Last week, Stanley Black & Decker filed this Form 8-K to report that it became the seventh company to fail to gain majority support for its say-on-pay, with only 39% voting in favor. Not only did shareholders reject the company’s SOP, they also came down hard on the board – two directors had 49% withheld. Cooley’s Amy Muecke analyzes why the company failed in this memo.
Then on Friday – in a midst of a flurry of filings on a day when the markets were closed – Umpqua Holdings Corporation filed this Form 8-K to report it became the eighth failed say-on-pay with only 35% voting in support. Umpqua’s Form 8-K is unique in that it chose to include a narrative on why it believed it failed (ie. ISS recommended against the company and the company disagrees with ISS’s analysis).
In his “Proxy Disclosure Blog,” Mark Borges gives us the latest say-when-on-pay stats: with 2177 companies filing their proxies, 43% triennial; 4% biennial; 51% annual; and 4% no recommendation.
Here’s news from Jeannemarie O’Brien and Adam Shapiro as written in this Wachtell Lipton memo:
Recently, several federal agencies, including the OCC, Federal Reserve, FDIC, OTS, NCUA, SEC and FHFA, jointly issued a finalized proposed rule regarding incentive-based compensation under section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 956 of Dodd-Frank prohibits covered financial institutions from having incentive compensation arrangements that encourage inappropriate risk because they provide excessive compensation or pose a risk of material financial loss to the covered institution.
The final proposed rule is substantially similar to the proposed rule approved by the FDIC on February 7, 2011 (see our February 18, 2011 memorandum). Certain agencies have modified the proposed general rule in their agency-specific rule. There is a 45-day comment period following publication of the proposed rule in the Federal Register, and the agencies have invited comments on a variety of topics, including with respect to the feasibility of complying with the final rule in the proposed time frame.
The final rule may become effective as early as year-end (six months after publication of the final rule in the Federal Register). As we previously advised, bank financials and non-bank entities that could be covered institutions, such as broker-dealers and investment advisers, should review the proposed rule, evaluate its potential application and impact and take the opportunity to seek clarification through the comment process. Companies should maintain flexibility in the design of their 2011 incentive compensation arrangements in order to accommodate the final rule and should consider creating a working group to develop a compliance action plan.
It’s also worth reading analysis of this proposal by Prof. Steven Davidoff…
We have posted the survey results regarding the latest clawback policy trends, repeated below:
1. Has your company adopted a clawback policy:
– Yes, we adopted a policy during 2010 for first time – 9.6%
– Yes, we already had one before 2010 but we recently amended it – 5.2%
– Yes, we already had one before 2010 and we intend to amend it soon – 28.9%
– Not yet – 56.3%
2. If you answered “Not yet” to question above, do you intend to take any of the following steps in advance of adopting or amending a clawback policy:
– Add provision into terms & conditions of certain incentive awards to enable a potential clawback – 22.5%
– Have executives sign an independent document to enable a potential clawback of incentive awards generally – 7.5%
– Add disclosure in proxy statement about the intention to adopt or amend a clawback policy after finalization of SEC rules implementing Section 954 of Dodd-Frank – 45.0%
– None of the above – 40.0%
3. Does your company plan to adopt a new clawback policy or amend an existing policy:
– Prior to finalization of SEC rules implementing Section 954 of Dodd-Frank – 7.5%
– After finalization of SEC rules implementing Section 954 of Dodd-Frank – 70.7%
– Don’t know yet – 15.8%
– No – 6.0%
4. Once fully completed or amended, does/will your clawback policy apply to:
– Executive officers only – 25.9%
– Group of key employees broader than executive officers – 20.7%
– All employees – 3.0%
– Some provisions of policy apply to certain group of employees and other provisions apply to other groups or all employees – 5.9%
– Don’t know yet – 44.4%
5. Once fully completed or amended, does/will your clawback policy apply to directors:
– Yes, the entire clawback policy will apply to directors – 8.2%
– Yes, but only part of clawback policy will apply to directors – 0.8%
– No, it will not apply to directors – 33.6%
– Don’t know yet – 57.5%
Like Disney and Hewlett-Packard before them (see this blog), General Electric and Northern Trust recently filed additional soliciting materials challenging ISS’s recommendations on their say-on-pay. We are compiling a list of all the companies that do this on CompensationStandards.com’s “ISS Policies & Ratings” Practice Area.
GE notes a “significant disagreement” with ISS. GE’s materials directly confront ISS. GE’s points are:
– ISS’s analysis fails to consider actions that aligned pay with performance during the recession.
– Mr. Immelt’s pay increased a modest 6.4% since 2007, the last year he received a bonus.
– ISS’s valuation of Mr. Immelt’s option grant significantly overstates his total compensation.
– ISS’s model to value options differs from GE’s model and is inconsistent with applicable accounting guidance.
Northern Trust
ISS claims Northern Trust has a pay-for-performance disconnect. Northern Trust’s materials reemphasize components of compensation related to equity-based incentive pay, cash incentives and business results. Northern Trust also claims that ISS’s calculations of comparative financial performance are flawed because the index includes several companies engaged in entirely different and unrelated businesses. Its also worth noting that Glass Lewis & Co. recommended shareholders approve executive compensation.
Yesterday, Allegheny Technologies joined those fighting their proxy advisor recommendation with these additional solicitation materials. And ISS’s Ted Allen blogged about how AFSCME has launched the first public “just vote no” campaign this proxy season against two companies over their pay practices.
I’m not sure what you heard from your spouse, friends and colleagues about the news from the past week that CEO pay has gone up in the double digits over the past year, but I’m getting an earful. They are angry that too many CEO are being rewarded for laying people off in a poor economy or having their incentive packages reset at the bottom of the market. They have also read that there is a widening gap between the CEO’s pay and the median pay of other Named Executive Officers. And the recent Transocean flap doesn’t help things – here’s an excerpt from this Houston Chronicle article:
Only a wily compensation consultant could come up with a rationale whereby Transocean not only rewards its executives but touts its safety record after an accident like that. Only a tone-deaf board could endorse such a proposal and only a myopic corporate counsel could allow it to be placed in the company’s proxy statement.
Anyways, here are the two 2010 CEO pay studies that have been released so far:
And this Gretchen Morgenson NY Times’ column entitled “Enriching a Few at the Expense of Many” is quite thought-provoking, featuring a money manager who uses pay as a “crucial tire” to kick when making investment decisions and how companies overseas seem to do a better job of paying their CEOs.
I’m still in the process of developing the agenda for “The Say-on-Pay Workshop: 8th Annual Executive Compensation Conference,” but I do know it will feature a number of prominent investors since they are so important going forward in a say-on-pay world. Remember that this conference is paired with the “6th Annual Proxy Disclosure Conference” and they will be held on November 1st-2nd in San Francisco and via video webcast. Register now to obtain a 25% Early Bird Discount!
The Forbes Fictional 15
Hat tip to Lois Yurow for pointing out this hilarious “The Forbes Fictional 15.” Here is an excerpt from the opening:
You’re not imagining it: The rich do keep getting richer. Even the fictionally rich. The members of our 2011 list of wealthiest fictional characters have an average net worth of $9.86 billion, up 20% from last year. In aggregate, the Fictional 15 are worth $131.55 billion -more than the gross domestic product of New Zealand.
Last week, Ameron International filed a Form 8-K to reveal it has become the sixth company to fail to receive majority support for its say-on-pay, with 42% voting in favor. As noted in this LA Business Journal article, the company also was the subject of a proxy fight. As I blogged earlier, I’m counting Hemispherx Biopharma as the 5th failed vote until someone convinces me otherwise (here is our list of failed votes so far)…
In his “Proxy Disclosure Blog,” Mark Borges gives us the latest say-when-on-pay stats: with 1689 companies filing their proxies, 42% triennial; 4% biennial; 51% annual; and 4% no recommendation.
Yesterday, the SEC issued this statement explaining that in the event of a government shutdown, EDGAR will remain fully functional – but that the SEC’s Divisions (including Corp Fin) will be unable to process filings, provide interpretive advice, issue no-action letters or conduct any other normal activities. As a result, new or pending registration statements or applications for exemptive relief will not be processed regardless of the status of any review of those filings.
There will be only an “extremely limited number” of Staffers working during the shutdown – so although the SEC’s statement provides an email address and phone number for emergencies, I imagine only true emergencies will be handled by the Staff. Other than these designated essential Staffers, any attempt to work during the shutdown is a firing offense – so there is nothing that a staffer can do for you even out of kindness of their heart. The government is scheduled to shutdown tonight at midnight.
Poll: How Many Corp Fin Staffers Will Be Working During the Shutdown?
As noted above, the SEC’s statement regarding the shutdown notes that only an “extremely limited number” of Staffers will be working if the shutdown is not avoided. Take a moment to predict how many Corp Fin Staffers that phrase means:
Last week, the SEC issued this “Small Entity Compliance Guide” regarding say-on-pay and say-on-golden parachutes. It’s brief and to the point and summarizes the new rules…
While we do not expect a huge amount of investor rejections of the SOP vote request, there will be a number of negative recommendations from proxy advisory firms (ISS and/or Glass Lewis (GL)) against issuer plans in 2011. The question for companies is how to react if and when you receive notification of the negative vote advisory from ISS and/or GL. Last week, Katie Wagner of Agenda had a story discussing the tactics and strategies used by certain issuers to fight back against negative vote recommendations from the proxy advisory firms, not always successful.
Hitting the Reset Button
For the issuer whose SOP vote request is in the crosshairs of either proxy advisory firm, the release of a negative vote recommendation requires the affected company to take immediate steps to communicate with ISS/GL, and shareholders, it’s point of view concerning the proxy advisors’ analysis – why the company disagrees as it relates to the pay package approved by the Compensation Committee.
While the proxy advisory firms have spoken through their vote recommendations – and they have an amplified voice – issuers have the ability to communicate to the broader market via SEC disclosure and to strategically communicate to specific investors whose support will be key to overcoming ISS or GL. This represents a second opportunity to present the Compensation Committee’s philosophy of pay in the context of the company’s performance and to rebut the contentions and factual inaccuracies, if any, from the proxy advisory analysis.
Using The SEC Disclosure Regime: 8-K or Additional DEF 14s
An issuer in this situation should take a moment to view the points of disagreement with the proxy advisory firms and develop strong and contextual responses to refute their analysis. Those key points of response then become the heart of the company’s communication to shareholders. Once disclosed, as an 8K or DEF14 filing, the company can then reach out to those shareholders identified, by their governance advisor/proxy solicitor, as open to dialogue on the compensation issues in contention.
Some advisors have suggested, to companies in the middle of contested SOP votes, that the Compensation Committee make immediate changes to CEO or named executive officer pay in an effort to appease the proxy advisors and announce the adoption of their concept of “best practices in pay”. We would counsel that such a course of action in advance of conversations with shareholders would be premature and harmful to the issuer’s cause. If an issuer is prepared to seriously consider potential “horse-trading” on a compensation issue, it should be after discussions with shareholders, not prior to them. Issuers forced to undertake this effort should be focused on educating their shareholder base.
Who Speaks to the Shareholders
Usually the CEO or other members of senior management speak for the company on all issues. In this instance, however, having the CEO or one of the named executive officers discussing the board’s rationale for the officers’ compensation might appear self-serving and may be viewed as if the board and compensation committee is a rubber stamp for management – a belief held by many shareholders. The company should be prepared, if necessary, to have a member of the Compensation Committee (if not the committee chair) involved in the engagement discussions. Engagement with a director often underscores for shareholders the fact that the board was involved and knowledgeable about the company’s executive compensation process and that the CEO’s pay was not determined by executive fiat.
The disclosure and communications strategy outlined above provides a company with a fighting chance against the proxy advisory firms, could potentially shift shareholder votes, and, irrespective of the immediate 2011 outcome, creates the basis of a strong shareholder engagement program for the 2012 and 2013 proxy seasons.
Recently, Fidelity issued its 2011 Proxy Voting Guidelines. As promised, they are a significant departure from past guidelines in the area of equity plan proposals. Where in years past Fidelity looked to dilution as the guiding principle along with assorted other concerns in determining its vote on equity plan proposals, it has now replaced that with 3-year average burn rates:
– 1.5% for Large Caps–companies in the Russell 1000 Index
– 2.5% for Small Caps–companies not in the Russell 1000 Index
– 3.5% for Micro Caps–companies with a market cap under US$300 million
Here is what I believe to be true about the new Fidelity guidelines (thanks to Reid Pearson at Alliance Advisors for sharing what he had learned with me as well):
– The new guidelines, including the burn rate policy for equity plan proposals, is effective immediately;
– Fidelity will not use a multiplier for full-value awards, i.e., options granted during the fiscal year + full value awards granted during the fiscal year / weighted average common shares outstanding (this is the “Traditional Burn Rate” in my Burn Rate Calculator available under Reference Materials -> Excel Tools; this is also reported on ISS’s Proxy Reports as the “unadjusted burn rate”);
– Fidelity will be considering mitigating factors to permit them to support a plan when a company has burn rates that exceed the burn rate caps (similar to what Fidelity did with its prior dilution caps). But, Fidelity is still working out the details.
I think there are a few open questions on the new Fidelity guidelines as well. For example, since Fidelity will look at historic burn rate, will it look at prospective burn rate at all in terms of the size of the share request and how many years it might last? Does that matter to Fidelity? One would assume that exceptions will have to made for extraordinary situations that cause a spike in burn rates from typical practice, but what will Fidelity be looking for in order to approve such exceptions?
Will Fidelity make allowances to its general burn rate caps for companies in various industry groups that have historically had higher burn rates (technology and biotech come to mind)? If not, what will this mean for these companies’ ability to gain shareholder approval of equity compensation plan proposals and continue to make use of equity awards as part of their compensation packages? We’ll have to wait and see how Fidelity ends up developing these guidelines further to see what the practical implications will be for share requests.