The SEC has received more than 60 comments on its proposed rules to implement the Dodd-Frank Act’s requirements that public companies hold shareholder votes on executive compensation, the frequency of future “say on pay” votes, and “golden parachute” arrangements. The SEC has not indicated when it might finalize the rules, but agency officials have said they hope to have final rules in place before the end of the year. Companies are required to hold a “say on pay” vote and a frequency (annual, biennial, or triennial) vote at their first shareholder meeting on or after Jan. 21, 2011, so the SEC is seeking to get the rules approved before a significant number of issuers have to file their 2011 proxy statements. A few companies with late January meetings have already released their proxy materials. (For more details, see this week’s “In Brief” section.) The pay vote rules are not on the agenda for the agency’s Dec. 15 open meeting, but SEC observers say the commission could issue final rules without holding a formal meeting.
Unlike the SEC’s proxy access rulemaking, the pay vote regulations haven’t generated significant controversy. Most companies expected that “say on pay” votes would be mandated by the Dodd-Frank Act, and the SEC issued similar rules in 2009 to govern advisory votes at financial firms that participated in the U.S. government’s Troubled Asset Relief Program. Here are examples of the comments offered by investors and issuer advocates on the various topics addressed by the draft rules:
The National Association of Corporate Directors (NACD) expressed skepticism about the value of an advisory vote on compensation, noting, “we believe that it is poor substitute for dialogue. It is much more valuable to have shareholder communication well in advance of [pay] plans or votes on plans.”
Two U.K. investors, Railpen Investments and the Universities Superannuation Scheme, suggested that the SEC require companies to hold a conference call or an Internet forum a week before their proxy voting deadline to answer questions about pay. “Providing a specific vehicle for handling questions, with responses posted and available to all shareholders via the internet, would improve transparency and efficiency of the process,” the investors wrote in their comment letter.
Should smaller issuers or newly public companies be exempted from holding pay votes?
Most of the institutions that submitted comment letters urged the SEC to maintain its position that all public companies must conduct votes on compensation and golden parachute packages. The Dodd-Frank Act authorizes, but does not require, the commission to exempt small issuers.
“Although absolute pay amounts may be lower at small companies, we are not aware of any evidence that problematic pay practices are less common at smaller companies. Indeed, smaller companies tend to lag behind larger ones in adopting corporate governance best practices,” the American Federation of State, County, and Municipal Employees, a long-time “say on pay” proponent, wrote in its comment letter.
Walden Asset Management and other investors argued that holding such votes would not be a significant burden. “We do not believe that an advisory vote on pay is any more burdensome for smaller companies than other routine votes, such as those for director elections or to ratify auditors,” Walden said in its letter.
The Social Investment Forum, the Florida State Board of Administration, and the Council of Institutional Investors (CII) expressed similar views. Likewise, CII argued that newly public issuers should not be exempt from holding pay votes at their first annual meeting as a reporting company.
However, the United Brotherhood of Carpenters and Joiners asserted that small firms should be exempted to reduce the voting burden on investors. “In order to allow shareholders acting as fiduciaries to properly undertake their new voting responsibilities the scope of the pay vote obligation should be limited to a universe of large cap companies. Such a limitation would allow shareholders to focus limited research and voting resources on those companies whose pay practices directly influence market practices,” the Carpenters wrote.
In its comment letter, the U.S. Chamber of Commerce urged the SEC to exempt companies with less than $75 million in market capitalization and called on the commission to do a cost-benefit analysis of the burden the rules would place on all firms. The NACD also supported an exemption for small companies and new issuers.
Should companies be allowed to exclude shareholder proposals that seek a different frequency for future pay votes?
Under the proposed rules, companies would be allowed to omit shareholder proposals that seek a different frequency if they heed the views of a plurality of investors during the “say when on pay” vote. Under the Dodd-Frank Act, companies only are required to hold frequency votes every six years. AFSCME, Walden, and the Social Investment Forum all argued that the SEC should not force investors to wait years to express their views on frequency, particularly if there has been a “material” change in a company’s pay practices.
“Significant changes can occur in a company’s compensation practices during a six-year period, and such changes could affect shareholders’ views regarding the desirable frequency of SOP votes,” AFSCME stated. “The hiring of a new CEO from outside the company shortly after the frequency vote, however, might bring with it practices, such as guaranteed incentive compensation or relocation benefits, of which shareholders disapprove. . . . Forcing [investors] to wait four or five years for the next frequency vote is unnecessary when a non-binding shareholder proposal advocating annual SOP votes would allow shareholders to register their sentiment on this issue in a non-disruptive way.”
Corporate representatives did not agree. The NACD argued that such votes would be “disruptive.” In its comment letter, Eaton Corp. argued: “There is no compelling justification for permitting additional votes on matters where a plurality of the shareholders have spoken, and the company’s policies conform with that vote. Obligating issuers to respond to such proposals and/or include them in the proxy statement would only serve to increase burdens on issuers and would be confusing to shareholders who have already voted on these matters.”
Boeing warned that allowing shareholders to seek new frequency votes after a “material” change in pay policies would force the SEC to evaluate numerous no-action letters and decide whether a particular change was “material” for that particular issuer. “Practically speaking, such a rule would also give shareholders seeking a ‘redo’ of the prior frequency vote an easy opportunity to simply declare that whatever change was recently made was ‘material’ and thereby seek to redo the frequency vote,” the aerospace company argued.
Boeing said that issuers should have flexibility when interpreting the results of the frequency vote. “For example, if shareholders’ preference is split 34 percent for an annual vote and 33 percent each for a biennial and triennial vote, an issuer may determine that a biennial vote best reflects overall shareholder preference. As a result, issuers should be permitted to choose any frequency that is reasonably believed to more accurately reflect shareholder preference,” the company said.
Keith Bishop, a California-based securities lawyer, said the SEC should allow companies to design proxies that may better assess shareholder preferences. For instance, he said companies may want to use a Borda count to allow investors to rank their preferences rather than select one frequency.
Should companies be allowed to omit similar shareholder proposals?
Issuers and their representatives also argued that the SEC also should permit the exclusion of similar shareholder resolutions on the grounds that the company has “substantially implemented” those requests. Boeing argued for the omission of proposals that ask for more specific compensation votes, either those that target particular pay aspects (such as incentive compensation or pension benefits) or “that wish to make the result of such votes binding in any respect.” “Permitting such ‘extra’ votes would (a) dilute the importance of the core shareholder vote proposed by these rules, (b) needlessly add to the length of companies’ proxy statements, (c) be extremely difficult for investors to analyze, and (d) be extremely difficult for issuers to adequately respond to . . .,” the company said.
Should the SEC mandate specific language for advisory vote proposals?
One issue that most commenters agreed on is that the SEC should not prescribe specific language for advisory votes, as long as there are minimum guidelines.
“Companies that have already implemented ‘say on pay’ votes under pressure from shareholders can provide good examples of the usefulness of offering some flexibility in this area. For instance, some companies have split votes into several sections to address a broader subset of issues, while others have tested specific executive pay points in different years,” the First Affirmative Financial Network, an ESG-oriented investor, said in its comment letter.
Should companies have to address if they considered previous shareholder votes on compensation?
There was debate over whether companies should be required to disclose whether they considered the results of previous shareholder votes on compensation in determining their pay policies and decisions. In its comment letter, TIAA-CREF said such disclosure should be mandatory. “This disclosure will ensure the Advisory Vote is not an afterthought and will encourage a healthy dialogue between shareholders and issuers on the topic of compensation on an annual basis,” the educational pension giant said.
UnitedHealth Group disagreed. “In the vast majority of instances, requiring this announcement will lead to boilerplate statements, further lengthening [the] CD&A without providing shareholders with meaningful information. Indeed, empirical evidence demonstrates that for most companies, this information will not be material: in 2010, management proposals for an advisory vote on executive compensation received average support of approximately 89.6 percent. In other words, there would be nothing to disclose in this mandatory disclosure,” the health insurance company said.
Pfizer argued that this disclosure shouldn’t be required and should be limited to those companies that received less than majority support during their most recent advisory vote.
Will the proxy system be able to handle four-ballot options?
The Society of Corporate Secretaries & Governance Professionals expressed concern that some proxy system participants won’t be able to handle the four ballot options–annual, biennial, triennial, or abstain–proposed for the frequency votes. The group suggested a two-question alternative whereby investors would be asked: 1) if they had a preference on pay vote frequency; and 2) whether they preferred votes to occur every one, two, or three years. Broadridge Financial, which processes proxy votes for 900 custodian banks and broker-dealers, said it is modifying its systems to accommodate four ballot options. “We estimate that the initial systems effort requires an investment of over 18,400 people hours for specification, development, testing, audit, and quality assurance,” Broadridge said.
In addition, there have been comments submitted ahead of the SEC making proposals on the other Dodd-Frank governance provisions, including this one from Davis Polk.