We’ve now posted the links for early-bird registration for our “2023 Proxy Disclosure & 20th Annual Executive Compensation Conferences.” The conferences will be fully-virtual from September 20th to 22nd. We’ve also posted a preview of the topics & speakers. This is a milestone year (two decades!), and the practical guidance our panelists share is more important than ever as we face an incredibly active SEC and a challenging economic, political and well…everything…environment.
Here’s what Liz shared on TheCorporateCounsel.net on why this is a can’t miss event:
We’re particularly excited about the fact that Corp Fin Director Erik Gerding will be sitting down with our very own Dave Lynn for an interview about his latest views on Corp Fin priorities & expectations.
This interview in itself is a compelling reason to be there. But if you (or your boss) need more convincing, consider these benefits (feel free to pass these along to whomever approves your budgeting requests):
– The Conferences are timed & organized to give you the very latest action items that you’ll need to prepare for the flurry of year-end and proxy season activity. Why spend time & money tracking down piecemeal updates to share with your higher-ups & board – all while you’re under a deadline and have other pressing obligations, increasing the risk of mistakes – when you can get all of the key pointers at once?
– Unlike some conferences, the on-demand archives (and transcripts!) will be available at no additional charge to attendees after the event, and you can continue to access them all the way till July 2024. That means you can continue to refer back to the sessions as issues arise. Again, saving time & money.
– Due to new SEC rules, the shareholder proposal environment, the increasing emphasis on risk oversight and pressures that companies are facing from both ends of the political spectrum, the performance of boards, individual directors and – thanks to Delaware’s latest spin on Caremark, individual officers – will be subject to greater & greater scrutiny in the coming proxy seasons. That could affect director elections, as well as your company’s ability to raise capital, and your directors’ and officers’ exposure to derivative claims. Our expert panelists will be sharing practical action items to protect your board & officers – and risks to watch out for. Facing a low vote for any director is a nightmare scenario, even if you’re not the target of a proxy contest. This event will empower you to avoid that situation.
– There’s an “early bird” rate!! We understand budgets are very tight and that more cuts could be coming. If you sign up now, you get the best price. This helps us plan ahead, and helps you save money. Register online by credit card – or by emailing sales@ccrcorp.com. Or, call 1.800.737.1271.
In February, Liz blogged about some pay versus performance disclosures starting to roll in. Those were from smaller companies and—maybe most notably—none of those early disclosures were in a proxy statement. We were anxiously awaiting filings by larger-cap companies. I’m happy to share that a simple EDGAR word search results in quite a few filings since late February.
Personally, I am most interested to see how “real life” examples deal with updated equity award valuation assumptions and the timing of accrued dividends and how much companies provide a narrative explanation if there is a disconnect between compensation actually paid (CAP) and the performance metrics in the PVP table. Check these out to see how they handled whatever disclosure topics you’re struggling with:
There are quite a few other large- and mid-cap examples available on EDGAR now too. Hat tip to our Editorial colleague & Fenwick team member Emily Sacks-Wilner, who continues to provide key updates to us all!
This Skadden post on the Columbia Law School Blue Sky Blog highlights a number of disclosure questions that remain after the SEC’s recent CDIs. Hopefully, some of the early filers have disclosed their approaches to these questions, where relevant, through the copious use of footnotes, so we can all see whether a consensus emerges on these topics.
Curious how these are disclosures are being received by investors and the media? It’s probably still too early for many takeaways, but the WSJ reported on some of the above filings—and others—over the weekend.
I searched this blog for entries about perks, and no fewer than 29 had “perk” and 11 had “enforcement” in the title. In my book, that’s already 29 reasons to beef up your perks disclosure controls and procedures. But the SEC keeps focusing on them, so we keep blogging about them!
It should surprise no one that the latest enforcement action involves a private plane, personal security and travel expenses for the spouses of executives. This time, the private plane was owned by the executive, and there’s a related-party transaction element.
Specifically, the SEC announced it settled charges against a global transportation company and its former CEO for failing to disclose $320,000 in perks. Further, with respect to the related-party transaction, the proxy disclosed that the company chartered the former CEO’s plane from an independent management company and that it paid $3 million for those charters. However, the company failed to include that the CEO received $1.6 million of that amount, and therefore did not disclose the approximate dollar value of the CEO’s interest in the transaction.
To settle the charges, the company and CEO agreed to pay $1 million and $100,000, respectively, in civil penalties.
We recently announced on TheCorporateCounsel.net that Meredith Ervine has joined our editorial team. She brings a wealth of experience – here’s her bio – and here are a few words from Meredith herself.
Meredith has hit the ground running and we’re so excited to have her on board. I’m particularly excited to share that she will be making her blogging debut on this site next week! Feel free to contact her any time at mervine@ccrcorp.com. Welcome, Meredith!
This one slipped by me! Last week, Glass Lewis published commentary that suggests the proxy advisor will be on the lookout for option repricing practices as part of say-on-pay and other votes this season. Here’s an excerpt:
The spring of 2022 already saw the start of a decline from the market’s 2021 peaks, due to a convergence of macroeconomic shocks and rising inflation and interest rates. However, last year’s shareholder voting results (and voting agenda) were on a lag — due to the retrospective nature of typical “say-on-pay” votes, in most cases shareholders were expressing an opinion on pay for surging 2021 performance.
In 2023, investors will generally be looking back on the first protracted downturn in a decade. In some cases, repricing may be one of the factors they will need to consider – whether voting directly on a repricing proposal, or in considering say on pay votes (or even the re-election of specific directors) where boards with the requisite authority unilaterally repriced or exchanged options in 2022.
On page 65 of its voting policies, Glass Lewis explains why it is generally opposed to option repricings – regardless of how they are accomplished. However, they may be more forgiving when macroeconomic conditions cause dramatic declines in equity value, versus company-specific issues. Glass Lewis may support a repricing or option exchange program if:
• Officers and board members cannot participate in the program; and
• The exchange is value-neutral or value-creative to shareholders using very conservative assumptions.
In its evaluation of the program, the proxy advisor also considers these features:
• The vesting requirements on exchanged or repriced options are extended beyond one year;
• Shares reserved for options that are reacquired in an option exchange will permanently retire (i.e., will not be available for future grants) so as to prevent additional shareholder dilution in the future; and
• Management and the board make a cogent case for needing to motivate and retain existing employees, such as being in a competitive employment market.
I blogged a few weeks ago that investors are pushing for higher-quality ESG metrics. A new PwC analysis of carbon targets shows they may have good reason to be skeptical. The “TL;DR” is that executives are getting “surprisingly high” bonuses despite the common understanding that we’re making inadequate progress on reducing carbon emissions worldwide. But in both this analysis & the pay plans themselves, the devil’s in the details.
The report assesses carbon targets at 50 of the largest European listed companies – which is the region of the world where linking pay to climate & other ESG targets is most well-developed. It looks at 4 criteria that investors say constitute “robust” targets – namely, that the targets are:
1. Significant – a separate & meaningful percentage of incentives
2. Measurable – objective & quantifiable
3. Transparent – externally clear & prospectively disclosed targets, and
4. Demonstrably linked to long-term carbon reduction goals – clearly disclosed bridge between short-term & long-term
Here are the high-level findings:
While there has been rapid adoption of carbon pay targets in the last couple of years, only one company’s carbon pay measures met every one of our criteria. And payouts on carbon targets disclosed in 2022 averaged 86%, with over half paying out at 100%. This is surprisingly high given the common understanding that we’re making inadequate progress on reducing carbon emissions, which raises the question on whether the carbon targets in pay are working.
The criteria that companies’ carbon measures most commonly failed to meet relate to the weighting (which is frequently quite low), the transparency of targets (which are rarely prospectively disclosed), and their quantitative link to the company’s stated long-term carbon reduction goals (which is often unclear).
Thankfully, the report also notes that many of the current shortcomings are easily addressed – e.g., disclosing prospective targets, adjusting weighting. While executive pay is never going to be the panacea for solving climate change, it can be part of the solution. It sets out 9 questions for boards to consider based on company-specific circumstances (along with examples & recommendations for each). When your comp committee next considers incentive plans, it may be worth diving into these details:
1. Should executive pay carbon targets be based on CO2 or CO2 equivalents?
2. Should executive pay carbon targets be adjusted for transactions?
3. Should offsets count for executive pay purposes?
4. Should executive pay targets use absolute carbon emissions or carbon intensity?
5. Should pay measures include Scope 3 emissions?
6. Are carbon measures relevant for low emitting companies?
7. Should Scope 4 emissions affect targets?
8. Are carbon targets relevant for companies covered by carbon trading scheme?
9. Should executive pay targets focus on new sources of competitive advantage over carbon reductions?
If you’re looking for “gold star” examples & food for thought, the report suggests looking at the companies below – and it also shares a mockup of hypothetical executive compensation disclosure (pg. 19):
A leading example from our analysis of disclosures in 2022 is TotalEnergies, which was the only company to score maximum points on our assessment. They disclose their strategic 2025 GHG reduction target in Mt CO2e, and disclose how their executive pay targets to reduce carbon emissions directly tie into that long-term ambition, by setting a Mt CO2e to hit by 2022, in line with this ambition.
Other positive examples include ABB, AstraZeneca, AXA, Enel, Reckitt and Santander, each of which score seven out of a possible eight points. But in the case of most companies reviewed, there are opportunities for further steps to fully meet investor expectations.
Here’s the latest 131-page guide for compensation committees from Wachtell Lipton. As always, the guide even includes a sample compensation committee charter at the back – with these wise words of caution:
It is not necessary that a company have every guideline and procedure that another company has to be “state of the art” in its governance practices. When taken too far, an overly broad or detailed committee charter can be counterproductive. For example, if a charter explicitly requires the compensation committee to review a particular type of compensation arrangement, meet a stated number of times each year or take other action, and the compensation committee has not taken that action, then the failure may be considered evidence of lack of due care. Therefore, we recommend that each company tailor its compensation committee charter and written procedures to those that are necessary and practical for the particular company.
This year’s guide also includes updated sections on “Dodd-Frank Act Compensation Clawback Rules” (pg. 46) and “Dodd-Frank Act Pay Versus Performance Rules” (pg. 10). The discussion on clawbacks identifies several questions to ask when crafting a policy that complies with the new rules, and goes on to note:
Over the past several years, prior to the adoption of the final SEC clawback rules, the prevalence of clawback policies increased dramatically, in part because many institutional investors have actively promoted the adoption of clawback policies. According to a recent study, 99% of 200 large publicly traded companies have disclosed that they maintain clawback policies, although most policies are discretionary and not mandatory.66 The study indicated that common clawback triggers include the following: ethical misconduct leading to a financial restatement (42% of policies); a financial restatement without a requirement of ethical misconduct (53%); ethical misconduct without a financial restatement (54%); violation of restrictive covenants, such as noncompetition, nonsolicitation, nondisclosure or nondisparagement obligations (25% of policies); reputational risk (20%); and failure to supervise (7% of policies).
For companies that have already adopted a clawback policy that is broader than the policy required by the final regulations, decisions will need to be made as to how to reconcile the existing policy with the newly mandated policy. Combining the two policies could lead to undesirable complications. In particular, most existing policies provide discretion to the compensation committee or board of directors as to whether to exercise the clawback, while the new regulations generally require the company to apply the clawback on a mandatory basis. Mandatory application is fundamentally inconsistent with the design of a broad discretionary policy, so a decision will need to be made as to whether to narrow the breadth of the existing policy, or, alternatively, to bifurcate the policy so that it includes both the mandatory clawback required by the final SEC rule and the optionality for the compensation committee or board of directors to continue to exercise discretion in determining whether to apply the existing clawback right. Other alternatives include maintaining two policies, or eliminating the existing policy altogether.
There’s a lot of work to be done on this topic before next year – both exchanges proposed listing standards last week which largely track Rule 10D-1.
On Wednesday of this week, the NYSE posted its initial rule filing to implement listing standards under the SEC’s Dodd-Frank clawback rules – and yesterday, Nasdaq followed suit by posting proposed listing standards on its website. Nasdaq is proposing a new Rule 5608. Here are a few key details, which track closely to the SEC’s Rule 10D-1:
– The new rule will require listed companies, in the event of a restatement (“Big R” and “little r”), to recover the amount of incentive-based compensation received by an executive officer that exceeds the amount the executive officer would have received had the incentive-based compensation been determined based on the accounting restatement.
– Companies will be subject to delisting if they don’t adopted a compensation recovery policy that complies with the listing standard, disclose the policy in accordance with SEC rules, or comply with the policy’s recovery provisions.
– Under the proposed listing standard, Nasdaq would determine whether the steps a company is taking constitute compliance – the propsal lists factors that the exchange will consider.
– Companies will be required to adopt the compensation recovery policy no later than 60 days following the effective date of Rule 5608, and to provide the disclosures required by the Rule and in applicable SEC filings on or after the effective date of Rule 5608.
– As proposed, a company will only be required to apply the recovery policy to incentive-based compensation received on or after the effective date of the new listing standard, notwithstanding the lookback requirement in the rule.
There will be an opportunity for comments on the proposal and it will be effective on the date it’s approved by the SEC (under Rule 10D-1, that’s required to happen by November 28th of this year).
Dave blogged more about the proposed listing standard on TheCorporateCounsel.net And, here’s what Dave blogged yesterday about the NYSE’s rule:
Last October, the SEC adopted Rule 10D-1, which directs the national securities exchanges to adopt listing standards that will apply the disclosure and clawback policy requirements of the rule to all listed companies, with only limited exceptions. Under the rule, each listed company will ultimately be required to adopt a clawback policy, comply with that policy and provide the required clawback policy disclosures. A company will be subject to delisting if it does not adopt and comply with a clawback policy that meets the requirements of the listing standards. The SEC indicated that each national securities exchange must file its proposed listing standards with the SEC no later than 90 days following November 28, 2022. The listing standards required by Rule 10D-1 must be effective no later than one year following November 28, 2022.
The NYSE has now posted on its website its initial rule filing with the SEC. The initial rule filing contemplates proposing new Section 303A.14 of the NYSE Listed Company Manual to require issuers to develop and implement a policy providing for the recovery of erroneously awarded incentive-based compensation received by current or former executive officers. The NYSE notes in the filing that proposed Section 303A.14 is designed to conform closely to the applicable language of Rule 10D-1.
Proposed Section 303A.14(b) would establish the timeframe within which listed companies must comply with proposed Section 303A.14, as follows:
– Each listed issuer must adopt the clawback policy required by proposed Section 303A.14 no later than 60 days from the adoption of the proposed listing.
– Each listed issuer must comply with its clawback policy for all incentive-based compensation received (as such term is defined in proposed Section 303A.14(e) as set forth below) by executive officers on or after the effective date that results from attainment of a financial reporting measure based on or derived from financial information for any fiscal period ending on or after the effective date.
– Each listed issuer must provide the required disclosures in the applicable SEC filings required on or after the effective date.
The NYSE also proposes to adopt new Section 802.01F, which would provide that in any case where the exchange determines that a listed issuer has not recovered erroneously-awarded compensation as required by its clawback policy reasonably promptly after such obligation is incurred, trading in all listed securities of such listed issuer would be immediately suspended and the exchange would immediately commence delisting procedures with respect to all such listed securities. While Rule 10D-1 does not specify the time by which the issuer must complete the recovery of excess incentive-based compensation, NYSE would determine whether the steps an issuer is taking constitute compliance with its clawback policy. A listed issuer would not be eligible to follow the procedures outlined in Sections 802.02 and 802.03 with respect to such a delisting determination, and any such listed issuer would be subject to delisting procedures as set forth in Section 804.
The SEC will next publish the Notice of Filing of Proposed Rule Change to Adopt New Section 303A.14 of the NYSE Listed Company Manual on its website. Comments will be due 21 days from publication of the Notice in the Federal Register.
In a study earlier this year, Willis Towers Watson found that 77% of large companies in Europe & North America are now including ESG metrics in executive compensation plans. Last week, global asset manager AXA IM reinforced its commitment to “net zero as a business & investor by 2050” – by announcing new decarbonization metrics for 400 senior executives. Here’s more detail:
– The weighted average carbon intensity (WACI) to reach the target of 25% reduction in carbon intensity for corporate portfolio by 2025: for the ESG part of the deferred compensation, this metric accounts for 75% for AXA IM Core and 37.5% for transversal functions employees in scope.
– An assets under management (AUM) target for 50% of the real estate portfolio to be aligned to the CRREM1 trajectories by 2025: for the ESG part of the deferred compensation, this metric accounts for 75% for AXA IM Alts and 37.5% of transversal functions employees in scope.
– The reduction of the corporate operational CO2 footprint, to reach the interim target to reduce it by 26% by 2025: for the ESG part of the deferred compensation, this metric accounts for 25% for all AXA IM Core, AXA IM Alts and transversal functions employees in scope.
AXA is a “responsible” asset manager that invests for the long-term – and has a “3 strikes & your out” escalation policy for climate laggards in its investment portfolios. So, this step makes sense for their business. AXA announced the new metrics at the same time it unveiled a new “AXA IM for Progress Monitor” that will show the firm’s progress on certain ESG targets.
The thing that caught my eye here is that AXA’s metrics are tied to specific portfolio company reductions and will be measurable in only two years. This could provide a roadmap for other investors – as well as companies – to integrate emission reduction goals into executive incentive plans. If it becomes more common for asset manager executives to tie their own pay to portfolio company emissions reductions in a meaningful way, they could eventually lose patience with portfolio companies who don’t do the same.
For now, though, it seems like most organizations are still carefully evaluating details – before making sudden moves towards specific, quantifiable metrics – and that’s probably how it should be, to avoid unintended consequences. It’s also worth noting that this type of plan would be much more difficult for index investors like BlackRock or Vanguard, who aren’t able to freely divest “climate laggards” & who are walking a fine line in US politics with climate-related policies.
If you work with REITs, make sure to check out this updated guide to executive compensation – provided by Morrison Foerster & Ferguson Partners. The 2023 edition includes 68 pages of guidance – it addresses:
– The various components of REIT executive compensation;
– Key compensation trends in the REIT industry;
– The respective roles of the board of directors, the compensation committee, management and outside advisors;
– Governance matters relating to executive compensation, including best practices and provisions viewed as problematic by investors and proxy advisory firms;
– Increasing expectations for accountability and transparency by linking ESG priorities and executive compensation; and
– SEC reporting and other obligations relating to executive compensation, including the SEC’s new rules relating to pay-versus-performance disclosures.