As perhaps can be expected given it’s a new ballot item for most companies, the first batch of companies reporting voting results regarding say-when-on-pay have led many members to send questions about how to properly count votes. As an example of the confusion, Steve Quinlivan notes a voting ambiguity at the end of this blog. And in his “California Corporate & Securities Law” Blog, Keith Bishop also blogs about the confusion of counting say-on-frequency votes – here is Keith’s follow-up blog too.
The bottom line is that whether a majority preferred a triennial vote depends on how “abstentions” are treated – which means that the same numbers could wind up with entirely different results for two different companies. Personally, I don’t see how abstentions wouldn’t be counted, but it seems like a matter of state law – not my area of strength. But I do note that the SEC’s adopting release in discussing the Rule 14a-8 exclusion states at footnote 151:
“Specifically, as adopted, the note to Rule 14a-8(i)(10) will permit exclusion of such a shareholder proposal if, in the most recent shareholder vote on frequency of say-on-pay votes, a single frequency (i.e., one, two or three years) received the support of a majority of the votes cast and the issuer has adopted a policy on the frequency of say-on-pay votes that is consistent with that choice. FN151
Footnote 151 – For purposes of this analysis, an abstention would not count as a vote cast. We are prescribing this voting standard solely for purposes of determining the scope of the exclusion under the note to Rule 14a-8(i)(10), and not for the purpose of determining whether a particular voting frequency should be considered to have been adopted or approved by shareholder vote as a matter of state law.”
One might ask whether the difference matters. There are some consequences. One is determining whether a specific frequency preference received a “majority of the votes cast” for purposes of the Rule 14(a)-8(i)(10) exclusion – so it matters for purposes of the shareholder proposal rule (I guess it also could have an impact on which preference received a plurality of the votes cast, but this situation isn’t likely to come up too often – and doesn’t seem have any legal consequences). Perhaps the biggest factor to consider is one that isn’t driven by regulation: the optics of how you report your voting results. In other words, how will it be received by shareholders and the media in general.
I expect that companies will want to disclose the potential voting implications “right” at the outset in their proxy materials – it doesn’t look good to file a corrective disclosure. So it’s something to figure out now and not when it comes time to report the voting results in a Form 8-K…
In his “Proxy Disclosure Blog,” Mark Borges gives us the latest say-when-on-pay stats: with 218 companies filing their proxies, 58% triennial; 6% biennial; 30% annual; and 6% no recommendation.
Recently, the CSA (Canadian securities administrators) proposed changes to executive compensation disclosure that would not take effect until the 2012 proxy season. Check out this Torys’ memo for more.
In addition, here is something from ISS’s Debra Sisti about how Ontario regulators are seeking input on “say-on-pay” and majority voting:
In keeping with its 2010-2011 Statement of Priorities, the Ontario Securities Commission recently issued a notice, in which the OSC indicated that it was considering future regulations on slate voting and majority voting in uncontested director elections, as well as “say on pay” advisory votes on executive compensation.
Following a comprehensive look at proxy voting mechanics in Canada, the law firm of Davies Ward Phillips and Vineberg released a paper by senior partner Carol Hansell, entitled, “The Quality of the Shareholder Vote in Canada,” which makes a number of recommendations for improvement beginning with a regulatory review of the proxy voting system. The OSC has included a review of the effectiveness of the proxy voting system in Canada as the third item on its “shareholder democracy” agenda for this year. Institutional investors in Canada have pushed back on slate voting, which provides a bundled director ballot and prohibits shareholders from registering individual votes for director nominees. From 2009 to 2010, the percentage of TSX companies with slate director elections fell from 46 percent to 28 percent, and declined from 28 percent to 17 percent at S&P/TSX Composite Index companies, according to ISS data.
Majority voting in the form of a director resignation policy had been voluntarily adopted by 146 companies by end of the 2010 proxy season; 130 of those are Composite Index companies and accounted for 53 percent of the index as of Dec. 31. As a result of shareholder engagement and letter-writing campaigns, a handful of other companies have publicly committed to adopt majority voting in the coming year.
Much like majority voting, “say on pay” has been voluntarily adopted by some of Canada’s largest companies in response to shareholder engagement and shareholder proposals. As of June 30, 2010, ISS had identified 28 issuers with management “say on pay” resolutions on their proxy ballots. And another 10 companies have announced they will follow suit this year.
While the tenor of shareholder engagement in Canada to date has been quietly conservative and has garnered substantial results, there has been some indication from larger shareholder coalitions that if engagement activity is not sufficient to make further gains on these issues, they will file shareholder proposals to prod unresponsive boards. The results of these efforts and the investor support for these proposals will be closely watched by regulators in contemplation of future regulation. In the interim, the OSC is asking stakeholders to submit their comments on the appropriateness of such regulation by March 31.
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):
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.
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?
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!”
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:
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.
– 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.
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)…