Yesterday, SEC Chair Mary Schapiro delivered a speech at PLI’s annual Securities Law Institute that summarized the current state of proposals that are Corp-Fin related, including identifying the areas that the SEC’s upcoming concept release on proxy plumbing will address. She indicated that the proxy access proposal would be considered by the Commission in early 2010 (which is not new news, as noted in this blog).
But she did not indicate when the proxy disclosure enhancements proposals would be adopted (a set of proposals that includes the proposed executive compensation rules). At this point, it’s clear that these rules will not be adopted on November 9th – as widely rumored for some time – and it’s unknown when they will be adopted or if they would still apply to the upcoming proxy season even though time is running short to modify D&O questionnaires to capture new information. Corp Fin Director Meredith Cross indicated on a panel that these rules might indeed apply to the 2010 proxy season, but as I understand it, her statement wasn’t definitive so anything can happen. [Don’t forget our upcoming TheCorporateCounsel.net webcast: “Ask the Experts: Prepping for a Wild Proxy Season.”]
And even harder for many companies: timing compensation committee meetings (and other board meetings) to deal with any new rules before the year is out. Numerous members have been emailing me asking if – and when – this is gonna happen…
Survey: Will Your Compensation Committee Hold a Special Meeting if the SEC Adopts New Rules?
Here is an anonymous survey to gather information about what companies are doing to prepare for the possibility of new SEC rules that apply to the upcoming proxy season:
Companies have continued to tune down their use of stock options, driven by the need to minimize the often significant financial impact of option expensing and equity dilution. There is also the very real need to better align executive compensation with sustained growth in shareholder value. Here are the charts that go along with this blog.
The most common approach to the options issue is reduction of option grants, elimination of broad-based plans, amendment or elimination of employee stock purchase plans, and/or adjustment of the vesting period or other terms of existing plans. While stock options should, and will remain a key element of executive compensation, the multi-million dollar “mega-grants” that fueled the biggest executive pay packages in recent history will continue to dwindle.
In place of stock options, companies are tuning up the use of performance-based restricted stock and restricted stock units (RSUs), as well as cash-based performance shares and performance units. With pure time-vested awards widely criticized by shareholders and governance watchdogs as “equity giveaways”, well designed long-term incentive (LTI) plans are based on meeting tangible, clearly defined, and measurable financial and/or operational goals that are ultimately linked to boosting overall corporate performance – rather than just share price alone.
The new accounting rules support this new trend, permitting companies considerable creativity and flexibility and in combining the use of different LTI vehicles, including cash-based alternatives such as stock appreciation rights (SARs) that pay out the difference between the strike price and the fair market value of the underlying shares. Even better, the optics of these performance-based plans look great to the very public eyes of shareholders and the media. We still have to be thoughtful though, and need to take into account the reduced risk of full-value plans such as restricted stock, as compared to stock options or other LTI vehicles, and need to carefully consider the standards and methodologies used by different institutional shareholder and governance ratings services when assessing new LTI plans.
Some companies, particularly start-ups, pre-IPO, and other high-growth companies, continue to conclude that the usefulness of stock options in attracting, retaining and motivating essential talent is worth swallowing the charge to earnings. Other companies use the advent of option expensing as the rationale for continuing to curtail or eliminate stock option participation, particularly among lower level employees. Either way, companies should ensure that, in analyzing the impact of accounting considerations and investor pressures, business and human resource considerations do not take a back seat.
As companies focus LTI plans on nuts-and-bolts business fundamentals that drive sustained growth rather than just market performance, short-term (annual) incentive (STI) plans are assuming a much more prominent role. Revised STI metrics reward executives for meeting specific tactical (quarter-by-quarter) targets, such as business unit or departmental performance goals that represent milestones that are key to the achievement of multi-year strategic goals.
For example, a performance-based long-term incentive plan pegged to three-year return on invested capital might be supported by an annual plan with related goals such as increasing revenue, lowering expenses, restructuring debt or developing new business opportunities.
Opportunities and leverage in both STI and LTI plans are also being customized to an organization’s business strategy and financial situation. For instance, rather than adopting the traditional “80/120” leverage design, payout thresholds might be lowered when budgets are “stretched” and difficult, or raised when performance is more certain. Likewise, some companies have chosen to increase upside opportunities to make rewards for incremental performance more meaningful.
– Test Your Access Now: To ensure you don’t have any technical snafus for the Conferences, please test your access today (this test is only available this week) by using the ID and password that you received for the Conferences.
When you test your access, you can test our CLE Tracker as well as input your bar numbers, etc. You also will be able to input your bar numbers anytime during the days of the Conferences too (remember that you will need to click on the periodic “prompts” all throughout each Conference to earn credit). If you are experiencing problems, follow these webcast troubleshooting tips.
– How to Access the Conference: To access the webcast, use the ID/password that you received in an email from us to get in via a prominent Conference link that will be on the home page of TheCorporateCounsel.net on the day of the Conference; this ID/password is separate and different from any you use for our sites. Note that times posted are in Pacific Time; archives will be available within 24 hours after the live event ends.
– How to Earn CLE Online: Read the “FAQs about Earning CLE” carefully to see if it is possible for you to earn CLE for watching online – and if so, how to accomplish that. Both Conferences will be available for CLE credit in most states (but hours for each state vary; see which state and hours in List: CLE Credits).
– Don’t Share Your ID/Password: We remind you that sharing your ID and password with anyone is stealing from us and a crime.
For those attending in San Francisco:
– Check-In Times: When you come to the San Francisco Hilton – located at 333 O’Farrell Street – you can check in for the Conferences (i.e. pick up your Conference materials, etc.) starting at 7:30 am on Monday, November 9th until the last panel on Tuesday. Continental breakfast is available on Monday from 7:30 to 8:30 am – and on Tuesday from 7:00 to 8:00 am.
– Monday Night Reception: We hope you can join us after the Conference on Monday for our Opening Reception – to be held after the last panel ends – from 6:00 to 8:00 pm. The opening reception will be held in the Exhibit Hall.
You Can Still Attend Via Video Webcast: Due to unprecedented demand and limited space at our conference hotel for the Conferences, we were forced to end Conference Registrations for those attending live in San Francisco. It’s sold out! But note in the alternative, you can still attend by video webcast. You automatically get to attend both Conferences for the price of one: Register now.
We just launched a survey on “Retention Strategies during Uncertain Economic Conditions” that we are using the survey to research what companies have done or expect to do to keep top talent as the economy shows signs of recovery. We know some boards are concerned that if the recovery is uneven, they may lose good people to industries that are coming out of the doldrums more rapidly. We address a number of possible techniques ranging from merit budgets, to option exchanges to more flexible work arrangements.
Last year, we got some great results, as companies indicated they were not likely to change incentive plan metrics or reprice stock options (taking “a deal is a deal” approach). I think boards need another reminder this year. We expect a number of companies will have merit budgets this year and will likely pay bonuses as means of retaining employees. Please take a moment to participate in the survey.
As Susan Wolf mentioned would happen during her podcast regarding Schering-Plough’s experiment of surveying its shareholders about its pay practices ahead of its annual meeting last year, the company issued a report yesterday regarding the survey responses it received. We have posted a copy of this report in our “Say-on-Pay” Practice Area.
As an aside, note that Pfizer is the second company to go “biennial” by announcing yesterday it will start putting say-on-pay on its ballot next year.
RiskMetrics Opens Its Policy Comment Period: Earlier this week, RiskMetrics opened its policy comment period, providing an opportunity for a range of industry constituents to provide feedback on updates to its proxy voting policies in markets worldwide. Topics covered include takeover defenses in the U.S.; board and director independence in Japan, the U.S., and Europe; compensation and slate ballots in Canada; and equity and share purchase authorities in Europe. The comment period runs through November 11th.
As could be expected given the nebulous wording in Section 304 of Sarbanes-Oxley, former CEO of CSK Auto Corp. has filed a motion to dismiss in the clawback case that the SEC brought against him a few months ago (I also recommend John Kelsh’s article in “The Business Lawyer” cited in the brief). Here is the SEC’s complaint.
As I blogged back then, this is one of the first times the SEC has used Section 304 – and it’s the first one where the “clawee” isn’t alleged to have violated the securities laws. The motion to dismiss asserts that the SEC’s complaint fails to allege any causal connection between CSK’s accounting restatements and the bonus payments and stock proceeds the SEC seeks to have forfeited – and that the SEC’s interpretation of Section 304 has constitutional defects.
Dave Lynn, Mark Borges & I just finished the new ’10 version of Lynn, Borges & Romanek’s “Executive Compensation Disclosure Treatise and Reporting Guide” – it is now posted on CompensationDisclosure.com and the hard copy is at the printers (delivery expected in mid-November). To obtain both the online and hard copy versions of this Treatise, you need to try a no-risk trial to the Lynn, Borges & Romanek’s “Executive Compensation Service” now.
Without access to this New Treatise – as well as the “Proxy Disclosure Updates” quarterly newsletters that you will get if you renew as a Service subscriber – you will miss our critical guidance that you need to prepare your proxy disclosures during this upcoming proxy season including this:
Proxy Disclosure Updates – Full Walkaway Model CD&A: Dave is putting the final touches on a key, new model CD&A disclosure which will need to be addressed in this year’s proxy statements. The upcoming Fall issue of “Proxy Disclosure Updates” will focus on this important new full walkaway disclosure, providing not only new model disclosure – but also invaluable guidance on what to cover and why and how. To receive this model disclosure as soon as it’s out, you need to try a no-risk trial now.
Deeply concerned about the current state of executive compensation, more than 100 independent directors have been meeting in small groups to address the problem. These meetings have given rise to a growing effort known as the Independent Directors’ Executive Compensation Project (IDEC).
Some of those involved in the project held a meeting in September at Kellogg School of Management where they reached consensus that there is a dire need for a set of principles to guide boards. They agreed that it is imperative for corporate boards to voluntarily embrace and abide by a set of principles that would serve as a lodestone of responsibility for setting executive compensation. Several major companies have already indicated interest in adopting these principles as a basis for good governance and effective disclosure.
The goal would be to create a contagion of better and better practices – of companies voluntarily abiding by the principles and other companies following suit, lest they be left out of the positive limelight and look bad by comparison. Hence, positive compensation practices would edge out negative practices. And, as extensive research shows, effective compensation practices can translate into enhanced shareholder value as surely as negative practices can destroy it.
The need for principles-based compensation has become apparent. Repeated instances of high pay without performance have been eroding the faith of shareholders and engendering a call for public action. Adding insult to injury, Americans who have been hurt by the global economic crisis have ended up seeing their tax dollars spent on bailing out some of the same companies they hold responsible. Legislators, regulators and shareholder groups are lining up to propose a variety of rules intended to limit perceived and real excesses. Unfortunately, government efforts to limit the excesses of executive pay also limit the effectiveness of executive pay.
The idea behind IDEC is to help boards improve accountability and thereby restore the faith of the investing public and preclude emerging government intervention. At a recent meeting – and all prior meetings of these independent directors – there was agreement that:
– There are serious problems with executive compensation at publicly traded companies.
– Independent directors should a take leadership role to do something about the problems.
– An ongoing effort should be undertaken to continuously define, research, develop and communicate principles and best practices.
– Those principles and best practices should ensue primarily from a series of meetings of independent directors.
Thus far, five key principles have emerged from our discussions:
These principles were discussed at length at the IDEC Project conference at Kellogg. The directors, academics and consultants gathered at that meeting suggested an initial set of illustrative factors for each principle. Here are the draft principles developed by those attending the meeting. Independent directors who have attended these meetings have expressed interest in fostering a voluntary peer-led process that would establish and expand these principles and encourage boards to incorporate them into their practices and proxy statements.
Something akin to this has been accomplished in Germany, where the corporate governance community took a direct approach. The German Corporate Governance Code (adopted in June, 2006) has three levels of guidelines: requirements that must be followed, recommendations that “should” be followed, and suggestions that “could” be followed. Companies that adopt the code agree to disclose the reasons behind any failures to follow recommendations or suggestions. This initiative has been successful as it has resulted in considerable peer pressure among companies to adopt and abide by the code while ensuring needed flexibility in applying it.
Corporate directors who attended the meeting concluded that the widespread adoption of key compensation principles would be an important step toward restoring public faith. They plan to hold conversations with their colleagues as well as with organizations which are working on developing principles such as the Conference Board and the Center on Executive Compensation. Independent directors who have joined the conversations over the past year express a sense of urgency that it is important that corporate boards take the lead in developing and implementing principles of compensation before those who little understand the power of compensation as an effective tool do it for them. The effect is to enable independent directors to employ compensation as the positive tool it can be to shape responsible corporate behavior that rewards both management and shareholders and builds a strong national economy.
Recently, the Office of the Special Inspector General of TARP issued an audit report on the troubled arrangements with AIG. I say “troubled” because Ken Feinberg and others were finding little legal authority to rein in bonus payments to AIG’s Financial Product Unit, as noted in this recent NY Times article – I wonder if the Special Master’s efforts last Thursday will come under legal challenge. The audit report addresses:
– What was the extent of knowledge and oversight by Federal Reserve and Treasury officials over AIG compensation programs and, specifically, retention payments to the AIG Financial Products Unit?
– To what extent were AIG Financial Products Unit retention payments governed by executive compensation restrictions or pre-existing contractual obligations?
– What are the outstanding AIG compensation issues requiring resolution, and what Federal Government actions are needed to address these issues?
From Cleary Gottlieb: Yesterday, the Federal Reserve released for comment proposed guidance on incentive compensation applicable to all banking organizations under its supervision. The proposal includes two supervisory initiatives. The first, applicable to 28 “large, complex banking organizations,” will involve a review each organization’s policies and practices to determine their consistency with the guidance described below. The organization-specific policies will be assessed by supervisors in a special coordinated “horizontal review.”
The press release issued with the proposed guidance states that “[t]he policies and implementing practices adopted by these firms in response to the final supervisory principles will become a part of the supervisory expectations for each firm and will be monitored for compliance.” The second initiative will involve a review of compensation practices at regional, community, and other banking organizations not classified as large and complex, as part of the regular, risk-focused examination process. These reviews will be tailored to take account of the size, complexity, and other characteristics of the banking organization.
The guidance is designed to apply to the compensation of: (1) senior executives and others responsible for oversight of an organization’s firm-wide activities or material business lines; (2) individual employees, including non-executive employees, whose activities may expose the organization to material amounts of risk; and (3) groups of employees who are subject to the same or similar incentive compensation arrangements and who, in the aggregate, may expose the organization to material amounts of risk.
Alongside the proposed guidance, the Fed released six Q&As. The Q&As state that the Fed has issued the proposed guidance under its authority to monitor the “safety and soundness” of institutions subject to its oversight. The Q&As also note that the proposed guidance is “consistent with” the Financial Stability Board’s Implementation Standards for its Principles for Sound Compensation Practices, which were released last month in conjunction with the G-20 Summit in Pittsburgh.
The FSB was organized at the direction of the G-20 in order to address vulnerabilities and develop and implement strong regulatory policies in the interest of financial stability. The United States is the first G-20 nation to issue detailed guidance on compensation practices since the FSB’s Implementation Standards were released. The Q&As provide that comments on the proposed guidance will be accepted for 30 days.
In his “Proxy Disclosure Blog” last night, Mark Borges blogged his analysis of the plan from Special Master Feinberg that was posted late yesterday. He also analyzes the separate “determination” letter sent to Banc of America.