The Advisors' Blog

– Broc Romanek, CompensationStandards.com

Hat tip to Ed Hauder and his blog: ISS recently released its 2011 Burn Rate Caps (see page 5). Ed analyzes the new burn caps in this presentation (here is a PDF of it):

– Broc Romanek, CompensationStandards.com

First, I note that the effective date of the SEC’s final say-on-pay rules has been set as April 4th (it’s tied to the rules being published in the Federal Register). The compliance date is also April 4th.

Second, here is analysis of a common query we are receiving: When Dave Lynn opened our popular webcast last week on say-on-pay and drafting disclosures, he noted that the SEC’s new say-on-pay rules would probably need a few interpretations from the SEC Staff like most major rulemakings. Based on the number of questions in our Q&A Forums (on this site and TheCorporateCounsel.net), that certainly seems the case. Here is one question that Dave answered yesterday regarding the smaller company exemption:

Member Question: Per Rule 12b-2 and Reg. S-K Item 10(f)(2), a calendar year issuer that exceeded $75 million in public float for the first time as of June 30, 2010 (i.e., the last day of its most recently completed second fiscal quarter) would not report the change of its smaller reporting company status until the filing of its Form 10-Q for the first quarter of 2011 and would remain eligible to use the scaled disclosure of a smaller reporting company for its Form 10-K and proxy statement filed prior to such Form 10-Q. Is this issuer required to include say-on-pay and say-on-frequency votes in its definitive proxy statement to be mailed prior to the filing of the first quarter Form 10-Q but pertaining to an annual meeting to be held thereafter?

Dave’s Answer: There appears to be some potential arguments that the issuer would not have to comply with the Say-on-Pay/Say-on-Frequency requirements when you consider the following Compliance and Disclosure Interpretation:

Question 104.13
Question: An issuer files its 2008 Form 10-K using the disclosure permitted for smaller reporting companies under Regulation S-K. The cover page of the Form 10-K indicates that the issuer will no longer qualify to use the smaller reporting company disclosure for 2009 because its public float exceeded $75 million at the end of its second fiscal quarter in 2008. The issuer proposes to rely on General Instruction G(3) to incorporate by reference executive compensation and other disclosure required by Part III of Form 10-K into the 2008 Form 10-K from its definitive proxy statement to be filed not later than 120 days after its 2008 fiscal year end. May the issuer use smaller reporting company disclosure in this proxy statement, even though it does not qualify to use smaller reporting company disclosure for 2009?

Answer: Yes, because the issuer could have used the smaller reporting company disclosure for Part III of its 2008 Form 10-K if it had not used General Instruction G(3) to incorporate that information by reference from the definitive proxy statement. [September 30, 2008]

I note, however, that the CDI is dealing with a unique issue from a disclosure perspective and I don’t think it was asked and answered with Say-on-Pay in mind. I get concerned here when the issuer knows that it is about to not be a smaller reporting company but still utilizes the exception nonetheless on what some might see as a technicality. I think it would be very useful to have the Staff’s input on this specific question.

– Broc Romanek, CompensationStandards.com

In this podcast, Kurt Schacht of the CFA Institute’s Centre for Financial Market Integrity talks about a CD&A Template put together by the joint efforts of a group of issuers and investors, including:

– Why was the template put together?
– What was the process for drafting it?
– How do you envision companies using it? How about investors?
– How does mandatory say-on-pay impact its use?

– Broc Romanek, CompensationStandards.com

On the heels of the first group of annual meetings experiencing a surprising number of majority (not even a plurality) votes for annual frequency – even though the companies had recommended triennial – a group of 39 institutional investors (with combined assets under management of $830 billion) issued this press release yesterday urging companies to recommend an annual frequency. This may add to the pressure for companies to go the annual route…

Webcast Transcript: “The Latest Developments: Your Upcoming Proxy Disclosures – What You Need to Do Now!”

We have posted the transcript for our popular webcast: “The Latest Developments: Your Upcoming Proxy Disclosures – What You Need to Do Now!”

– Broc Romanek, CompensationStandards.com

Last year, three companies in the US failed to obtain a majority vote for say-on-pay. That was a surprise to me as I have written about before given that so few United Kingdom companies have experienced failures over their decade of mandatory say-on-pay.

Well, in the very first week of annual shareholder meetings under Dodd-Frank’s mandatory say-on-pay regime, we already have our first failed SOP vote. Late Friday, Jacobs Engineering filed this Form 8-K reporting a 54% “against” vote and a 45% “for” vote (as I hinted in a tweet back then). The company received a negative recommendation from ISS.

It’s not a good sign that so early in the season – out of only a handful of companies having meetings – Monsanto’s say-on-pay vote only received 65% “for” and another company’s vote did not pass. Although it’s still early, this could be a harbinger that SOP results will defy the predictions of those that felt that most say-on-pay votes would easily pass.

In the “Dodd-Frank.com Blog,” Steve Quinlivan notes that Jacobs Engineering’s vote results may be explained by the fact that they filed additional solicitation materials explaining one-time grants they had given to its executives, while the proxy statement “had only a perfunctory overview and the grants were otherwise barely addressed” (additional solicitation materials are often filed after a company receives a negative ISS report and must then actively solicit). Perhaps more disclosure in the proxy statement in the first instance would have helped? Who knows but it wouldn’t have hurt the company. To get up-to-speed on drafting considerations, consider listening to the audio archive of last week’s CompensationStandards.com blockbuster webcast featuring Mark Borges, Dave Lynn, Alan Dye and Ron Mueller (transcript coming later today).

Steve also reports about the difficulty that companies who recommended a triennial frequency in getting support for that recommendation. Of the six companies that have announced voting results so far – only two have received majority or plurality support for a triennial frequency (and each of the two had concentrated holdings).

In his “Proxy Disclosure Blog,” Mark Borges gives us the latest say-when-on-pay stats: with 205 companies filing their proxies, 59% triennial; 6% biennial; 29% annual; and 5% no recommendation.

The Proxy Solicitors Speak on Say-on-Pay

We have posted the transcript for our CompensationStandards.com webcast: “The Proxy Solicitors Speak on Say-on-Pay.”

Poll: How Many Companies Will Receive a “Failed” Say-on-Pay Vote?

Now that say-on-pay is mandatory for US companies – and we’ve already had one failed vote under the mandatory regime – please take a moment to participate in this anonymous poll and express how you read the tea leaves:

– Broc Romanek, CompensationStandards.com

I’m sad to report that Pearl Meyer has passed away. One of the true pioneers in the executive compensation field, I was blessed to have worked with Pearl when she spoke at our annual pay conference several times over the years. Her wealth of experience allowed her to offer strong viewpoints and a perspective that few could match. Directorship ran this nice story that covers her long career in detail. We will miss you Pearl.

– Broc Romanek, CompensationStandards.com

In its “Implementation of Dodd-Frank Act” rulemaking timeline, the SEC pushed back its estimate yesterday of when it will push out proposed rules from April-July to August-December for the following topics:

– Pay-for-performance disclosure (how compensation is related to financial performance; Section 953)
– Pay ratios (ratio of CEO pay to average employee pay; Section 954)
– Clawback policies (clawback of the compensation of current and former officers upon restatement; Section 954)
– Hedging policies (whether company has a policy regarding the ability of directors and employees to hedge; Section 955)

This delay is not surprising given that there are no deadlines for these rules under Dodd-Frank – and given the vast number of required rulemakings that the SEC still has on its plate that do have a deadline (as noted in this WSJ article). Also note that the SEC is working with a more limited budget than was expected (as I blogged about before – and will be blogging about more soon). Looking at the new estimated timeframes for these four proposals, it’s possible that these rules may not be finalized in time to apply to the 2012 proxy season.

Note that these rulemakings are not included in the SEC’s semi-annual regulatory agenda that came out last month (and whose information is good as of September 30th, the end of the SEC’s fiscal year). Two non-Dodd-Frank rulemakings potentially are in the works according to this agenda: consolidation and enhancement of risk disclosures and requiring voluntary filers to comply with the SEC rules when they do voluntarily file.

– Broc Romanek, CompensationStandards.com

Yesterday, as noted in this press release, the SEC adopted new say-on-pay rules – by a 3-2 vote – and then posted the 152-page adopting release, just in time for today’s webcast – “The Latest Developments: Your Upcoming Proxy Disclosures – What You Need to Do Now!” Mark Borges, Alan Dye, Dave Lynn and Ron Mueller were up to the wee hours analyzing the adopting release and are now prepared to cover how the new rules impact you in practical terms during today’s webcast. Here’s Chair Schapiro’s opening remarks – and remarks from the two dissenting Commissioners: Parades and Casey.

For those wondering how many attend open Commission meetings in person these days, I hear that yesterday’s meeting drew mostly SEC Staffers plus maybe a dozen lawyers and another dozen reporters. It’s pretty remarkable how webcasting the meetings have killed live attendance – a popular topic like SOP would have drawn hundreds in the old days. Personally, I haven’t attended an open meeting at the SEC since they began webcasting them…

Monsanto Shareholders Back Company’s SOP Despite Negative ISS Recommendation – But Significant Number Vote “Against”

Yesterday was the first annual meeting at which a say-on-pay vote was submitted to shareholders under Dodd-Frank. Right after Monsanto held its meeting, it filed its Item 5.07 8-K on the same day. The most noteworthy aspect of the Monsanto vote is that the company’s SOP passed despite a recommendation by ISS against it. However, the company garnered only about two-thirds of the vote in favor – with a third voting against it. This relatively high level of “against” votes should probably be viewed by the company as a warning sign, as mentioned on our earlier say-on-pay webcasts (a notion likely to be repeated by our experts during today’s webcast).

Also noteworthy is that notwithstanding the board’s recommendation that shareholders vote for “triennial,” shareholders selected “annual” – here is how that voting went: 62% for annual; 36% triennial; 1% biennial, and 0.5% abstentions. Even though this vote in non-binding, the company went ahead and disclosed in its Form 8-K that it would implement an annual SOP vote (as also reflected in this press release). However, the company was mum about the potential ramifications of the significant “against” votes on its SOP – understandably so since it may take the company some time to internally process the results (and engage shareholders to better understand why so many “against” votes were cast)…

– Broc Romanek, CompensationStandards.com

Assuming the SEC posts the adopting release later today for its new say-on-pay rules, tune in tomorrow for the CompensationStandards.com webcast – “The Latest Developments: Your Upcoming Proxy Disclosures – What You Need to Do Now!” – to hear Mark Borges of Compensia, Alan Dye of Hogan Lovells and Section16.net, Dave Lynn of CompensationStandards.com and Morrison & Foerster and Ron Mueller of Gibson Dunn discuss all the latest guidance about how to overhaul your upcoming disclosures in response to say-on-pay including analysis of what the adopting release says.

If the adopting release is not posted today, we will push back this program to Tuesday, February 1st so that these experts can provide you their guidance on this important rulemaking. Stay tuned!

In his “Proxy Disclosure Blog,” Mark Borges gives us the latest say-when-on-pay stats: with 153 companies filing their proxies, 54% triennial; 8% biennial; 31% annual; and 7% no recommendation. These are fairly close to the percentages seen earlier – so the relative ratios remain pretty steady so far. But many more companies will be filing over the next month or so and could disrupt current trends…

– Ted Allen, ISS’s Governance Institute

Many institutional investors will have their first chance to express their views on the frequency of advisory votes on compensation when Monsanto, an S&P 500 company, holds its annual meeting on Jan. 25. Under the Dodd-Frank Act, companies are required to hold “say on pay” votes at their first annual meeting after Jan. 21 and to ask investors to vote on whether to hold future votes on an annual, biennial, or triennial basis. Both the pay vote and the “say when” frequency vote will be non-binding. Frequency votes also will be the ballot next week at the annual meetings of Johnson Controls (Jan. 26), Costco Wholesale (Jan. 26), and Visa (Jan. 27).

These early votes may have a significant influence on companies with later meeting dates that still are deciding which frequency to recommend. Most companies with early meeting dates have recommended triennial votes, but two recent surveys suggest that more large issuers will endorse annual votes as the traditional U.S. spring proxy season gets under way.

Pay vote advocates and corporate lawyers will be watching closely to see whether investors follow the triennial vote recommendations of management at Monsanto, Johnson Controls, Costco, and other firms. Monsanto, which doesn’t have a significant insider share block, should be a good test of institutional views on frequency. The agricultural products company’s five largest institutional holders (which all have less than a 5 percent stake) include: PRIMECAP Management, Marisco Capital Management, Vanguard Group, BlackRock Fund Advisors, and State Street Global Advisors, according to FactSet data. Johnson Controls and Costco also don’t have large insider share blocks. If a plurality of investors defy management and vote for an annual frequency at these companies, it’s likely that other large issuers will take notice. Visa is recommending an annual vote, so presumably most of that company’s investors will support that recommendation.

So far, it appears that many institutions plan to back annual votes. In a Jan. 20 webcast hosted by ISS’ Governance Exchange, representatives from State Street, Vanguard, and the California State Teachers’ Retirement System all said they would support annual votes. (Editor’s Note: ISS has advised its benchmark policy clients to vote for an annual frequency.)

Walden Asset Management, Connecticut’s state pension system, and the American Federation of State, County, and Municipal Employees (AFSCME) are among the activists that are urging investors to support annual votes. These activists argue that compensation is too important of an issue for only biennial or triennial consideration. Given that compensation committees typically make annual decisions on executive salaries, bonuses, and severance, the investors contend that an annual vote is central to proper shareholder oversight. They also assert that annual votes would not be overly burdensome for investors, pointing out that shareholders already vote annually on the election of directors and the ratification of auditors. The activists further point out that annual votes are standard practice in other markets with shareholder votes on pay, including Australia, the United Kingdom, France, the Netherlands, Norway, Spain, and Sweden. However, some investors may be swayed by the arguments of the United Brotherhood of Carpenters and Joiners, which has argued that triennial votes would be more meaningful and less burdensome.

So far, a majority of issuers that have filed early proxy statements are advising their investors to support a triennial advisory vote. As of Jan. 20, 125 companies had filed proxy materials that include a “say when” ballot item. Among those companies, 66 (52.8 percent) had a triennial recommendation, while 40 companies (32 percent) endorsed an annual vote, according to ISS data. Eleven issuers supported a biennial vote, while eight companies gave no recommendation. Apple, TD Ameritrade, Oshkosh, and Beazer Homes USA are among the well-known companies that have endorsed annual votes.

While many companies have focused on pay vote frequency during their engagement efforts before the 2011 proxy season, some institutional investors have expressed frustration that corporate officials are not doing enough to address concerns about their underlying pay practices. These investors see the debate over frequency as distraction away from the more important question of whether a particular company’s pay practices merit investor support.