In the “Davis Polk Governance Blog” yesterday, Ning Chiu gave us this recap: During its 2012 North American Proxy Season review, proxy advisory services firm Glass Lewis looked back to the 2011 proxy season and also gave insights as to what we can expect from them in 2012. Highlights included:
Say-on-Pay. Glass Lewis recommended against 17.5% of say-on-pay proposals in 2011. They use a proprietary model to evaluate companies and come up with “A” to “F” grades. 10% of companies that they reviewed received “F”s in 2011, with the average say-on-pay results at those companies at 73%. While, like ISS, they cite pay for performance issues as the primary reasons for causing negative recommendations, Glass Lewis also tends to cast an unusual focus on CD&A disclosure that sometimes surprises companies. According to Glass Lewis, they find it problematic when companies disclose performance measures but not the rationale for the selection or the weighting of the measures, or when they perceive inadequate discussion of a compensation committee’s exercise of discretion. Glass Lewis grades CD&A disclosure as “poor, fair and good,” and 5% of companies received “poor” citations in 2011. They mentioned Amazon as an example of a company that, in their view, both performs and has appropriate executive compensation, but has poor CD&A disclosure. In terms of evaluating company responses to prior year say-on-pay votes, Glass Lewis will examine those companies that received at least 75% negative votes for whether to recommend against either the chairman of the compensation committee or the entire committee, depending on companies’ engagement efforts with shareholders and then the level of responses.
Shareholder Proposals, Including Proxy Access. Glass Lewis data shows that there were 443 shareholder proposals in 2011, a decrease from 591 in 2012, mainly attributable to the absence of compensation proposals in light of mandatory say-on-pay. This year’s most popular proposal, given the election year, will likely be on political contributions and related topics. As for proxy access shareholder proposals, similar to ISS, Glass Lewis will review those on a case-by-case basis before making recommendations, including the percentage ownership requested and holding period requirement. Their list of factors that they will consider is much longer than the ISS policy, including an analysis of the company’s shareholder base in both percentage of ownership and type of shareholders, responsiveness of board and management to shareholders as evidenced by “progressive shareholder rights policies” such as annual elections and majority voting, and company performance and steps taken to improve bad performance.
Exclusive Forum Provisions. Glass Lewis discussed the selection of Delaware as an exclusive forum for shareholder derivative suits by 80 companies as of November, adopted either after seeking shareholder approval or by board action alone. We recently blogged about ISS policies on this matter. Like ISS, Glass Lewis generally recommends against an exclusive forum provision and a company will need to demonstrate that it has a long history of suffering from frivolous lawsuits to justify the proposal. But Glass Lewis also takes it a step further and will recommend against the chairman of the governance committee if the company adopts exclusive forum provisions either without shareholder approval or pursuant to a bundled bylaw or charter amendment (where exclusive forum is coupled with other changes). If a company adopts an exclusive forum provision before a company’s IPO, Glass Lewis will recommend against the chairman of the governance committee or the board chairman if there is not a governance committee chairman.
Talk to Us Now. Glass Lewis reiterated that they do not engage with companies during the proxy season, long a frustrating policy for companies after they receive negative Glass Lewis reports, but they are available for discussions during the off-season. At times during the proxy season, they will sponsor “proxy talks” involving a specific company and invited clients.
Here is a recent question posed in our “Q&A Forum” (#892):
I’m considering the “how the registrant has considered the results of the most recent shareholder advisory vote on executive compensation required by section 14A of the Exchange Act (15 U.S.C. 78n-1) or Rule 240.14a-20 of this chapter in determining compensation policies and decisions” language and wondering if this consideration covers just the results of the most recent say on pay advisory vote or the results of the most recent frequency vote as well (I’m not sure if the “most recent shareholder advisory vote on executive compensation required by Section 14A” language refers to just the advisory vote (Rule 14a-21(a)) or the frequency vote (Rule 14a-21(b) as well).
Here is a response from Dave Lynn:
I had a similar reaction, as the rule text may be a little ambiguous because the frequency vote is arguably a vote “on executive compensation,” I think Section II.A.3(c)of the adopting release makes it pretty clear that the CD&A requirement covers only the say-on-pay vote:
“After considering the comments, we are adopting amendments to the disclosure requirements of Item 402(b)(1) substantially as proposed, with a modification to clarify that this mandatory topic relates to the issuer’s consideration of the most recent say-on-pay vote. As discussed below, issuers should address their consideration of the results of earlier say-on-pay votes, to the extent material.”
All of that said, I have found that it is sometimes useful to mention the frequency of future say-on-pay votes when describing the consideration of and actions taken with respect to the prior say-on-pay vote or votes.
I haven’t seen anything on this – so I guess we all missed this OECD report on board practices in setting executive compensation that was published back in August. Among the many interesting parts of this report is the UK section, particularly Section 7.1.6 regarding shareholder engagement. The UK has had say-on-pay for a decade – so the US can look to the Brits to see what might lie ahead here perhaps. Observations about the undue influence by a couple of groups and feelings of distrust and hostility do not bode well. Of course, maybe we can do better here. Hope springs eternal.
Thanks to Valerie Diamond and her global equity services team at Baker McKenzie, here is a chart with a matrix that parses the enforceability and other legal issues related to clawback provisions in equity award agreements in 40 key countries including Dodd-Frank clawbacks, non-compete related clawbacks and financial firm clawbacks.
Dave Lynn and Mark Borges just wrapped up the Lynn, Borges & Romanek’s “2012 Executive Compensation Disclosure Treatise & Reporting Guide.” For those that want to access it online, it’s now posted on this site. For those that like a hard copy, it will be finished being printed in a few weeks.
How to Order a Hard-Copy: Remember that a hard copy of the 2012 Treatise is not part of a CompensationStandards.com membership so it must be purchased separately – however, CompensationStandards.com members can obtain a 40% discount by trying a no-risk trial now. This will ensure delivery of this 1200-plus page comprehensive Treatise as soon as it’s done being printed.
ISS Corporate Services recently released a white paper, “Bridging the Pay Divide: Trends in C-Suite Pay Disparities.” This white paper examined the total direct compensation for the top five highest-paid executives at Russell 3000 companies in fiscal years 2008, 2009, and 2010. Total direct compensation is defined as the sum of pay received from: base salary, bonus, non-equity incentive plan compensation, stock awards, option awards, change in pension value and nonqualified deferred compensation earnings, and all other compensation, such as perquisites.
Here are some of the paper’s key takeaways:
– The gap between total direct compensation of the CEO and next highest paid named executive officers has closed dramatically since fiscal 2008.
– As of fiscal 2010 and where the CEO is the top paid executive, the pay gap is most pronounced at large-cap companies, where CEOs received, on average, 2.4 times the pay of the next highest paid executive officer. By comparison, the multiple is 2.1 times at Russell 3000 companies below the S&P 1500.
– Across sectors, companies in the materials sector saw the largest pay spread with an average multiple of 2.4 in fiscal 2010, while, conversely, telecommunications firms had an average multiple of just 1.9.
– The prevalence of “excessive” multiples between the CEO and next highest paid executive, defined here as three or more, declined markedly from fiscal 2008 when evidenced at more than half of all Russell 3000 companies.
– Across indices, the CEO’s share of total compensation of the top five earning officers dropped radically from fiscal 2008 to 2009, though has held steady into 2010 with CEOs claiming 42.2 percent of the total pay pie across the full Russell 3000 universe.
This recent CFO.com article notes how going public can be costly for shareholders, particularly the hike in executive pay. Here is an excerpt:
Being public adds about $2.5 million, on average, to a company’s cost structure, with $1.5 million of that devoted to higher compensation for CEOs, CFOs, and others in the finance function, such as investor-relations professionals, according to the survey. That figure also covers increased board costs, as more than 80% of companies had either added new members to their boards of directors or increased director compensation prior to their IPO.
Indeed, Angie’s List, which went public this week, notes in its S-1 filing that it boosted executive cash compensation to hit the 75th percentile, based on a study of other pre-IPO companies, in advance of its offering. “As part of the compensation committee’s comprehensive review of executive compensation levels during July 2010, we found that our base salaries generally fell significantly below the median in both of our pre-IPO and public companies studies,” according to the S-1. As a result, Angie’s List made “significant increases in recognition of both the growth of our company over the last few years and the efforts that would be required of all our executive officers as we began to move toward becoming a public company.”
Twelve Australian ASX 300 companies have received a first “strike” under the new “two strikes” law in Australia that allows shareholders to oust directors if a company’s remuneration report receives 25 percent or more “against” votes for two consecutive years.
The controversial rule, which is part of an amendment to the Australian Corporation Act that went into effect July 1, requires companies to put a “spill” motion on the ballot of the annual general meeting at which a second strike could occur. If the spill motion passes with a simple majority, the company must hold a general meeting within 90 days at which all directors, except managing directors, stand for reelection. The legislation, which applies to any Australian-domiciled company, prohibits key management personnel or their closely related parties from voting on the remuneration report and on the spill resolution.
The 12 companies with first strike votes so far are: Bluescope, Crown, Dexus, Pacific Brands, Watpac, UGL, GUD, Austock, Tassal Group, Sirtex Medical, Perpetual, and Globe.
The two strikes rule has increased the focus on executive pay in the Australian market, but has otherwise received mixed reviews, with some stakeholders concerned that shareholders could use the rule as a way of ousting directors instead of focusing on remuneration. They fear it could dilute the existing feedback mechanism without actually curbing any of the pay excesses. An advisory vote on remuneration packages has been required in Australia since 2005.
