Yesterday, as noted in this blog, ISS opened the comment period for it’s 2012 policies, as it has for the past several years. Here is their policy gateway where you can input your views – and here are the draft policies. The comment period is short – ending on October 31st.
Given the importance of this proxy season, this would be a good time to get involved if you haven’t before. Come hear from ISS and Glass Lewis about their policies during our upcoming pair of say-on-pay conferences (one regarding disclosure and one regarding pay practices – both combined for one price) that takes place in less than 2 weeks. You can attend online or in San Francisco. Register now.
UK companies could face a binding vote on executive compensation under new proposals outlined by the government yesterday. Vince Cable, the UK business secretary, has launched a consultation paper on executive pay that questions whether the non-binding votes companies currently undertake are a strong enough incentive to link pay and performance.
The consultation paper , which is open for responses until November 25, states some shareholders believe a binding vote would encourage shareholders to be more active and prompt companies to take the issue more seriously. ‘If introducing a binding vote, its legal status would need to be established, including what expectations this would place on a company to revise its remuneration proposals in the event of a vote against, and whether revised proposals would then need to be verified by a second shareholder vote,’ states the paper.
The consultation document also acknowledges, however, that many shareholders and other stakeholders view a binding vote as a bad idea. Critics argue it would be costly and inconvenient, could run into legal problems and is unnecessary as shareholders that want to take concrete action can already vote against the chair of the remuneration committee.
The Netherlands, Norway and Sweden have all adopted a binding vote on remuneration but the majority of countries that mandate a vote on pay call for a non-binding poll only.
The proposal is part of a wide range of ideas set out by Cable in two consultation papers covering executive pay and narrative reporting. They will run alongside a review into the UK equity markets launched last week, also at the behest of Cable. On the topic of pay, the government is also looking at questions including whether it should make remuneration committees more diverse, and whether the ratio between the CEO’s pay and median earnings in a company should be published.
The main proposal for narrative reporting is to split the existing narrative report into two documents:
– a ‘strategic report’ for shareholders, including information on results, strategy, risks, pay and social and environmental issues
– an ‘annual director’s statement’, containing information underpinning the strategic report, which would be published online.
In a move that will be welcomed by the UK’s IR community, Cable says part of the aim of his proposals on reporting is to streamline bloated annual reports. ‘The average length of an annual report is now almost 100 pages, even longer for FTSE 100 companies,’ he notes in a statement. ‘It has become unwieldy, complex and hard to understand, so investors cannot easily find the information they need. ‘Changing the way companies do their annual reports will provide investors with better information on how well businesses are performing and what their directors are being paid, increase transparency and reduce the burden on businesses, freeing them up to concentrate on growing and focusing on the long term.’
One of the more interesting things detailed in the report is the finding that the optimal exercise time for stock options is when their time value is in the range of 10%-30% of total value. This could result in option exercises that occur well before the end of the option term. Many advisors had previously advised that executives should hold onto options until they are just about to expire in order to maximize the potential return from the stock options.
Additionally, the report compiles AllianceBernstein’s key findings, which include:
How to evaluate and compare different types of stock-based compensation
How to integrate stock-based compensation into lifetime wealth planning, using a “core and excess capital” framework
A method for determining how much single-stock risk is appropriate in your portfolio, and, if you need to diversify, a framework for choosing which holdings to divest and which to keep
Strategies for integrating single stock with estate and charitable planning
Determining when and how to use non-qualified deferred compensation plans
Best uses of 10b5-1 plans
How to make well-informed decisions regarding Net Unrealized Appreciation (NUA) elections and 83-b elections
Yesterday, ISS released its Final 2011 U.S. Postseason Report, which includes vote results for meetings held before September 1st, with findings that include:
– During 1st year of mandatory say-on-pay, investors overwhelmingly endorsed companies’ pay programs, providing 92.1% support on average.
– 38 Russell 3000 companies, or just 1.6% of the total that reported vote results, had their say-on-pay voted down. The primary driver of these failed votes appears to be pay-for-performance concerns, which were identified at 28 companies. Almost half of the failed-vote firms have reported double-digit negative three-year total shareholder returns. Also contributing to investor dissent were issues like tax gross-ups, discretionary bonuses, inappropriate peer benchmarking, excessive pay, and failure to address significant opposition to compensation committee members in the past.
– Investors overwhelmingly supported an annual frequency for SOP, with a majority (or plurality) support at 80.1% of companies in the Russell 3000 index, as compared to triennial votes, which won the greatest support at 18.5% of issuers.
– Management preferences did not appear to have a significant influence on the outcome of this year’s frequency votes. Investors had defied management recommendations for triennial votes at 538 of 892 Russell 3000 companies. Shareholders also were not swayed by biennial recommendations at 34 out of 47 Russell 3000 firms.
– The number of directors at Russell 3000 firms that failed to garner majority support fell by nearly half as say on pay votes presented shareholders with an alternative to votes against compensation committee members. Poor meeting attendance, the failure to put a poison pill to a shareholder vote, and the failure to implement majority-supported shareholder proposals were among the reasons that contributed to majority dissent against board members this year.
Only Two Weeks Until the Big Conference! ISS & Glass Lewis on 4 Different Panels!
As happens so often, there is now a mad rush for folks to register for our upcoming pair of say-on-pay conferences (one regarding disclosure and one regarding pay practices – both combined for one price). Come hear the views of ISS and Glass Lewis, as representatives will sit on a total of 4 panels during the two days of action. See the agendas.
Act Now: Come join 2000 of your colleagues in San Francisco – or thousands more watching live (or by archive) online – to receive a load of practical guidance and prepare for what is promising to be a challenging proxy season. Register now.
Recently, Nasdaq, The Conference Board, and Stanford’s Rock Center teamed up to survey companies about their views regarding the role of proxy advisors – ISS and Glass Lewis – in the compensation decision-making process. The survey ends on November 11th and companies that participate will receive a copy of the findings.
Here is news from Barbara Nims of Davis Polk from this blog:
As revealed in court documents filed last week, a series of lawsuits filed in New York by shareholders who claimed that bonuses paid to Goldman Sachs employees resulted in corporate waste were dismissed on September 21, 2011. Security Police & Fire Professionals of America Retirement Fund and Judith A. Miller sued the investment bank in December 2009, accusing directors and executives of breaching their fiduciary duties by reserving half of the company’s net revenue for employee compensation. Shareholders Ken Brown and Central Laborers Pension Fund filed similar suits the following month, and the two actions were consolidated.
The consolidated case was subsequently dismissed by mutual agreement; however, in connection with dismissal, the plaintiffs requested attorneys’ fees. To determine whether the award of fees was appropriate, the Court focused on whether the lawsuit at the outset was capable of surviving a motion to dismiss.
On this issue, the Court found that the case was not “meritorious when filed” because the plaintiffs failed to make a pre-suit demand. Demand was not excused because the plaintiffs’ complaints failed to create a reasonable doubt that: (1) the directors were disinterested and independent and (2) the challenged transaction was otherwise the product of a valid exercise of business judgment. Plaintiffs’ request for attorney fees and expenses, therefore, was denied. The court’s decision is available here.
Another similar case against Goldman Sachs alleging breach of fiduciary duty and unjust enrichment of management is currently pending in the Delaware Chancery Court, and it will be interesting to see if it results in a similar outcome. Here is the Amended Shareholder Derivative Complaint.
Comparing this case with the Cincinnati Bell say-on-pay lawsuit recently surviving a motion to dismiss, it is difficult to generalize about the factors leading to, or correlated with, the differing outcomes, or to predict how easy (or difficult) it will be to get these types of actions dismissed.
A new study by BDO USA surveyed directors on a variety of topics, including these related to pay practices:
– Say-on-Pay Not Helpful to Managing Pay – More than three-quarters (78%) of board members do not believe Dodd-Frank’s “Say-on-Pay” disclosure rules will help them better manage the compensation of their key executives. In fact, just one-fifth (22%) describe the rules as helpful. Directors who serve as members of their board’s compensation committee were even more likely (91%) to say the new rules will not help manage executive pay. Moreover, an overwhelming majority (81%) of board members believe shareholder criticism of executive compensation frequently suffers from 20/20 hindsight.
– Compensation Weary – Dodd-Frank’s executive compensation mandates seem to have taken a toll on corporate directors. When asked a variety of topics they would like their board to spend more or less time on, 71 percent say they do not want to spend more time on executive compensation – no other topic elicited such a negative response.
– Non-Binding Votes are Non-Issue – Although most board members do not find Dodd-Frank helpful, they do not see the non-binding nature of the Say-on-Pay votes as a problem. When asked if the non-binding nature of the Dodd-Frank Say-on-Pay votes diminished their effectiveness, only a quarter (24%) of the directors agreed. Three-quarters (76%) feel the non-binding nature of the votes do not limit their effectiveness, and directors serving on their board’s audit (85%) and compensation (79%) committees were even more likely to feel this way.
– Change of Control Provisions – Less than a fifth (19%) of directors perceive the disclosure of change-of-control provisions in executive compensation packages, mandated by Dodd-Frank, as having a negative impact on M&A activity. In fact, three-quarters (81%) indicate this provision will have no impact on merger activity. Members of compensation (91%) committees are even more confident that these disclosures will not adversely affect M&A activity.
– Board Compensation – When asked about their own compensation as board members, more than two-thirds (69%) believe their compensation is commensurate with their responsibilities. Yet, almost one-third (31%) feel their compensation is lacking, given the increased responsibilities and workload brought about by recent regulatory changes. Board members serving on the compensation committee (39%) were more likely to feel their compensation needs to be enhanced.
Yesterday, the Washington Post ran this lengthy article criticizing peer group benchmarking on the front page, in the upper left corner. The piece is way too long to repeat here – but it’s well worth a read.
With an election year upon us and the unemployed becoming more willing to be vocal about perceived inequalities, I imagine we are going to see much more media attention to the processes by which CEO pay is set. Although much progress have been made over the past decade in corporate governance generally – and CEO pay specifically – I believe we are still in the infancy of the governance reforms that ultimately need to be made. There still are way too many stories of excesses – and not just by “outliers.” And as we’ve been saying all along, the overreliance on peer group surveys is one of the biggest adjustments that boards need to make…