Section 951 of Dodd-Frank requires that any public company, at its first shareholders meeting on or after January 21, 2011, hold a separate vote “to determine whether Say-on-Pay votes will occur every 1, 2 or 3 years” (the SEC recently proposed rules implementing this provision). This vote has been called the frequency vote or “Say When on Pay.” The Say When on Pay vote must be held no less frequently than once every six years. In a previous post, I described some mechanical issues with offering all three choices of frequency (i.e., an annual, biennial or triennial Say-on-Pay vote).
But what frequency should companies recommend for Say-on-Pay votes – annual, biennial or triennial? Most public company officials will quickly react that they prefer a triennial vote. The advantages are obvious – Say-on-Pay votes create some additional drafting, solicitation and shareholder relations issues, and a triennial vote allows the company to avoid these issues in two out of every three years.
Are there any advantages to annual or biennial votes? In the recent pre-Conference webcast for this site, compensation consultants Mark Borges of Compensia and Mike Kesner of Deloitte brought up a few factors that should at least be considered before settling on a triennial vote recommendation:
– Some companies are coming to the conclusion that an annual vote is preferable, on the theory that an annual non-binding vote will seem routine after the first year – somewhat like the annual vote to approve the company’s auditors.
– Also, biennial or triennial votes may present a disadvantage because there will be “off years” with no vote. If ISS or other shareholder advisory services want to send a signal to the board about compensation in an off year, their only choice is to recommend a withhold vote against compensation committee members.
– It’s not clear whether the shareholder advisory services such as ISS will recommend annual votes or some other cycle. Companies should also be mindful of any stated preferences of their large shareholders.
On the last point, companies should not assume that institutional investors will all prefer an annual vote. In a post on Altman Group’s Governance and Proxy Review, “Open Questions on Dodd-Frank: Say-on-Pay Implementation (SOP) and Proxy Access,” Francis Byrd reports that many institutional investors have feared the prospect of being flooded by annual advisory votes for all of their portfolio companies. Such investors may be happy to vote for biennial or triennial advisory votes. Byrd also points out a common justification by companies for triennial votes – that many companies’ pay plans are crafted around three-year periods, and triennial votes allow investors to better judge the value of these plans.
In any event, the Say When on Pay vote presents a variety of strategic considerations, and public companies should start thinking about these considerations now.
Here is a PowerPoint entitled “Sample Pay-for-Performance Assessment” that I mentioned during the “5th Annual Proxy Disclosure Conference” last month that I hope you find useful.
Recently, we completed a study on director stock ownership guidelines. Here are the key findings:
– Ownership Policy Prevalence: The prevalence of Fortune 250 companies with publicly disclosed director stock ownership policies increased from 82.1 percent in 2008 to 84.0 percent in 2009. Ownership policy prevalence includes companies that have ownership guidelines, holding requirements, or both.
– Ownership Guideline Prevalence: Ownership guidelines grew in prevalence at Fortune 250 companies, with 79.4 percent of companies disclosing director ownership guidelines in 2009 compared with 77.5 percent in 2008.
– Holding Requirement Prevalence: The prevalence of holding requirements at Fortune 250 companies increased from 2008 to 2009, rising from 19.2 percent to 19.7 percent. An increasing number of companies used holding requirements in conjunction with ownership guidelines.
– Ownership Guideline Design: The prevalence of companies that defined ownership guidelines as a multiple of the annual retainer decreased from 57.0 percent in 2008 to 55.0 percent in 2009. In addition, the prevalence of companies that disclosed ownership guidelines as a fixed number of shares increased from 27.4 percent in 2008 to 23.8 percent in 2009.
– Holding Requirement Design: In 2009, 34.0 percent of director holding requirements at Fortune 250 companies were designed to be in effect only prior to the satisfaction of ownership guideline targets. Once ownership goals are met, these holding requirements are no longer active.
– Target Ownership for Directors: At Fortune 250 companies, the median value of the target stock ownership level for directors was $261,750 in 2009. Ownership guidelines targeted using a fixed number of shares increased from $212,150 in 2008 to $261,750 in 2009.
– Hardship Provisions: Among companies having ownership policies, the prevalence of companies disclosing hardship provisions for their directors decreased 4.3 percent in 2009.
– Other Practices: As companies continue to adjust to new disclosure regulations, more detail has emerged on key practices related to stock ownership policies. This report explores new disclosure related to compliance status, non-compliance penalties, and restrictions on hedging.
Not surprisingly, I received quite a bit of member feedback on my recent blog about the Boston Globe article that found many companies incorrectly totaling the amounts in their Summary Compensation Tables. Others are blogging about this story too, such as this entry from Mark Borges in his “Proxy Disclosure Blog.”
Here is a useful response from Jim Brashear of Zix Corporation:
I copied the summary compensation table from one of the SEC filings cited in the recent Boston Globe article on math errors in proxy statements, and I pasted it into this Word document. I wondered if the addition errors could have been avoided by some simple changes to how the Word tables were formatted. Avoided at least while the issuer and its counsel are working on the document in Word, before it gets handed off to the printer and is reformatted.
A lot of lawyers don’t know that you can use Word tables very much like Excel spreadsheets. It’s particularly easy to sum columns and rows of adjacent cells that all contain numbers. If there are intervening cells that are empty or have non-number characters, it’s a bit more complicated to sum the cells, but it can still be done.
In my Word document, the top table is straight from the SEC filing (only names redacted). The bottom table shows how I cleaned up the table to remove the cell “padding”, replaced the dashes with zeros and, most importantly, inserted into the far right column a formula that calculates automatically the sum of the columns to the left. (I left one blank column between Year and Salary so that the formula would not add the year date to the compensation amount.
Inserting a formula is done in Word from the Table menu by selecting Formula. Word will even suggest the correct formula – in this case “=SUM(LEFT)”. Then, the author selects the Number Format to display $ and the commas (delete the cents if you don’t want them). Voila, no more simple addition errors! If there are changes to numbers in the table, you may have to refresh the formula cells by selecting them and pressing F9 – but that refresh happens automatically when the document is printed.
And here is a follow-up from a member: While this would work, since most company’s external reporting departments already prepare the tables in Excel, all you need to do is copy the Excel table in Excel and then paste it into the Word document at the proper location. You can even re-open the table in the Word document while in Word and edit the Excel spreadsheet.
By the way, here is a follow-up article from the Boston Globe that includes some quotes from a SEC spokesperson. I agree with the thoughts in the article from Lynn Turner that it would be impossible for Corp Fin Staff to be involved in checking the math when conducting their disclosure reviews. For me, not only is it impossible, it is impractical. Who would ever think that the team of folks that draft disclosure documents wouldn’t bother to check the math…and is Corp Fin expected to foot every row and column of numbers in the financials too when a filing is selected for review?
– impose a structure,
– assist board/committee in compliying with fiduciary duties,
– help ensure legal compliance, and
– give attorney-client privilege protection, when necessary.
Check it out and give Mike and Eric your feedback…
Mike Melbinger noted last week on his blog that the disclosure of the relationship between compensation and risk will be an important element of consideration for ISS and investors in the upcoming proxy season, so now is the time to start thinking about how to “do it right.” One thing that I have found helpful in benchmarking risk assessments has been the plethora of data points that can be gleaned from the hundreds of comments letter responses that have been submitted on EDGAR in response to the Staff’s comment asking companies to explain what they did to reach their conclusions as to whether disclosure was required under Item 402(s) of Regulation S-K (which effectively resulted in disclosure that was not otherwise required). In most cases, these responses talk about a process whereby:
– compensation programs were reviewed, particularly focusing on incentive compensation programs;
– program features were identified which could potentially encourage excessive or imprudent risk taking;
– the specific business risks that related to such features were identified;
– mitigating factors (if any) were identified;
– an analysis was undertaken to determine the potential effects of the risks and the impact of the mitigating factors; and
– an analysis was undertaken of the particular situations described in Item 402(s) as they apply to the company.
The findings that companies often reached were similar, focusing on:
– the mix of compensation, which tended to be balanced with an emphasis toward rewarding long term performance;
– the use of multiple performance metrics that are closely aligned with strategic business goals;
– the use of discretion as a means to adjust compensation downward to reflect performance or other factors;
– caps on incentive compensation arrangements;
– the lack of highly leveraged payout curves;
– multi-year time vesting on equity awards which requires long term commitment on the part of employees;
– the governance, code of conduct, internal control and other measures implemented by the company;
– the role of the compensation committee in its oversight of pay programs;
– frequent business reviews;
– the existence of compensation recovery (clawback) policies;
– the implementation of stock ownership or stock holding requirements;
– the use of benchmarking to ensure the compensation programs are consistent with industry practice;
– the uniformity of compensation programs across business units and geographic regions, or alternatively, the differences employed to reflect specific business unit or geographic considerations; and
– the immaterial nature of some plans.
In terms of employee plans, there was a lot of discussion in the comment responses regarding sales incentive plans, often focusing on controls in place on those plans such as caps, negative discretion, prepayment review, and recovery in the event of error or fraud, etc. The responses often note that the analysis was conducted by management with the concurrence or consultation of the compensation committee, and they also frequently referenced the use of compensation consultants in performing the analysis, with that consultant in many cases being the same compensation consultant that the compensation committee used for other compensation matters.
Note that these proposals weren’t a product of an open Commission meeting. The SEC smartly issued this set of proposals without the fanfare of an open meeting, which is not required if all of the Commissioners sign an order (ie. seriatim). Probably since these proposals are required by Dodd-Frank – and time is of the essence – the SEC went with what used to be the traditional route of getting a proposal out of the SEC (more recently, nearly all proposals are the product of open Commission meetings; it wasn’t that way a decade ago).
Say-on-Pay: What Should September 30th Fiscal Year End Companies Do?
You may recall that Dodd-Frank requires that say-on-pay must be included in proxy statements relating to a company’s first annual or other meeting of shareholders occurring on or after January 21, 2011 – regardless of whether the SEC has adopted final rules by then. The comment deadline for both rulemakings is November 18th – so it will be a tight squeeze for the SEC to adopt final rules by January 21st (but it is doable).
I have been hearing from a number of companies with 9/30 fiscal year ends that were freaking out because they didn’t have SEC guidance on a number of issues. Now, they have some guidance – even though it isn’t final. One big issue for these companies related to their proxy preparation schedule because they didn’t have any relief from the preliminary proxy filing requirements yet. Fortunately, in the SEC’s proposing release, the SEC does provide some relief on page 65. Here is that excerpt:
Rule 14a-6 currently requires the filing of a preliminary proxy statement at least ten days before the proxy is sent or mailed to shareholders unless the meeting relates only to the matters specified by Rule 14a-6(a). Until we take final action to implement Exchange Act Section 14A, we will not object if issuers do not file proxy material in preliminary form if the only matters that would require a filing in preliminary form are the say-on-pay vote and frequency of say-on-pay vote required by Section 14A(a).
In the proposing release, the SEC also states that these companies are permitted to conduct the frequency vote on the basis of the proposed four choices – every year, every two years, every three years, or abstain.
The ‘Former’ Corp Fin Staff Speaks on Proxy Access & Dodd-Frank
This is a “biggie.” Tune in tomorrow for the 75-minute webcast on TheCorporateCounsel.net – “The ‘Former’ Corp Fin Staff Speaks on Proxy Access & Dodd-Frank” – to hear former Senior Staffers Brian Breheny of Skadden Arps; Marty Dunn of O’Melveny & Myers; John Huber of Latham & Watkins; Brian Lane of Gibson Dunn and Dave Lynn of TheCorporateCounsel.net and Morrison & Foerster weigh in on what do now that the proxy access rules are stalled, plus analysis of all the latest from the SEC’s Corp Fin on Dodd-Frank related-matters – including say-on-pay and more. If you’re not a member of TheCorporateCounsel.net, try a no-risk trial for 2011 and gain access to this webcast for free.
The SEC staff has rejected a no-action request by Winn-Dixie Stores to omit a proposal from Schultze Asset Management that seeks an annual “say on pay” vote. The Florida-based grocery retailer argued that it had “substantially implemented” the proposal because its board adopted a governance policy in July that calls for a biennial vote on compensation. Winn-Dixie plans to hold its first advisory vote at its 2010 annual meeting on Nov. 10. The staff of the SEC’s Corporation Finance Division did not agree, noting: “We are therefore unable to conclude that Winn-Dixie’s policies, practices, and procedures compare favorably with the guidelines of the proposal such that Winn-Dixie has substantially implemented the proposal.”
The staff ruling is potentially significant because many U.S. companies likely will seek to hold less frequent advisory votes after the 2011 proxy season, and some activist investors may continue to use shareholder resolutions to press for annual votes. The Dodd-Frank Act requires U.S. issuers to hold a pay vote at their first annual meeting after Jan. 21, 2011, and directs companies to conduct a vote on the frequency of future pay votes at that meeting (and then once every six years). Given this mandated vote on frequency, companies may have better luck in their efforts to exclude similar shareholder proposals next season. However, the SEC may rule differently on 2012 proposals when a frequency vote will not be on corporate ballots.
Based on a number of requests from members, we have posted a “Quick Survey on Clawback Policies.” It’s anonymous and just takes a few seconds to complete. Once you participate, you will see a link with running results.
Late last year, the SEC issued final rules that require companies to provide narrative disclosures in their proxy filings of their compensation policies and practices that create risks that are “reasonably likely to have a material adverse effect” on the company. These rules were generally effective for proxy filings occurring on or after February 28, 2010 and apply to all compensation arrangements that could result in material adverse risk — not just those covering senior executives of the company. The rules do not require affirmative disclosure in cases where it is determined that a company’s compensation policies and practices do not rise to the “reasonably likely” level.
Recently, we researched proxy filings of over 200 S&P 400 non-financial companies that filed their proxy statements on or after February 28, 2010 for the purpose of examining how companies addressed the SEC’s compensation risk disclosure. Our study concludes that there is very little consistency among companies’ disclosure practices involving compensation risk assessments.
The SEC’s risk disclosure requirement was intended to provide meaningful information for investors to evaluate how compensation programs affect risk taking. Because the assessment of risks as they relate to compensation practices and policies is a complex and subjective area and guidance has been limited, many believed that there would be a great deal of uncertainty during the 2010 proxy filing season. Our study affirms this belief and raises two key questions:
– If companies do not apply a consistent approach towards risk assessment and disclosures, can investors truly benefit from the SEC’s requirement to provide narrative disclosures where compensation practices and policies create risks that are reasonably likely to have a material adverse effect?
– Is the lack of overall consistency within proxy disclosures creating confusion and thus achieving the opposite effect of what had been intended by the SEC?
Some of the key findings of the study include:
– Although affirmative statements are not required where the “reasonably likely” threshold is not met, most companies (67 percent) included some discussion of risk assessment within their proxies.
– Of those companies, 63 percent provided an affirmative statement that there were no risks that would rise to the level of “material adverse effect.”
– Not surprisingly, no company indicated that they uncovered material adverse risks within their compensation programs.
– Very few companies described the process they used to determine that there were no material adverse risks. Rather, the disclosures emphasized how plan design elements have served to mitigate risk. Most companies (58 percent) indicated a balance of short-term and long-term incentive structures as a risk mitigation element.
– Although the majority of companies (60 percent) identified a specific employee group covered by their risk assessment, the composition of the employee groups varied widely. Only 27 percent covered all employee groups (as opposed to only executives) and 40 percent of the companies that performed a risk assessment did not identify a specific group.
– Corporate boards and their compensation committees have almost universally left day-to-day risk management in the hands of management while maintaining an oversight role.
SEC’s Response to Disclosures
The SEC has begun to question whether companies have truly established risk assessment policies and procedures that would allow for a conclusion that there are no arrangements in place that would be “reasonably likely to have a material adverse effect” on the company. The SEC has been sending out letters to companies requesting confirmation for how they drew this conclusion. While the letters have generally been targeted at companies whose proxy disclosures were silent about compensation risk, some companies have received letters even though they included a statement in the proxy about their conclusion but did not describe the risk assessment process. Certain public comments by SEC staff are revealing – e.g.,” Where there was no disclosure, did it mean the company went through an analysis or that they were not paying attention?”
The Bottom Line
As compensation risk assessment continues to evolve, both conceptually and procedurally, one could surmise that disclosures involving risk assessment (versus nondisclosure) will emerge as a “best practice.” A reasonable disclosure would be one that clearly conveys that: (i) a comprehensive risk-assessment was performed covering, not just plan design, but internal processes as well and (ii) the assessment was not just focused on plans covering executives but also covered all compensation plans covering employees throughout the organization.
Further, in light of the Dodd-Frank Act, compensation committees will be required to take a closer look at all of their policies, charters, guidelines, and procedures which includes standards associated with assessment of risk within the company’s compensation plans. While compensation committees will still maintain an oversight role, there will be more of a need for committees to fully understand the rigor with which management has conducted a risk assessment and drawn its conclusions.