– Broc Romanek, CompensationStandards.com
As noted in the excerpt below of this article from Manifest (a European proxy advisor service), Australia may take the concept of say-on-pay further than proposed here in the US (here is the Australian’s full response on this topic):
Australian Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen has delighted Australian shareholders with plans to introduce extensive executive remuneration reforms designed to force boards to be more accountable and give shareholders more power.
In a ringing endorsement of the Productivity Commission’s review of executive pay which was published in January this year, the Rudd administration has announced that it will introduce legislation to implement many of the PC’s 17 recommendations, including the “two strikes” proposal, which will strengthen the non-binding vote on remuneration and set out consequences where companies do not adequately respond to shareholder concerns on remuneration issues.
As currently proposed, the two strikes and re-election resolution would work as follows:
– 25 per cent ‘no’ vote on remuneration report triggers reporting obligation on how concerns addressed; and
– Subsequent ‘no’ vote of 25 per cent activates a resolution for elected directors to submit for re-election within 90 days.
It is not clear whether it would be the entire board to be submitted for re-election, just the remuneration committee or the chairman, however there will be a further opportunity for input as there during the consultation process ahead of the final drafting of amendments to the Corporations Act 2001.
An unexpected but welcome addition to the proposals is a “claw-back” provision which would require a director or executive to repay to the company any bonuses calculated on the basis of financial information that subsequently turned out to be materially misstated. Bowen asserted that the introduction of a claw-back provision “warrants further analysis, as it would help strengthen the ability of shareholders to recover overpaid bonuses that have occurred as a result of materially misstated financial statements.”
Issuers have expressed their concerns in the Australian media calling the proposals “heavy handed”. Speaking to ABC News, John Colvin from the Institute of Company Directors said: “We’re a bit perplexed and quite frankly bemused at why we would have such a heavy-handed, red-taped, legislative approach to this area,”
“Whilst there are examples of, and we acknowledge those, of pay outcomes which haven’t been in line with either company expectations… on the whole Australian remuneration of corporate governance has been very good.”
The Australian Shareholders Association (ASA) said that the response was “much stronger than they had anticipated.”
“We think that it’s a very well-measured, very well-considered report,” said an ASA representative “from the ASA’s point of view it certainly went a little bit further than we had asked, but we’re very positive about the recommendations and we’re very hopeful that they’ll have the effect of making boards much more accountable on this issue which is very important to shareholders.”
– Ted Allen, RiskMetrics’ ISS
Notwithstanding predictions of an exodus of executives from companies under U.S. government oversight, 84 percent of the executives whose compensation was cut last year by the federal “pay czar” in October were still at their firms early this year, according to Kenneth Feinberg, the Treasury Department’s special master for executive compensation.
This finding was among those in a March 23 report on Feinberg’s 2010 pay rulings for 119 senior executives at five companies–American International Group, General Motors, GMAC, Chrysler, and Chrysler Financial–that received “exceptional” assistance from the federal government’s Troubled Asset Relief Program (TARP). News reports suggest that a weak economy and loyalty to companies were factors that may have reduced executive turnover.
Feinberg originally had oversight over the 25 highest-paid executives at seven firms, which then included Bank of America and Citigroup. In late October, he reduced their total compensation by about 50 percent on average from 2008 levels. Bank of America and Citigroup since have repaid their TARP assistance and no longer are subject to Feinberg’s authority.
Under Feinberg’s latest round of pay rulings, the cash pay for the covered executives declined by 33 percent on average from 2009 levels, 82 percent of them received cash salaries of $500,000 or less. Feinberg said he also reduced total compensation at AIG, GMAC, and Chrysler Financial by about 15 percent compared with the pay these executives received in 2009; GM and Chrysler were excluded from this total due to their bankruptcy restructurings in 2009. At AIG, Feinberg said he succeeded in making sure that the executives at the company’s Financial Products unit repaid the full $45 million they pledged to give back from previous bonuses.
Feinberg said his rulings also reaffirm the principles announced last year to bring executive pay into line with “long-term value creation and financial stability,” including: a majority of compensation must be paid in stock that is held for the long term; and incentives may be paid only if objective performance results are achieved, and must be subject to a clawback if results prove illusory. Feinberg also has extended his $25,000 cap on executive perks and continued to freeze supplemental retirement plans.
In addition, Feinberg issued a letter to all 419 companies that received TARP assistance prior to Feb. 17, 2009, requesting that they respond within 30 days and provide information on compensation paid to their “top 25” highest-paid executives prior to that date. As authorized by the American Reinvestment and Recovery Act of 2009, Feinberg said he will review those payments to determine “whether any payment was contrary to the public interest” and whether “to negotiate reimbursements to the federal government.”
Meanwhile, as I blogged recently, the AFL-CIO is leading a charge to push shareholders to vote against pay packages at financial institutions this proxy season, leveraging the say-on-pay items on their annual meeting agendas.
– Broc Romanek, CompensationStandards.com
Even though executive compensation has been very much in the news, it seems like the focus on perks has subsided – or at least, it is not among the top issues in the pay area compared to past years. But recently, there has been a spate of perks news, including this SEC action charging three former senior executives and a former director of infoUSA and infoGROUP for their roles in an alleged scheme in which the CEO funneled illegal compensation to himself in the form of perks worth millions of dollars.
To me, the most noteworthy aspect of the SEC’s action is that it is going after the audit committee chair and appears to have applied a pretty low standard in terms of the audit chair’s responsibility for what went wrong (here are some thoughts by Keith Higgins on the topic; and Kevin LaCroix has commentary too). Note that the last time the SEC went after an audit committee chair was the Chancellor Corp. case back in 2003.
And Paul Hodgson recently wrote this – in TheCorporateLibrary Blog – in a piece entitled “Country Club Membership Perk Still Going Strong”:
But, although still provided to only a small minority of CEOs, the payment of membership fees for country clubs, city clubs, sports clubs et al still appears to be holding up with just under 400 CEOs receiving the perk in both of the most recent 12-month periods.
There’s been some shift, with some companies terminating the benefit, but on the other hand many companies have introduced it. Some of this is due to the disclosure threshold. Initiation fees of up to $100,000 in one year followed by annual membership of less than $10,000 (the SEC disclosure threshold) the next might cause some data just to disappear.
– Broc Romanek, CompensationStandards.com
Below is an excerpt from this Akin Gump memo, based on their survey on recent risk oversight disclosures:
To assess the types of disclosures that companies are providing about the board’s role in overseeing risk management, we reviewed preliminary or final proxy statements filed by 50 randomly selected S&P 500 companies since the February 28, 2010 effective date of the new disclosure rules. The results of our survey, categorized by the various types of disclosures, are set forth below.
Separate Section Devoted to Risk Oversight
Ninety-two percent of surveyed companies had a designated section in their proxy statements for risk oversight. This section typically stood alone, but sometimes was combined with the section addressing board leadership structure. Typically, the section was located in the portion of the proxy statement discussing corporate governance matters and was often titled “The Board’s Role in Risk Oversight” (or words of similar effect).
Statements about Management’s Primary Risk Management Responsibility
Twenty-four percent of surveyed companies included a statement to the effect that management is primarily responsible for risk management, while the board’s role is one of oversight.
Sample disclosures are set forth below:
Sunoco, Inc.: “Management of risk is the direct responsibility of the Company’s CEO and the senior leadership team. The Board has oversight responsibility, focusing on the adequacy of the Company’s enterprise risk management and risk mitigation processes.”
Peabody Energy Corporation: “Management is responsible for the day-to-day management of the risks we face, while the Board, as a whole and through its committees, has responsibility for the oversight of risk management.”
AT&T Inc.: “Assessing and managing risk is the responsibility of the management of AT&T. The Board of Directors oversees and reviews certain aspects of the Company’s risk management efforts.”
Strategic Direction
Forty-two percent of surveyed companies explained that oversight of risk management was an important or integral part of the board’s role in the strategic planning process.
Several illustrative examples are set forth below:
Valero Energy Corporation: “The Board also believes that risk management is an integral part of Valero’s annual strategic planning process, which addresses, among other things, the risks and opportunities facing Valero.”
Stryker Corporation: “A fundamental part of setting the Company’s business strategy is the assessment of the risks the Company faces and how they are managed.”
Bristol-Myers Squibb Company: “Our Board meets regularly to discuss the strategic direction and the issues and opportunities facing our company in light of trends and developments in the biopharmaceutical industry and general business environment. Our Board has been instrumental in determining our strategy to combine the best of biotechnology with pharmaceuticals to become a best-in-class next generation biopharmaceutical company. Throughout the year, our Board provides guidance to management regarding our strategy and helps to refine our operating plans to implement our strategy. Each year, typically during the second quarter, the Board holds an extensive meeting with senior management dedicated to discussing and reviewing our long-term operating plans and overall corporate strategy. A discussion of key risks to the plans and strategy as well as risk mitigation plans and activities is led by the Chairman and Chief Executive Officer as part of the meeting. The involvement of the Board in setting our business strategy is critical to the determination of the types and appropriate levels of risk undertaken by the company.”
Enterprise Risk Management
Fifty-four percent of surveyed companies expressly used the term “enterprise risk management.”
Sample disclosures are set forth below:
American Express Company: “The Company relies on its comprehensive enterprise risk management process (ERM) to aggregate, monitor, measure and manage risks. The ERM approach is designed to enable the Board of Directors to establish a mutual understanding with management of the effectiveness of the Company’s risk management practices and capabilities, to review the Company’s risk exposure and to elevate certain key risks for discussion at the Board level. The Company’s ERM program is overseen by its Chief Risk Officer who is an executive officer of the Company and a member of the Company’s most senior management.”
Express Scripts, Inc.: “In order to assist the board of directors in overseeing our risk management, we use enterprise risk management (“ERM”), a company-wide initiative that involves the board of directors, management and other personnel in an integrated effort to identify, assess and manage risks that may affect our ability to execute on our corporate strategy and fulfill our business objectives. These activities entail the identification, prioritization and assessment of a broad range of risks (e.g., financial, operational, business, reputational, governance and managerial), and the formulation of plans to manage these risks or mitigate their effects.”
Primary Responsibility at Board vs. Committee Level
Eight percent of surveyed companies stated that the primary responsibility for risk management oversight rests with the entire board, 34 percent of surveyed companies stated that primary responsibility is vested in one or more committees and 52 percent reflected that both the board and various committees have responsibility for risk management oversight.
Of those companies where primary responsibility is vested in one or more committees, 65 percent (22 percent of all surveyed companies) identified their audit committees as having primary responsibility, 18 percent had a separate committee expressly dedicated to risk management (all of these companies were in the financial services or insurance industries) and 18 percent stated that various board committees were responsible for overseeing the management of risks relating to the committee’s primary areas of responsibility.
Regardless of where primary responsibility rested, over half of the surveyed companies included descriptions of the specific types of risks that various committees of the board oversee.
Compensation Committee Responsibility for Determining Compensation Risk Disclosure
As discussed above, the new SEC disclosure rules require companies to discuss their compensation policies and practices for employees as they relate to risk management practices and risk-taking incentives if the risks arising from those policies and practices are reasonably likely to have a material adverse effect on the company. The new rules do not require a company to include any disclosure if the company has determined that the risks arising from its compensation policies and practices are not reasonably likely to have a material adverse effect.
RiskMetrics has announced that it does not take a position regarding whether companies should disclose their risk determinations where the company has determined that a material adverse effect is not reasonably likely. RiskMetrics does, however, advise companies “at a minimum” to discuss their process in reaching a determination and any mitigating features (such as clawbacks or bonus banks) that they have already adopted. RiskMetrics views this disclosure “as an opportunity for communication, not simply compliance” and expects that shareholders will be looking for a reasonably substantive discussion of the board’s process for determining whether the company’s incentive pay programs motivate inappropriate risk-taking and what they are doing to mitigate that risk.
Our survey shows that many companies elected to provide disclosure about their compensation risk determinations and the process the company undertook to make the determination.
– Compensation Committee Responsibility to Assess Risks. Sixty-eight percent of surveyed companies stated that their compensation committee was charged with either determining that the compensation policies and practices do not encourage excessive risk-taking or determining whether the risks arising from such policies and practices are reasonably likely to have a material adverse effect on the company.
– Disclosure of Determination. Seventy-four percent of surveyed companies expressed a determination that their compensation policies and practices either did not encourage excessive or unnecessary risk-taking (or used words of similar effect) or were not reasonably likely to result in a material adverse effect on the company. Of the 37 companies that disclosed a determination, 17 of them (46 percent) phrased their conclusion in terms of the absence of a material adverse effect, 15 companies (41 percent) expressed their conclusion in terms of not encouraging excessive or unnecessary risk-taking and the remaining companies phrased their conclusions in terms of a determination of an “appropriate level of risk-taking” or an “effective balance of risk and reward” or words of similar effect.
– Who Made the Determination. Companies varied widely as to who made the risk determination regarding compensation programs and policies. Twenty-three companies (62 percent of those disclosing the determination) stated that the determination was made by the compensation committee, 10 companies (27 percent of those disclosing the determination) phrased the determination as being made by the company or “we” and, in the remaining instances, “management” made the determinations.
– Process for Determination. Sixty-five percent of those companies disclosing a risk determination provided disclosure of the process that the company or compensation committee undertook to make the determination.
– Location of Determination. Companies varied widely on the location of the disclosure in their proxy statements. Almost half of the companies included the disclosure in Compensation Discussion and Analysis. Other popular disclosure locations included under a separate heading in the corporate governance section, in the discussion of board oversight of risk or under a separate heading near discussions of compensation committee interlocks and compensation consultants.
– Risk-Mitigating Features. Regardless of whether a company disclosed a risk determination with respect to its compensation policies and practices, almost three-quarters of the surveyed companies discussed various features of their compensation programs and policies that are designed to mitigate excessive risk-taking.
The following excerpt from Kraft Foods’ proxy statement discusses the compensation committee’s process in evaluating compensation risks, risk-mitigating features contained in the company’s compensation policies and practices and the conclusion of the compensation committee with respect to such risks:
“Analysis of Risk in the Compensation Architecture
In 2009, the Human Resources and Compensation Committee evaluated the current risk profile of our executive and broad-based compensation programs. In its evaluation, the Human Resources and Compensation Committee reviewed the executive compensation structure and noted numerous ways in which risk is effectively managed or mitigated. This evaluation covered a wide range of practices and policies including: the balance of corporate and business unit weighting in incentive plans, the balanced mix between short-term and long-term incentives, caps on incentives, use of multiple performance measures, discretion on individual awards, a portfolio of long-term incentives, use of stock ownership guidelines, and the existence of anti-hedging and clawback policies. In addition, the Human Resources and Compensation Committee analyzed the overall enterprise risks and how compensation programs impacted individual behavior that could exacerbate these enterprise risks. The Human Resources and Compensation Committee collaborated with the Audit Committee in this analysis. Additionally, we engaged an outside independent consultant to review our incentive plans (executive and broad-based) to determine if any practices might encourage excessive risk taking on the part of senior executives. The outside consultant noted several of the practices of our incentive plans (executive and broad-based) that mitigate risk, including the use of multiple measures in our annual and long-term incentive plans, Human Resources and Compensation Committee discretion in payment of incentives in the executive plans, use of multiple types of long-term incentives, payment caps, significant stock ownership guidelines, and our recoupment and anti-hedging policies. In light of these analyses, the Human Resources and Compensation Committee believes that the architecture of Kraft Foods’ compensation programs (executive and broad-based) provide multiple, effective safeguards to protect against undue risk.”
Reporting Processes
As previously discussed, the SEC suggested in the adopting release that, where relevant, companies disclose in their proxy statements whether the officers responsible for risk management report directly to the board or to a board committee or how information is otherwise received from such persons. Thirty-eight percent of surveyed companies identified their principal risk officer or officers by title and disclosed that the officer or officers reported directly to the board or a board committee.
Frequency of Entire Board Review
One-third of surveyed companies reported that the full board reviews risk management at least annually, 22 percent stated that the full board reviews risk management issues “periodically” or “regularly” and a few companies reported quarterly or semiannual reviews by the entire board.
Length of Disclosure
Most companies devoted at least two or three paragraphs to their discussion of the board’s role in risk oversight. The average length of the disclosures was 10 sentences, with the length of the discussion ranging from a high of 27 sentences to a low of three sentences. These numbers do not reflect any specific discussions of risks relating to compensation policies and practices or factors mitigating those risks.
Effect of Board’s Role in Risk Oversight on Leadership Structure
Only 20 percent of the surveyed companies specifically addressed the effect of the board’s role in risk oversight on the board’s leadership structure. Instead, most companies simply stressed in the discussion of their leadership structure the role that a lead director or the independent directors play in providing strong, effective oversight of management.
Set forth below are disclosures by several companies that expressly addressed the matter:
IBM: “The Board’s role in risk oversight of the Company is consistent with the Company’s leadership structure, with the CEO and other members of senior management having responsibility for assessing and managing the Company’s risk exposure, and the Board and its committees providing oversight in connection with those efforts.”
Teco Energy: “We believe that our Board leadership structure promotes effective oversight of the company’s risk management for the same reasons that we believe the structure is most effective for our company in general, that is, by providing unified leadership through a single person, while allowing for input from our independent Board members, all of whom are fully engaged in Board deliberations and decisions.”
The Coca-Cola Company: “The Company believes that its leadership structure, discussed in detail [above], supports the risk oversight function of the Board. While the Company has a combined Chairman of the Board and Chief Executive Officer, strong Directors chair the various committees involved in risk oversight, there is open communication between management and Directors, and all Directors are actively involved in the risk oversight function.”
– Ted Allen, RiskMetrics
Here is something I recently blogged: At Waddell & Reed Financial’s annual meeting on Wednesday, investors will consider a shareholder proposal that seeks an annual advisory vote on executive compensation.
The Kansas-based investment services company has taken the unusual step of including a special solicitation with its proxy statement to oppose the proposal. The resolution is sponsored by Boston Common Asset Management, the California State Teachers’ Retirement System, and Calvert Asset Management. In a March 5 letter to shareholders, CEO Henry Herrmann warned that adoption of this reform would put the company “at a serious competitive disadvantage and could erode the value of your investment.”
While more than 60 U.S. issuers, including JPMorgan Chase, Wells Fargo, and Goldman Sachs, have agreed to hold voluntary pay votes, Waddell & Reed argued that advisory votes would lead to a “loss of executive talent” and would not result in “meaningful dialogue with shareholders.”
Last year, the company initially reported that a “say on pay” proposal received majority support; the company later petitioned a Delaware judge for permission to count additional votes, which pushed the support level below 50 percent. Pay vote proponents have been surprised by the company’s efforts to oppose this resolution.
“Waddell & Reed is one of the outliers in its aggressive campaign against this important reform, and that concerns us as shareowners,” said Dawn Wolfe, associate director of ESG Research at Boston Common.
Here is an update since I wrote the above: According to Dawn Wolfe of Boston Common Asset Management, Waddell & Reed did not disclose preliminary vote results at the meeting or indicate that the proposal passed or failed. Most companies usually indicate whether a proposal passed or failed at the meeting. Under the new SEC disclosure rules, Waddell had to disclose results within 4 business days in a Form 8-K, which it did on Friday.
– Fred Whittlesey, Hay Group
Following up on Broc’s recent blog on semiannual bonuses, we should remember that a lot of technology companies have had shorter incentive compensation cycles for many years and the practice appears “indefinite.” This is a fairly common practice for technology companies with roots going back to the early days of Silicon Valley culture, the quarterly “cash profit sharing” plans. The founders would gather all employees together at the end of every quarter in the employee cafeteria and pass out the quarterly bonus checks one by one. The system has matured a bit over time but the quarterly and semi-annual basis remained.
So, while this is “news” for some of the traditional industries, it’s old news in the tech sector. (My colleague in our Retail Sector practice notes that semiannual incentive plans have been common in that sector as well, due to the spring/fall cycles for many retailers.)
Messrs. Feinberg and Bebchuck should take a total pay perspective and realize that in some companies the same employees who are purportedly incented to “cut corners” also have a large portion of their pay in stock-based compensation, more so than executives in some companies. There might even be a correlation between these “awful” compensation practices and the high levels of innovation that have brought us the iPod, iPhone, Amazon.com, Google, broadband internet access, wifi, Twitter, Facebook, LinkedIn…the list goes on.
Just a little history for context in this discussion.