As noted in this Proskauer memo, pursuant to Executive Order 38 issued by Governor Cuomo, thirteen New York State agencies released very similar proposed regulations on May 16th, placing a limit on the funds that can be used for administrative expenses and executive compensation by entities, both for-profit and not-for-profit, that receive state funds or state-authorized payments to provide services. These regulations are available for comment to July 14th – and are scheduled to become effective on January 1, 2013. Pretty wild stuff…
Nell: What have shareholders learned from two years of “Say on Pay?”
Broc: It obviously will depend on each shareholder but the main lesson is how to manage the enormous logistical nightmare of voting on executive pay for the many portfolio companies they own. This was a sea change in responsibilities at a time when investors were cutting from a department that is not a profit center. Now that the concept of “shareholder engagement” being a year-long process, the proxy season has turned into a year-long event for those investors who take their voting responsibilities seriously. Some still don’t.
Nell: What have companies learned?
Broc:That say-on-pay isn’t the end of the world. Even in this era of intense anger over skyrocketing pay, only about 50 companies have failed say-on-pay in each of the first two years. Even for those that failed, the consequences have not been that extreme even though a spate of say-on-pay lawsuits threw a scare into a dozen companies. Given that those lawsuits aren’t failing that well, say-on-pay is well on its way to being a routine along with the rest of the proxy season action items. This was always my biggest beef with say-on-pay – it will cause boards to become complacent because they think they are doing a great job with CEO pay because the voter said so.
Companies have also begun to treat annual meetings like real campaigns. For the first time, they are willing to publicly battle a negative recommendation from the proxy advisors through the use of supplemental letters that rebut what the proxy advisor has said about them. This practice has grown like wildfire with nearly one-third of the companies receiving negative recommendations willing to go to the mat this proxy season.
Nell: What is more important in getting a majority “no” vote on pay — the make-up of the pay or the make-up of the shareholder base?
Broc: Probably the shareholder base.
Nell: How influential are the proxy advisors?
Broc: The proxy advisors – ISS and Glass Lewis being the primary ones in the US – are quite influential and have primarily been responsible for boards making changes to pay practices as their policies have pushed the envelope at times. However, their influence has often been overstated – as borne out by several recent studies – and they have been targets for criticism by quite a few corporate interests.
Surprisingly, at least one of these studies shows that management often benefits from proxy advisor influence – leading me to say “be careful what you wish for” for those managers who bash proxy advisors more out of a knee-jerk reaction to not wanting to make any changes to a broken executive pay process.
Nell: What should a company with a “no” vote do?
Broc: Schedule a series of compensation committee meetings to develop, approve and monitor an outreach plan to figure out why the vote was negative. Don’t wait for a lawsuit to be spurred into making real changes. And don’t rely solely on advisors – like proxy solicitors – for intelligence about why the vote came in the way it did. Directors should also participate in some of the research to get a firsthand feel of what shareholders are saying about the company’s pay program.
Nell: Do shareholders vote “no” on comp committee members when they don’t like the pay?
Broc: Sometimes, but less than they used to before say-on-pay became the law of the land. Note what happened at Cablevision Systems recently; the company did not have say-on-pay on its ballot this year because the frequency is triennial (triennial was the choice of shareholders last year) – but then the members of its compensation committee received less than majority support at this year’s annual meeting presumably due to pay issues. The company has a plurality vote standard so there is no direct impact from this vote – but I consider this to be a more serious failure than a nonbinding SOP vote.
Nell: Will binding “say on pay’ votes become law in the UK? In the US?
Broc: Yes, seems pretty close to a done deal in the UK. I’ll be shocked if it happens in the US but you never know…
Recently, I blogged about the UK’s march towards binding say-on-pay. Now, as described in this Davis Polk blog, the UK has published a consultation paper focusing on the content of remuneration reports of UK-incorporated quoted companies that would disclose the compensation of directors, including executive directors. Read the blog for more…
Just in time to be discussed during today’s webcast – “Proxy Season Post-Mortem: The Latest Compensation Disclosures ” – the SEC’s new compensation committee/advisor release was published yesterday in the Federal Register. This starts the clock ticking as the stock exchanges now have 90 days to propose their own rules (and then a year to finalize the standards with approval from the SEC). I expect the exchange’s proposals will come sooner than the maximum 90 days.
As has been touched on in some firm memos – and as will be discussed during today’s webcast – there are some open interpretive issues in the wake of the SEC’s rulemaking, particularly when dealing with compensation advisors. For example, what it means to “receive counsel” or a possible expansive interpretation of what it means to “select” other advisers. This was an aspect that was not clear in the SEC’s proposal. In the ABA’s comment letter, this point was specifically raised as follows:
“To implement the statutory language, we believe that the final rules should clarify that Proposed Rule 10C-1(b)(4) is intended to apply only to legal counsel and other advisers “selected,” that is, separately and specifically retained by the compensation committee. We believe the statutory language does not support a more expansive approach to this provision, and that the Commission should not seek to expand the scope of the provision in a manner that would interfere with a compensation committee’s routine operation by requiring a committee to consider the specified independence-related factors before consulting with or obtaining advice from in-house counsel or outside counsel retained by the management…. For different reasons, we also believe that the requirement for an independence assessment should not apply to compensation consultants who are retained by management even if that consultant’s advice is presented to and considered by the compensation committee. Performing an independence assessment where compensation consultants, legal counsel or other advisors do not purport to be and are not held out as independent would be a time-consuming and unnecessary exercise.”
Another ambiguous aspect of the rulemaking is that it’s not on its face limited to advisers that deal with executive and director compensation, but to any advisor that the committee has. More to come…
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 – as well as how the SEC’s new compensation committee and compensation advisor rules impact you.
Recently, I blogged about the UK moving closer to a binding say-on-pay framework – and I have posted memos on this development in our “International” Practice Area. Also note this Reuters article entitled “Long “shareholder spring” seen harming UK firms.”
In response, I got queries from members confused about how the UK framework works now – and in our countries that have say-on-pay. Cristina Ungureanu helps us by noting that this confusion may be caused by two aspects:
– Particularities of the corporate governance / board models in various EU jurisdictions (one-tier, two-tier, mixed models).
– Differentiating between vote on the remuneration report and vote on the remuneration policy
Here are the existing frameworks in other countries:
– United Kingdom: The vote is on the entirety of the remuneration report, covering both retrospective payments and policy, as well as future remuneration policy. The remuneration voted on is therefore applicable to the entire board, which includes executive and non-executive directors (in the UK, the board has a one-tier structure).
– Nordic Countries: The Nordic corporate governance structure lies between the Anglo-Saxon one-tier and the continental European two-tier model. Further, a separation between the board and executive management is required. The same person cannot be CEO and chairman of the board. Hence, the great majority of the Nordic listed companies have entirely or predominantly non-executive boards. The AGM must decide on the fees and other remuneration for each director of the board. The nomination/remuneration committee makes the remuneration recommendations, which are then presented in the notice of the AGM. As to the executive committee members, the Board must present proposed guidelines for their remuneration to the AGM for its approval; therefore the vote on executive pay is on the future remuneration policy.
And here is news about governance developments in Asia, courtesy of Towers Watson.
I’ve added 5 more companies to our failed say-on-pay list for 2012. We are now at 54 companies in ’12 that have failed to garner major support. Hat tip to Karla Bos of ING Funds for keeping me updated.
For this year’s pre-season poll predicting how many say-on-pay failures there would be, the results were as follows: Less than 10 failures – 5%; 11-20 failures – 13%; 21-30 failures – 24%; 31-40 failures – 20%; 41-50 failures – 17%; 50-99 failures – 24% and more than 100 failures – 24%. So once again, perhaps I predicted too few failures myself in designing the poll. But a hardy 24% predicted correctly…
Two days ago, the UK took another step closer to mandating binding say-on-pay when Business Secretary Vince Cable presented a bill to Parliament mandating binding say-on-pay for consideration. Here is a page with information on the “Enterprise and Regulatory Reform Bill.”
As I understand it, it looks very likely that the bill will pass and perhaps be law by October of 2013. There would actually be three types of say-on-pay votes:
– Review of past compensation – non-binding and annual
– Prospective review on compensation policy – binding and would happen every three years so long as the company’s pay policy hadn’t changed; if it had changed, would happen annually
– Share plans – binding
The biggest debate is over the annual advisory vote – which is backward looking – and supermajority vote thresholds. This Manifest blog captures some of the debate. I’ll be blogging more on this as I figure it out.
What will happen now is that amendments to the Enterprise Bill are introduced in the House of Commons for debate. It then goes to committee and then to the upper chamber, the House of Lords, which then has their debate and committee and then if all is well, it is passed into law (unlike Congress, no riders or changes can be snuck in – only the bill that has been debated can pass). The Financial Reporting Council – which is a separate body and which looks after the UK Governance Code – will then do its own consultation regarding amendments to the UK Governance Code to ensure that the Law, as it applies to UK incorporated companies, will apply to listed companies. Thanks to Sarah Wilson of Manifest for helping to explain the UK process!
Yesterday, the SEC finally adopted rules that direct the stock exchanges to adopt listing standards for compensation committees and compensation advisers under Section 952 of Dodd-Frank (Section 952 added Section 10C to the ’34 Act). The Commission adopted the rules by seriatim.
The stock exchanges have 90 days from when the SEC’s rules are published in the Federal Register to propose listing standards (and they have one year to finalize them). As noted in Mark Borges’ blog, if the exchanges and the SEC move quickly, it’s possible that the listing standards could be in place in time for the 2013 proxy season. In any event, there will be at least one new disclosure requirement in place for the 2013 proxy season – the adopting release provides that companies must comply with the disclosure changes in Item 407 of Regulation S-K in any proxy statement for a regular annual meeting occurring on or after January 1, 2013. This Item 407 change requires disclosure of an assessment of whether any work performed by a compensation consultant raises any conflict of interest (and if so to disclose the nature of the conflict and how it was addressed).
As Mike Melbinger’s blog notes, the SEC’s rules confirm that Section 10C does not require compensation committees to retain – or obtain advice – only from independent advisers. A listed issuer’s compensation committee may receive advice from non-independent counsel, such as in-house counsel or outside counsel retained by management, or from a non-independent compensation consultant or other adviser, including those engaged by management.
Tune in next Thursday, June 28th, for the webcast – “Proxy Season Post-Mortem: The Latest Compensation Disclosures” – to hear Mark Borges, Dave Lynn and Ron Mueller analyze what was (and what was not) disclosed this proxy season as well as discuss these new rules.
On Monday, Monolithic Power Systems announced the dismissal of its say-on-pay lawsuit. We haven’t heard much about this year’s crop of say-on-pay lawsuits, probably because it’s a little early and the plaintiffs haven’t fared too well so far in last year’s suits. Mark Poerio of Paul Hastings has maintained this chart of suits (and we have our own list) – here is something that Mark blogged about a Texas lawsuit:
Copycat “Failed” Say on Pay Class Action – Helix Energy Hit
Will Texas provide a friendlier forum than Delaware for the latest complaint that second-guesses executive compensation decisions by reference to a later say on pay vote? The complaint against Helix Energy begins with the usual refrain: “This is a ‘failed’ say on pay shareholder derivative action, arising from the Board’s unwarranted and excessive spending … on executive compensation.” Within the same paragraph, the complaint contorts applicable corporate law by intimating that the business judgment rule is violated where a majority of shareholders disagree with a board decision (see complaint ΒΆ3: “A majority of the Company’s stockholders agree; they rejected the Board’s business judgement by voting …”).