1. Clawbacks
2. Pay vs. Performance Disclosures
3. CD&A Enhancements & Trends
4. Shareholder Proposals
5. Proxy Advisor & Investor Policy Updates
6. Perquisites Disclosure
7. ESG Metrics & Disclosures
8. Say-on-Pay & Equity Plan Trends, Showing “Responsiveness” to Low Votes
9. Status of Related Rulemaking
This webcast was a doozy – they spoke for over 90 minutes and covered quite a lot of ground. You will definitely want to check this out as we enter the proxy season, and the transcript is a low-time-and-effort way to get up to speed.
We’ve been getting a ton of queries about our 2024 Proxy Disclosure & 21st Annual Executive Compensation Conferences – and one of the most frequently asked question is whether we’ll be back in person this year. The answer is yes! Join us for these timely conferences taking place in San Francisco on October 14-15, 2024, or join us virtually (we will continue to offer a “hybrid” format).
The SEC’s regulatory agenda continues in 2024 amidst all types of uncertainty. We are truly “living in interesting times.” Make sure you are getting the practical guidance and expert knowledge you need (and expect!) from our conferences as rules, regulations and procedures continue to evolve. We will be posting the conference agendas and announcing the speakers soon, so stay tuned.
You can register now by one of two methods: by visiting our online store or by calling us at 800-737-1271. Sign up now for our early bird in person Single Attendee Price of $1,750, which is discounted from the regular $2,195 rate!
Meredith & I have blogged many times about the alluring concept of simplifying executive pay. Wouldn’t we all appreciate a bit less complexity in our lives? In this new 14-minute episode of the “Pay & Proxy Podcast,” Meredith explored this topic with Ani Huang, who is the CEO of the Center On Executive Compensation. Meredith & Ani discussed:
1. How did pay design get so complex?
2. Calls for “radical simplification” of pay design from prominent institutional investors
3. A real-world example of a company that has sought to simplify its pay programs
4. Key questions to ask when exploring simplification
Perks are a sensitive topic for investors – and as Meredith blogged last week, they may take you to court over the board approvals. In addition, the SEC’s Enforcement Division frequently investigates whether they are properly disclosed. A recent Bloomberg Law article from Jones Day identifies which types of perquisites are most likely to draw regulatory scrutiny. Here’s an excerpt:
Personal travel is the perk most frequently flagged by the SEC, appearing in all but two cases in the last 10 years. Most of those cases involved travel on commercial or chartered aircraft for vacations, sporting events, or other personal activities. Personal use of a company owned or leased aircraft came up in seven cases.
In those situations, the SEC requires a company to report the “aggregate incremental cost” of the executive’s personal use of the aircraft—that is, the direct operating cost attributable to the personal travel. In one case, the SEC faulted a company for disclosing the taxable value of its executives’ personal use of company aircraft, rather than the aggregate incremental cost — a much higher figure.
Several cases involved undisclosed payments for family and friends to accompany an executive to business events, such as a board meeting to which directors’ spouses were invited or to customer and industry receptions.
Not all the travel in these cases had an obvious personal purpose. In one case, a company reimbursed its CEO for flights to attend entertainment events sponsored by a company supplier. But in the SEC’s view, merely having a connection to the company’s business wasn’t enough to justify nondisclosure, because the travel wasn’t integrally and directly related to the executive’s duties.
The article says that undisclosed payments for personal expenses, personal entertainment, personal transportation (e.g., company vehicles), charitable donations, professional services, and housing expenses, round out the most common enforcement topics. The article then gives several pointers to mitigate risk. Check out our “Perks” Practice Area for our treatise chapter and other practical resources that can help you navigate this topic.
Given recent legal developments, this perspective from Shearman & Sterling encourages companies to consider a wholesale review of existing forms, including:
– offer letters and employment agreements
– separation agreements
– restrictive covenant agreements (including proprietary information and confidentiality agreements)
– equity award agreements
– employee handbooks
Many companies were already taking a fresh look at some of these forms in light of 2023 enforcement actions focused on language that potentially stifles corporate whistleblowing, but the alert highlights a number of other developments that should be considered for updates. Those include:
– Restrictions, notification requirements, outright bans and other regulator attention on non-compete clauses and other restrictive covenants that could operate as non-competes
– Developments impacting confidentiality provisions, including NLRB decisions and changes in state law regarding non-disclosure and non-disparagement covenants
– Potential interest in expanding definitions of cause to include behaviors causing reputational harm
– State laws impacting social media policies
– Separation disclosure considerations and timing requirements for a valid release
If your forms haven’t been “refreshed” in a while, it sounds like it’s time to get them back in front of your employment lawyers!
As compensation committees consider company performance and payout amounts under incentive compensation plans, the question of whether unplanned, discretionary adjustments should be made to address unusual or one-time occurrences will arise for some. Institutional investors often take issue with these adjustments when they result in greater payouts to executives, particularly if the company fails to articulate a strong rationale in its proxy materials.
This Semler Brossy insight reviews recent adjustment practices by Fortune 100 companies specifically focused on the type of discretionary adjustments met with skepticism from institutional investors — those made outside of a pre-defined metric (for example, further adjustments beyond those in the definition of an Adjusted EBITDA metric). Looking at the 2023 proxy statements of 92 Fortune 100 companies, Semler Brossy found that very few made discretionary, upward adjustments:
We found that 22 companies (approximately 24 percent) adjusted incentive payouts or targets. Of those companies, 10 made changes only to Annual Incentive Plans (AIP), 10 adjusted only Long-Term Incentive (LTI) plans, and 2 made changes to both AIP and LTI plans. Of these, the majority (14) were downward adjustments, which tend to receive minimal scrutiny from investors.
Of the eight companies (approximately 9 percent) that made upward adjustments to incentives (six of 12 LTI adjustments, two of 12 AIP adjustments), all displayed a positive total shareholder return (TSR) in the year of adjustment. This is an important distinction: upward adjustments are received more positively when they align with the shareholder experience (e.g., positive TSR) and business outcomes. Additionally, upward adjustments typically were made due to factors outside management’s control such as macroeconomic factors (COVID-19, Ukraine conflict) or tax and accounting regulatory changes. Commentary from ISS on these upward adjustments was generally minimal in most cases (none received “Against” recommendations).
The main factors driving adjustments were “macroeconomic factors, M&A activity, pay vs. performance misalignment, changes to company long-term strategy, and tax-related regulatory changes,” while adjustments were not made for “changes in market supply and demand or competitive landscape, non-tax and accounting regulatory changes, or changes in interest rates.” The insight notes other circumstances that commonly result in adjustment, including “restructuring costs, renegotiation of contract terms, foreign currency fluctuations, asset impairments or write-offs, litigation costs, accelerated items, and impacts from natural disasters.”
In terms of navigating and communicating adjustments to lessen or manage potential criticism, the insight notes the importance of considering upfront whether the adjustments are aligned with the shareholder experience and business outcomes, considering whether the adjustments relate to factors outside management’s control, and, in all cases, clearly articulating a strong rationale. Preferably, companies would set a framework for adjustments before a performance cycle begins and then “have consistent and symmetrical application of the pre-defined guidelines” so that the adjustments occur in both directions and don’t inherently favor management.
As personal use of corporate jets is on the rise, scrutiny continues apace. The latest legal challenge involving personal aircraft use & disclosures comes in the form of a derivative suit against Skechers alleging breach of the duty of oversight, waste, breach of contract, and disclosure violations. In Conte v. Greenberg (Del. Ch.; 2/24), Vice Chancellor Zurn granted the defendants’ motions to dismiss on the basis that plaintiff failed to show demand futility.
Plaintiff argued that at one point, “more than 50% of each airplane’s use was for personal travel” by defendants, the company’s CEO/chairman and his two sons, who were also company officers and who collectively controlled 55% of the voting power of the company, and their family members. Plaintiff also argued that “the higher ratio of personal use caused the Company to lose certain favorable tax treatment.” Alleging that the Skechers board failed to impose meaningful restraints on personal use of corporate jets, plaintiff pointed to the compensation committee’s request that management make recommendations for a policy setting reasonable limits on such personal use although no such recommendations were ever presented.
But the opinion concluded that none of the compensation committee members faced a substantial likelihood of liability on any of the claims. Concerning the Caremark claims for inadequate oversight, VC Zurn declined to infer bad faith based on the committee’s inaction since “the magnitude or severity of the risk decreases, more facts are required to support an inference of bad faith.”
Plaintiff has not met his significant burden of pleading that the allegedly excessive compensation was such that a decision not to address it with a formal policy, alone, supports an inference of bad faith. That risk was contained; it was limited to the use of two corporate assets by a discrete group of individuals, as compared to a widespread operational deficiency. The Company was not violating an internal policy or any regulations, which can support an inference of bad faith.
The allegedly excessive personal airplane use was also of a relatively minimal magnitude. In 2021, Skechers’ gross profit exceeded $3 billion and its operating expenses totaled about $2.5 billion. The Management Defendants’ airplane perquisite compensation totaled about $5.3 million over four years; with one exception, it represented between about 0.5% and 4.9% of each of the Management Defendants’ annual compensation during that time. The tax gross-up payments—the only aspect of the airplane perquisite compensation FW Cook identified as problematic—represent even less of that compensation: about $1.6 million over the same period. On average, the tax gross-up payments made up less than 1% of the executives’ total compensation from 2018 through 2021.
While this is seemingly a helpful case for corporates, Tulane Law Prof Ann Lipton pointed out that the opinion “is striking for what it didn’t do” — that is, it didn’t dismiss the Caremark claim “on the grounds that Caremark is limited to violations of law. Instead, [VC Zurn] simply held that under the particular facts of this case, the complaint did not allege that the directors’ failures to act were so egregious as to suggest bad faith.” That, Ann points out, could be “the sound of a potential expansion of Caremark.” TBD.
Recent research from WTW covering more than 1,000 companies (including the S&P 500, FTSE 100, TSX 60, and major European and Asia Pacific indices) found that 81% of those surveyed include ESG metrics in incentive plans — up from 75% of surveyed companies in 2022. Not surprisingly, the practice is more prevalent in Europe, with 93% of surveyed European companies using ESG metrics, compared to 76% in the U.S. In the U.S. and Canada, use of ESG metrics in LTI plans specifically has more than tripled since 2019.
Human capital metrics are most prevalent, with common metrics including employee engagement, safety, succession & talent management, and management & workforce representation. That said, environmental and climate metrics are becoming increasingly common, with 80% of companies using them in Europe. In the U.S., prevalence has jumped from 12% in 2020 to 44% in 2023.
The announcement notes that companies need to focus on “identifying and measuring individual elements of ESG most impactful to businesses” given institutional investor and regulatory pressure. During our recent webcast, “The Latest: Your Upcoming Proxy Disclosures,” Gibson Dunn’s Ron Mueller noted that we’ve seen some shareholder proposals this proxy season asking companies to eliminate GHG reduction metrics as performance measures. We have yet to see whether this slows, halts or reverses the recent growth in the use of climate metrics.
Meredith blogged yesterday on TheCorporateCounsel.net about the NYSE’s annual letter to listed companies. The letter covers a point on clawback policies that we have also written about on this blog. Here’s what Meredith wrote about the NYSE reminder on this point (visit our “Clawbacks” Practice Area for more on this topic):
In response to listed company inquiries, NYSE’s annual Listed Company Compliance Guidance letter also includes a reminder to debt-only issuers that they, too, are required to adopt a clawback policy. Here’s an excerpt:
In adopting Rule 10D-1, […] the SEC did not provide any such exemption for issuers whose only listed securities are debt securities, including issuers of debt securities guaranteed by a parent company whose common equity securities are typically listed on the Exchange. In response to inquiries from listed companies and their advisors, NYSE Regulation has sought clarification from the SEC regarding the treatment of debt-only issuers under Rule 10D-1 and Section 303A.14.
As a result of those conversations, NYSE Regulation confirms that all debt only issuers listed on the NYSE are required to adopt a Recovery Policy, including, without limitation, those with guarantees from listed parents and those that are exempt from disclosure requirements pursuant to Exchange Act Rule 12h-5. To the extent an issuer has not put in place relevant procedures, it is out of compliance with NYSE rules.
This Davis Polk memo from a few weeks ago has more on this and explains the mechanics (or lack thereof) for some debt-only issuers.
A subsidiary of a public company (including an operating company or finance subsidiary) can itself be the issuer of debt securities or a guarantor of debt securities issued by its parent company. […] Under SEC rules, where the parent guarantees the debt, the subsidiary is exempt from ongoing SEC reporting (in accordance with Rule 12h-5 under the Securities Exchange Act of 1934), and the parent reporting company is not required to provide separate financial statements to the SEC for the subsidiary (in accordance with the exemption under Rule 3-10 of Regulation S-X). […] Subsidiary securities are sometimes listed on an exchange.
Subsidiaries with listed securities should adopt a clawback policy to comply with the listing standards. The good news is that under both NYSE and Nasdaq listing standards, if the subsidiary is not itself subject to SEC financial reporting requirements, there should be no events that would trigger recovery of compensation under the policy.
This is because under the clawback rules, recovery of compensation is only triggered by a financial restatement that the issuer is required to prepare due to the issuer’s (i.e., the subsidiary’s) material noncompliance with financial reporting requirements under the U.S. federal securities laws. If the subsidiary issuer is not subject to such financial reporting requirements, then it should never be required to prepare a restatement due to material noncompliance with such financial reporting requirements.
The memo goes on to say that the clawback policy “could simply state that the parent company’s clawback policy applies to the subsidiary” and even includes a sample resolution that could be adapted for this purpose as an annex. Finally, it clarifies that, for any such subsidiary that does not file an annual report on Form 10-K, Form 20-F or Form 40-F, there would be no need to file the clawback policy as an exhibit.
Vanguard recently released its updated 2024 proxy voting policy. The policy is effective beginning this month and applies to Vanguard-advised funds.
There were no significant substantive changes to the asset manager’s case-by-case approach to compensation-related ballot items (including say-on-pay), but it has reframed the factors that it considers.
For example, the policies say that Vanguard considers 3-year TSR as part of its consideration of “alignment of pay & performance.” The policies also expand on what the funds look at for “compensation plan structure” – and they now expressly state that Vanguard considers “governance” as well. Here’s an excerpt:
– Alignment of pay and performance. The funds look for evidence of clear alignment between pay outcomes and company performance. This is mainly assessed through alignment of incentive targets with corporate strategy and analysis of three-year total shareholder return and realized pay over the same period vs. a relevant set of peer companies. If there are concerns that pay and performance are not aligned, a fund may vote against a pay-related proposal.
– Compensation plan structure. Plan structures should be aligned with the company’s stated longterm strategy and should support pay-for-performance alignment. Where a plan includes structural issues which the funds determine have led to, or could in the future lead to, pay-for-performance misalignment, a fund may vote against a pay-related proposal. For compensation structures which are not typical of a market, the Vanguard-advised funds look for specific disclosure demonstrating how the structure supports long-term value creation for shareholders.
– Governance of compensation plans. The funds look for boards to have a clear strategy and philosophy on executive pay, utilize robust processes to evaluate and evolve executive pay plans, and implement executive pay plans responsive to shareholder feedback over time. The funds also look for boards to explain these matters to shareholders via company disclosures. Where pay-related proposals consistently receive low support, the funds look for boards to demonstrate responsiveness to shareholder concerns.
The policy document goes on to list practices that raise high & moderate concern, which are unchanged from last year. But if you find that you are engaged in any of these practices, all is not lost. New this year, the policy also acknowledges:
Where these warning signs exist, elements of strong compensation governance, such as board responsiveness and disclosure that includes data, rationale, and alternatives considered, can sometimes serve to mitigate these concerns.
Keep in mind that there may be other policies at play if your company is in Vanuard’s portfolio. Wellington makes voting decisions for some Vanguard funds and also released its policies (see the full policies and a summary of changes on Wellington’s policy portal). And of course you now also need to keep track of policies that apply when investors are using “proxy voting choice.”