moss staying on as CEO, that’s wrong. Only 4.6% of votes were cast against him, but another 5% or so were withheld.

– Broc Romanek, CompensationStandards.com

A long while back, the Fifth Circuit addressed in one opinion – In the Matter of: TransTexas Gas Corporation – two separate appeals arising from a company’s Chapter 11 bankruptcy. At the outset, the Court held that a severance payment to the former CEO was a fraudulent transfer. First, the court found that the former CEO was an insider, since he was still CEO when the severance agreement was signed, even though he was not employed when he received the actual payment.

The Court further held that the company did not receive equivalent value for the severance payment. Under the original employment agreement, the CEO was not entitled to any payment if he resigned – which is what the CEO did. In addition, evidence existed that the CEO could have been terminated for cause, in which case he was entitled to only half of what he received. Addressing the second appeal, the Fifth Circuit concluded that since the payment was a fraudulent transfer, it was not an insurable loss.

– Broc Romanek, CompensationStandards.com

Yesterday, Davis Polk’s Ning Chiu blogged this nice piece about what to do to seek a waiver from Corp Fin for failing to timely file a Form 8-K announcing the frequency vote. We have covered the Staff’s willingness to go down this road in this blog – as well as covering it in the January-February issue of The Corporate Counsel.

Ning lists various items that may need to be in the request letter (as I understand it, what exactly needs to be in the request depends on which Staffer you are dealing with – so it’s a trial and error process), including:

– Whether the company has an existing Form S-3 registration statement or is planning to file one
– A request for the waiver, including any requests to use an existing Form S-3 registration statement or the ability file a new one
– Background on the frequency vote conducted and the board’s decision as to the frequency selected
– The reasons for the failure to file the Form 8-K on a timely basis
– Whether the company received a shareholder proposal on the frequency of the advisory vote on executive compensation for the 2012 meeting
– Whether the company has previously failed to make any required Exchange Act filings on a timely basis
– Processes and procedures implemented to ensure timely Exchange Act filings in the future

The Staff will respond orally and will not confirm in writing.

– Keith Bishop, Allen Matkins

Here’s something I recently blogged: Since 2002, California has imposed its own disclosure requirements on publicly traded corporations incorporated in or qualified to transact intrastate business in California. A subject corporation is currently required to disclose, among other things, the compensation for the most recent fiscal year paid to each member of the board of directors and paid to each of the five most highly compensated executive officers of the corporation who are not members of the board of directors, including the number of shares issued, options for shares granted, and similar equity-based compensation granted to each of those persons. Corporations Code Sections 1502.1(a)(4) and 2117.1(a)(4). These disclosures are made in statements of information filed with the California Secretary of State’s office. The Secretary of State provides an on-line search tool to locate filings by these corporations.

Of course, these disclosures are neither as comprehensive nor as current as those available on the Securities and Exchange Commission’s EDGAR system. As I’ve said, California’s disclosure requirements are far more likely to mislead than to inform the public.

Despite the manifest shortcomings of California’s disclosure regime, Senator Mark Leno has introduced a bill, SB 1208, that would require these corporations to disclose:

The total compensation for the most recent fiscal year of the publicly traded corporation paid to each of the five persons retired from the corporation who received from the corporation the highest amounts of total compensation that the corporation paid to retirees, and the name of each of those retirees.

Senator Leno claims that if SB 1208 is enacted, it would be “the first attempt by any state to require disclosure of the actual compensation awarded to retirees”. Item 402 of Regulation S-K does require some disclosure about pension benefits and deferred compensation but this relates to the current named executive officers. SB 1208, in contrast, requires disclosure with respect to individuals who have retired. The bill would also define “total compensation” and require disclosure of the total compensation paid to each member of the board of directors, the principal executive officer, the principal financial officer, and the three most highly compensated executive officers, other than the principal executive officer and principal financial officer, of the corporation who are not members of the board of directors.

According to this analysis prepared for the Senate Judiciary Committee, SB 1208 is supported by Alliance of Californians for Community Empowerment; California Labor Federation; California Nurses Association; California Professional Firefighters; Consumer Federation of California; and California School Employees Association. No opposition was registered. I’ve been informed by Senator Leno’s office that SB 1208 passed out of the Senate Judiciary Committee last week.