Chesapeake Energy Corp CEO Aubrey McClendon plans to reimburse the company $12 million it paid to purchase his antique map collection in 2008 as part of a settlement with shareholders angered by the transaction. The preliminary settlement, filed in Oklahoma state court on Tuesday, also places restrictions on senior management’s right to hold company stock in a margin account or make speculative trades with Chesapeake shares. The settlement requires court approval, after which ownership of the maps will revert back to McClendon.
McClendon, who founded the company and is one of the industry’s most visible proponents of natural gas, was forced to sell 94 percent of his Chesapeake shares in 2008, amounting to 6 percent of the company’s outstanding stock, to meet margin calls. That same year, the company’s board awarded a $75 million bonus to McClendon in a year when its stock fell 60 percent. The sale of his map collection to the company in 2008 also netted McClendon a $4 million profit. Influential proxy advisory service ISS this year opposed McClendon’s reelection to the company’s board, citing unresponsiveness to investors and compensation issues.
At this year’s annual meeting in June, more than 40 percent of the company’s shareholders rejected Chesapeake’s executive pay plan, and McClendon was reelected with 78 percent of the vote. Before the settlement, Chesapeake had already taken some steps in respect to its governance practices. It hired a compensation consultant and a lead independent director this year.
As Ted Allen blogged yesterday, Regis Corporation received more than 71% opposition to its say-on-pay at its annual meeting, which is the greatest dissent seen so far this year. We have added the Regis Form 8-K to our list of failed say-on-pays in our “Say-on-Pay” Practice Area.
The video archive of last weeks’ pair of Conferences – the “6th Annual Proxy Disclosure Conference” & “Say-on-Pay Workshop: 8th Annual Executive Compensation Conference” – are posted. Hopefully, you’ve talked to some of the many that attended this event and heard how much practical guidance was imparted. Our panels really delivered this year – and it’s not too late to watch them as you can still register and watch the panels now or when you are gearing up to draft your proxy materials.
Here are three short videos from our week of Conferences this week – this first one shows the sheer size of our “Investors Speak” panel on Wednesday (2000 attendees in person and many more online):
A groovy exhibit from E*Trade in our Exhibit Hall:
Also liked this set-up in the Exhibit Hall from Bank of America/Merrill Lynch:
Equilar recently released two new surveys. One examines Fortune 100 CEOs from 2005 to 2010, evaluating how the financial crisis and the recession have changed boards’ approach to perks. A few of those findings:
– Total “other” compensation drops: After falling 28.3 percent from 2008 to 2009, the median value of “other” compensation for F100 CEOs fell again in 2010, with a more modest decline (8.3 percent) from 2009 levels.
– Tax gross-ups on the chopping block: The median value of perquisites related to tax gross-ups fell 48.4 percent from 2009 to 2010. Their prevalence decreased from 50 percent in 2009 to 25.3 percent in 2010.
– Eliminating some perquisites is on the rise: In 2010, 14.7 percent of F100 companies indicated that they would eliminate some executive perquisites in late 2010 or early 2011. The most frequently eliminated perk was tax reimbursements, with 7.4 percent of companies eliminating them.
– Stock options declining: The median number of options granted by S&P 1500 firms fell 3.8 percent annually from 2006 to 2010.
– Restricted stock is becoming more common: 74.9 percent of companies disclosed restricted-stock grants in 2006, while 89.9 percent disclosed them in 2010.
– CEOs are getting bigger slices of the equity pie: The amount of options granted to CEOs as a percentage of total options granted rose from 6.2 percent in 2006 to 7.4 percent in 2010.
We have posted the remarks from Albert Meyer of Bastiat Capital regarding “Egregious Executive Pay Via Stock Options” that were made in connection with yesterday’s “Say-on-Pay Workshop:8th Annual Executive Compensation Conference” for general consumption (the video archive of that Conference is now posted). It’s great to see investors speaking out.
Today is the “The Say-on-Pay Workshop: 8th Annual Executive Compensation Conference”; yesterday was the “6th Annual Proxy Disclosure Conference” and the video archive of that Conference is posted. Note you can still register to watch online by using your credit card and getting an ID/pw kicked out automatically to you without having to interface with our staff. Both Conferences are paired together; two Conferences for the price of one.
– How to Attend by Video Webcast: If you are registered to attend online, just go to the home page of TheCorporateCounsel.net or CompensationStandards.com to watch it live or by archive (note that it will take about a day to post the video archives after it’s shown live). A prominent link called “Enter the Conference Here” on the home pages of those sites will take you directly to today’s Conference (and on the top of that Conference page, you will select a link matching the video player on your computer: Windows Media or Adobe Flash Player).
Remember to use the ID and password that you received for the Conferences (which may not be your normal ID/password for TheCorporateCounsel.net or CompensationStandards.com). If you are experiencing technical problems, follow these webcast troubleshooting tips. Here is today’s Conference Agenda; times are Pacific.
– How to Earn CLE Online: Please read these FAQs about Earning CLE carefully to see if that is possible for you to earn CLE for watching online – and if so, how to accomplish that. Remember you will first need to input your bar number(s) and that you will need to click on the periodic “prompts” all throughout each Conference to earn credit. Both Conferences will be available for CLE credit in all states except for a few – but hours for each state vary; see the CLE list for each Conference in the FAQs.
Today is the “Tackling Your 2012 Compensation Disclosures: The 6th Annual Proxy Disclosure Conference”; tomorrow is the “The Say-on-Pay Workshop: 8th Annual Executive Compensation Conference.” Note you can still register to watch online by using your credit card and getting an ID/pw kicked out automatically to you without having to interface with our staff. Both Conferences are paired together; two Conferences for the price of one.
– How to Attend by Video Webcast: If you are registered to attend online, just go to the home page of TheCorporateCounsel.net or CompensationStandards.com to watch it live or by archive (note that it will take about a day to post the video archives after it’s shown live). A prominent link called “Enter the Conference Here” on the home pages of those sites will take you directly to today’s Conference (and on the top of that Conference page, you will select a link matching the video player on your computer: Windows Media or Adobe Flash Player).
Remember to use the ID and password that you received for the Conferences (which may not be your normal ID/password for TheCorporateCounsel.net or CompensationStandards.com). If you are experiencing technical problems, follow these webcast troubleshooting tips. Here is today’s Conference Agenda; times are Pacific.
– How to Earn CLE Online: Please read these FAQs about Earning CLE carefully to see if that is possible for you to earn CLE for watching online – and if so, how to accomplish that. Remember you will first need to input your bar number(s) and that you will need to click on the periodic “prompts” all throughout each Conference to earn credit. Both Conferences will be available for CLE credit in all states except for a few – but hours for each state vary; see the CLE list for each Conference in the FAQs.
As roughly 40 companies in the US face the prospect of failing say-on-pay for a second time (and perhaps one company already has, depending on the math – also see this blog about the large number of abstentions), this article about Australia’s new “two strike” law bears reading, repeated below:
Australia’s new “two strikes” law giving shareholders more power to curb excessive executive pay packets, promises to shake up some businesses. Homewares company GUD Holdings has already been hit with a protest vote from 42% of shareholders over the company’s remuneration report, under the new legislation introduced in July.
Under the new amendment to the Australian Corporations Act, if 25% or more of votes cast at two consecutive AGMs oppose the adoption of a remuneration report, then the company must formally respond by asking all board members except the managing director to stand for re-election within 90 days. In addition, key management personnel whose remuneration is disclosed in the remuneration report are excluded from voting, ensuring those with an obvious interest in the outcome cannot vote.
There are few more controversial issues than executive pay. Here in Australia, Qantas chief executive Alan Joyce found himself in the firing line for his large pay increase despite a damaging industrial dispute. Last week, the Australian Shareholders Association indicated it would oppose the remuneration package of Wesfarmers chief Richard Goyder and financial officer Terry Bowen at the company’s AGM in November.
Non-binding vote
Since 2005, Australian shareholders have had the right to vote on the remuneration report of their companies at an AGM. The tougher Australian laws parallel similar moves in the Netherlands, Norway, Sweden and the United Kingdom which have responded to public outrage about executive pay levels. The US has also introduced similar legislation effective from the 2011 proxy season in the wake of public concern about the role of excessive remuneration in the global financial crisis.
New research
Our new research backs the idea that shareholder voting is an effective way to discipline boards over unsatisfactory executive pay arrangements. Using a sample of 240 ASX listed firms between 2001 and 2009, fellow UQ researchers Peter Clarkson, Shannon Nicholls and I investigated the pay-for-performance relationship and its effect on governance. Pay-for-performance is an important metric because it measures how much executive pay changes or varies with firm’s performance. That is, it captures the incentive effect of the remuneration structure. Not surprisingly, a weak pay-for-performance relationship is a focus for shareholder dissent.
Research around the effects of the UK advisory vote, for instance, showed shareholders were more likely to vote “no” on remuneration packages that are excessively high, had a weak pay-for-performance link or were greatly dilutive. We found the average “no” vote on the remuneration report for our sample has increased steadily from 5.4% in 2005 (the first year of the vote) to 11.4% in 2009.
Pay-for-performance
The pay-for-performance relation strengthened across the nine year period, with enhanced remuneration disclosure and the non-binding shareholder vote the most important avenues to achieve greater monitoring and greater shareholder control of the executive remuneration process. Our research findings have important implications for Australian regulators and company directors. Shareholders are increasingly voicing their concerns about excessive executive pay and have used the advisory vote effectively to flag inappropriate remuneration packages to the board.
Our research suggests that boards of directors have listened to their shareholders and have adapted pay packages to be more in line with shareholder expectations. This season, the two-strikes rule gives shareholders an even stronger say on pay and there is every reason to believe that shareholders will use it. For their part, company boards need to listen closely to what shareholders have to say about the remuneration report and respond accordingly. Transparent and careful disclosure about remuneration is more critical than ever this reporting season if company boards are to avoid “striking out” with their shareholders.
On October 4th, we blogged about the dismissal of a series of lawsuits filed in New York by Goldman Sachs shareholders. We noted that a similar shareholder suit against Goldman Sachs was pending in the Delaware Chancery Court. Last week, that suit was dismissed.
With respect to executive compensation issues, the shareholders in the Delaware case claimed that Goldman’s directors breached their fiduciary duties by (1) failing to properly analyze and rationally set compensation levels for Goldman’s employees and (2) committing waste by “approving a compensation ratio to Goldman employees in an amount so disproportionally large to the contribution of management, as opposed to capital as to be unconscionable.”
Ruling on Goldman’s motion to dismiss for failure to make a pre-suit demand upon the board and for failure to state a claim, the Delaware Chancery Court found that a pre-suit demand was not excused because the plaintiffs failed to plead demand futility with sufficient particularity. In other words, the plaintiffs failed to plead particularized factual allegations that raised a reasonable doubt as to whether (1) Goldman’s board lacked independence because of its financial ties to Goldman, (2) the board’s compensation structure was the product of a valid exercise of business judgment and (3) the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand.
Taking the New York and Delaware results together, it is clear that for these types of compensation lawsuits, at least based on Delaware law, it is not easy to plead demand futility with sufficient particularity to survive at the motion to dismiss stage. It will be interesting to see for how much longer the plaintiffs’ bar will continue trying. Note that the one say-on-pay-based derivative suit (against Cincinnati Bell) so far that has survived a motion to dismiss, and excused pre-suit demand, applied Ohio substantive law.
Recently, we’ve been asked by several clients if they can craft their performance-based incentive plans to preserve tax deductibility under Code Section 162(m) (the million-dollar pay cap) in the event of a corporate acquisition, reorganization or recapitalization. We’ve also read articles suggesting that this goal can be accomplished through careful planning, with one stating: “If the Compensation Committee’s authority to make adjustments is not properly structured and designed, then any adjustment will cause the bonus award to be considered non-performance-based compensation, and [thus] may not be tax deductible by the company.”
Based on that promising statement, we’ve thought hard about the meaning of “properly structured” and have concluded there is no one-size-fits-all approach that can be employed by all companies in every situation. That said, there are strategies that can maximize companies’ chances for success, depending on their specific circumstances. Also, keep in mind that the Section 280G rules may also come into play with regard to the tax treatment of payments that occur due to corporate transactions; these rules need to be carefully considered in tandem with 162(m). Learn more in our Bulletin.