– Broc Romanek, CompensationStandards.com
Recently, ISS released its “Preliminary 2011 U.S. Postseason Report,” whose key findings include:
– During the first year of advisory votes on executive compensation under Dodd-Frank, investors overwhelmingly endorsed companies’ pay programs, providing 91.2% support on average.
– Shareholders voted down management “say on pay” proposals at 37 Russell 3000 companies, or just 1.6% of the total that reported vote results. Most of the failed votes apparently were driven by pay-for-performance concerns.
– “Say on pay” votes spurred greater engagement by companies and prompted some firms to make late changes to their pay practices to win support.
– Investors overwhelmingly supported an annual frequency for future pay votes, even though many companies recommended a triennial frequency.
– Among governance proposals, the biggest story this year was the greater support for board declassification. Shareholder resolutions on this topic averaged 73.5% support, up more than 12% from 2010, and won majority support at 22 large-cap firms.
– Shareholder resolutions on environmental and social issues reached a new high of 20.6% average support. Five proposals received a majority of votes cast, a new record.
– The arrival of “say on pay” contributed to a significant decline in opposition to directors. As of June 30, just 43 directors at Russell 3000 firms had failed to win majority support, down from 87 during the same period in 2010. Poor meeting attendance, the failure to put a poison pill to a shareholder vote, and the failure to implement majority-supported investor proposals were among the reasons that contributed to investor dissent.
– Broc Romanek, CompensationStandards.com
As it has done before, the SEC has adjusted its tentative rulemaking calendar to push back some of the expected proposal and adoption dates for the remaining executive compensation and corporate governance items on its agenda. Thanks to Mike Melbinger, who blogged this information yesterday on CompensationStandards.com (see Davis Polk’s blog for more analysis):
On Friday, the SEC modified its schedule for adopting rules relating to the Dodd-Frank Act, including the key provisions applicable to executive compensation, as follows:
August – December 2011 (planned)
– §951: Adopt rules regarding disclosure by institutional investment managers of votes on executive compensation
– §952: Adopt exchange listing standards regarding compensation committee independence and factors affecting compensation adviser independence; adopt disclosure rules regarding compensation consultant conflicts
January – June 2012 (planned)
– §953 and 955: Adopt rules regarding disclosure of pay-for-performance, pay ratios, and hedging by employees and directors
– §954: Adopt rules regarding recovery of executive compensation
– §956: Adopt rules (jointly with others) regarding disclosure of, and prohibitions of certain executive compensation structures and arrangements
July – December 2012 (planned)
– §952: Report to Congress on study and review of the use of compensation consultants and the effects of such use
Dates still to be determined
– §957: Issue rules defining “other significant matters” for purposes of exchange standards regarding broker voting of uninstructed shares
Thus, it seems unlikely that all five of the clawback, pay-for-performance, CEO pay ratio, incentive compensation rules for large financial institutions, and hedging by employees and directors provisions will be effective for next year’s proxy season. However, if they meet this schedule, one or two of the provisions will be effective for proxies filed after January (as with the say on pay rules, published in January 2011). Fortunately, the SEC will propose rules first (and already has for a couple of the provisions), so we should know well in advance which provisions will be final for the 2012 proxy season.
– Broc Romanek, CompensationStandards.com
We continue to post numerous reports about the results of say-on-pay from this past proxy season in our “Say-on-Pay” Practice Area – including this one from Bentham Stradley and Ira Kay of Pay Governance. Also check out this blog from Matt Orsagh of the CFA Institute which describes say-on-pay developments in various countries.
– Anne Cotter, Leonard Street & Deinard
Here is something I recently blogged on our Dodd-Frank.com Blog: Section 954 of the Dodd-Frank Act requires national securities exchanges (meaning, for instance, the NYSE, Amex and Nasdaq) to adopt rules as directed by the SEC, which rules will require issuers to develop and implement a policy providing:
– for disclosure of an issuer’s policy on incentive compensation that is based on financial information required to be reported under securities laws; and
– that, if an accounting restatement is prepared, the issuer will recover any excess incentive-based compensation from any current or former executive officer who received such incentive-based compensation in the three preceding years.
Rules regarding Section 954 of the Dodd-Frank Act have not yet been proposed or finalized. However, we reviewed recent SEC filings to see what public companies are doing to prepare for the eventual adoption of the rules related to clawback policies:
Robbins & Myers. The board of directors of Robbins & Myers, Inc. adopted a compensation clawback policy and approved a compensation clawback acknowledgement and agreement. The form of acknowledgement and agreement provides that all annual incentives and other performance-based compensation granted on or after October 1, 2010 are subject to the clawback policy. The policy provides that the employee must repay or forfeit any annual incentive or other performance-based compensation as directed by the board of directors of the company if:
– the vesting of such compensation was based on the achievement of financial results that were subsequently the subject of a restatement of the company’s financial statements,
– the employee engaged in fraud or misconduct that caused or contributed to the need for the restatement,
– the amount of such compensation that would have been received by the employee would have been lower than the amount actually received, and
– it is in the best interests of the company and its shareholders for the employee to repay or forfeit the compensation.
Caplease. Under Caplease, Inc.’s recently adopted clawback policy, the board of directors may recover incentive compensation paid to any current or former executive officer of the company if all of the following conditions apply:
– the company’s financial statements are required to be restated due to material non-compliance with any financial reporting requirements under the federal securities laws (other than a restatement due to a change in accounting rules),
– as a result of such restatement, a performance measure which was a material factor in determining the award is restated, and
– in the discretion of the compensation committee, a lower payment would have been made to the executive officer based upon the restated financial results.
The clawback policy applies to any incentive compensation paid on or after December 7, 2010 and the recovery period is the three year period preceding the date on which the company is required to prepare the accounting restatement.
Employment Agreements
Signet. An employment agreement for a new CEO of Signet Jewelers Limited provides “[t]he Executive shall be subject to the written policies of the Board applicable to executives, including without limitation any Board policy relating to claw back of compensation, as they exist from time to time during the Executive’s employment by the Company.”
SuperMedia. An employment agreement for a new CEO of SuperMedia Inc. provides “[n]otwithstanding any other provision in this Agreement to the contrary, any “incentive-based compensation” within the meaning of Section 10D of the Exchange Act will be subject to claw-back by the Company in the manner required by Section 10D(b)(2) of the Exchange Act, as determined by the applicable rules and regulations promulgated thereunder from time to time by the U.S. Securities and Exchange Commission.”
Benefit Plans
Dover. Dover Corporation recently adopted a severance plan and a change-in-control severance plan. Each plan gives the corporation the right to recover amounts paid to an executive under the respective plan “if required under any claw-back policy of the Corporation as in effect from time to time or under applicable law.”
NACCO. Nacco Industries, Inc. recently amended its Value Appreciation Plan to provide “[t]he Employers may recover all or a specified portion of any Award paid after the Effective Date under the Plan . . . in the event the Participant, either during employment with the Employers or within two years after termination of such employment, commits an act materially adverse to the interests of the Employers or that materially disrupts, damages, impairs or interferes with the business of the Company and its affiliates.
Dominion Resources. The grant agreement for a recent award of restricted stock to the CEO of Dominion Resources, Inc. includes provisions regarding:
– recovery of shares in the event of restated financial statements as a result of fraud or intentional misconduct;
– recovery of shares in the event of fraudulent or intentional misconduct materially affecting the company’s business operations; and
– the award is subject to any clawback policies the company may adopt to conform to the Dodd-Frank Act.
– Broc Romanek, CompensationStandards.com
From this Cooley news brief: Equilar has issued a report on trends among the S&P 1500 in selecting peer groups in 2010. Apparently, companies change their peer groups quite a bit. According to Equilar, 55.8% modified their peer groups from 2009 to 2010. The most interesting finding was this: “companies benchmark to higher-revenue peers: 78.6% of companies had revenues equal to or below the 60th percentile of their peer group. The average revenue rank was around the 45th percentile.” This finding is consistent with those of earlier academic studies and just might account for the constant ratcheting up of executive pay.
– Broc Romanek, CompensationStandards.com
As I blogged a few weeks back on TheCorporateCounsel.net Blog, ISS recently released its 2011-2012 Policy Survey – comments are due by August 3rd. Although it’s only a survey, the questions, responses and comments serve as the basis for ISS’s policy formulation process. Here’s some thoughts on the survey from Amy Wood of Cooley – and here are thoughts from ExeQuity.
– Broc Romanek, CompensationStandards.com
Here is something that GMI’s Paul Hodgson recently blogged:
In a press release last week, Sen. Carl Levin, D-Mich., and Sen. Sherrod Brown, D-Ohio, announced that they had introduced legislation to end tax breaks for stock options. Since they are considered performance-related pay, stock option expense is subject to corporate tax relief under Section 162(m) of the IRC. However, the tax relief is given on the actual expense of the stock options, based on the profits made by the executives at the time the options are exercised. This, Sen. Levin and Sen. Brown have discovered, is a much larger figure than the expenses recorded in company accounts, which estimates the cost of the option at its grant date. This differential, the senators claim, is a huge corporate tax break, and closing the loophole would net the Treasury about $25 billion.
This is priceless information and an eye-popping piece of legislation and there are almost too many conclusions here for one little blogger to deal with.
– If this is true, companies are seriously underestimating the costs associated with stock options, thus bamboozling shareholders and the markets.
– If this is true, companies are seriously underestimating the amount of pay being granted to their executives, thus bamboozling everyone.
– If this is true, I was right all along in insisting that the SEC use the amount recorded as profit as the proper record of pay for executives, even though it ignored me.
– If this is true, virtually every other pay survey – apart from ours – is not just wrong but seriously underestimates the amount of pay that executives receive.
But the real doozy is left to the end, in the summary of the bill. Just read this:
– make stock option deductions subject to the existing $1 million cap on corporate tax deductions for compensation paid to top executives of publicly held corporations.
In other words, stock options will no longer be considered performance-related pay under Section 162(m). That’s fine by me. I never thought market-priced stock options should be in the first place. Of course, there should be exceptions – premium-priced options, index-linked options, performance-vesting options. But if this went through this would be the death knell of the market-priced option for all but the smallest companies which aren’t affected by the $1 million cap anyway.
And no bad thing either.
– Broc Romanek, CompensationStandards.com
According to this Washington Post article yesterday, the SEC’s Commissioners have disagreed with its Enforcement Staff to settle the CSK Auto clawback case because the penalty amount was too low. It’s relatively rare that the Commission disagrees with its Enforcement Staff – but certainly not unheard of – but it is rare that a closed Commission meeting outcome like this is made public. Here is the WaPo article in its entirety:
The SEC has rejected a proposal by its own enforcement staff to settle a landmark case in which the agency is trying to force a former corporate chief executive to give up millions of dollars in bonuses and stock profits he received while the company was cooking its books. The plan to settle for significantly less money than the agency originally sought posed a test question for the Securities and Exchange Commission: Was the staff letting the former executive off the hook too easily? Or was the agency being overzealous when it brought the case in the first place?
Both sentiments combined to torpedo the deal when the commissioners weighed the proposal last week, according to a source close to the matter. The case involves Maynard L. Jenkins, former chief executive of CSK Auto, an Arizona-based auto-parts retailer that had to correct years of financial statements. In 2009, the agency sued Jenkins, saying he should repay the auto parts retailer more than $4 million that he reaped while the company was “engaged in a pervasive accounting fraud.” Jenkins, however, was not personally charged with fraud.
It was the first time the SEC had filed a so-called clawback suit to wrest money from an executive who was not accused of complicity in accounting fraud. The SEC was using the watershed Sarbanes-Oxley law enacted in 2002 in response to accounting scandals at companies such as Enron and WorldCom. The law calls for chief executives and chief financial officers to forfeit stock profits or bonuses they receive while their company is misleading the public about its financial performance.
He and the SEC staff notified the trial court in March that they had reached a tentative settlement, subject to approval by the SEC’s governing commissioners. On Monday, they notified the court that their efforts “have not been successful.” The proposed settlement was for less than half the amount the SEC originally sought, according to a second source familiar with the matter.
Jenkins and the staff thought the deal was in both his interest and that of the agency, but a bipartisan majority of the SEC’s commissioners disagreed, the first source said. Both spoke on condition of anonymity because the information involved internal SEC deliberations. “We cannot comment on Commission deliberations, but we will continue to pursue the case vigorously,” SEC spokesman Kevin J. Callahan said by e-mail. John W. Spiegel, a lawyer for Jenkins, declined to comment.
The law’s clawback provision was meant to hold top executives accountable for fraud and to prevent them from profiting from it. It can encourage executives to be vigilant, but it can also penalize executives who had nothing to do with the wrongdoing. The objective is to reimburse the company and shareholders. But it can cost companies money to recoup money.
In a January court filing, CSK Auto said it is responsible for Jenkins’s legal costs. The company has been billed “approximately $1.9 million in legal fees and costs associated with Mr. Jenkins and $1.5 million since litigation commenced” in the SEC’s case against him, according to a court filing by Jeffrey L. Groves, general counsel of CSK’s parent company, O’Reilly Automotive. Those costs have been covered by an insurer for CSK, according to another court document.
Jenkins is 68 and in declining health, his lawyers said in a January court filing. The SEC lawsuit has left him in financial limbo, they wrote. As long as it remains unresolved, he “cannot plan financially for his future and that of his family,” they said.
His defense team has argued that the SEC “is attempting to impose a Draconian penalty on an admittedly innocent person.” “The SEC’s nonsensical view is that Mr. Jenkins must pay (literally and figuratively) for . . . misconduct by others beca use he was the ‘captain of the ship,’ despite the fact that under its own view of the evidence, his crew was mutinous,” his lawyers have argued.The rejection of the settlement came soon after the SEC took flak for a settlement in which it fined J.P. Morgan Securities but took no action against any of the firm’s employees or executives. In another case, SEC Commissioner Luis A. Aguilar last week took the extraordinary step of publicly dissenting from an SEC enforcement action on the grounds that it was too weak. The rejection of the Jenkins settlement sets the stage for a civil trial.
Barring a new settlement, the case will test the SEC’s application of the clawback law, and it will call on the agency to prove that CSK’s accounting involved “misconduct” rather than innocent error.