I’ve blogged a few times about the Tornetta v. Musk litigation – in which the plaintiff is arguing that Tesla’s directors (& Elon Musk, as an allegedly controlling stockholder) breached their fiduciary duties when they approved Musk’s 2018 “moonshot” award. This case may have disclosure & governance implications for other companies.
Last month, Charles Elson – who is the founding Director of the Weinberg Center for Corporate Governance at the University of Delaware – filed an amicus brief in support of the plaintiff, which can be found along with other trial-related documents on this docket page. Professor Elson argues that Musk’s award was unfair to stockholders & that the defendants ignored the purpose of equity-linked compensation in crafting it. Here’s an excerpt:
When the challenged award was made, Musk owned 21.9% of Tesla’s outstanding common stock.32 Thus, for every $50 billion dollars that Tesla’s market capitalization increased, Musk would personally see a $10.95 billion benefit based solely on his existing holdings. In this critical respect, Musk could not be more dissimilar from the professional managers whom modern equity compensation packages were designed to motivate. As a founder-owner-manager, Musk is more like Gates, Bezos, Zuckerberg, Brin and Page. And like them, Musk’s pre-existing holdings should have been a more-than-adequate incentive for him to do whatever it took to help Tesla grow.
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For Musk’s award to be justified, Defendants must somehow show that the marginal benefit to Musk—i.e., above and beyond the benefits he would obtain from the increase in value of his significant existing holdings — would meaningfully affect his motivations. They make no serious effort to do so.
Professor Elson also suggests the court consider the effect that Musk’s award has had beyond Tesla – the “Lake Wobegan” dynamic of executive compensation – which I blogged about last year.
Chancery Daily will be live-“tooting” on Mastadon during post-trial arguments today. Here’s their recap of the current procedural status:
The Tornetta v. Musk trial was held back on November 14th through 18th, 2022. Remember those days? To be honest, it’s all a bit of a blur, but at least for the moment, sufficient failover systems still in place mean that most days, Twitter remembers. (At the end of this email, you’ll find links to all of the live Twitter coverage from the trial, as well as to the previous Substack summary of the case.)
But why are we talking about a trial from November, and what was the outcome anyway? Well, that’s kind of the point! Here’s why you should you care, especially now. Because there hasn’t been a verdict yet. These are bench trials, baby! And they are the best. And bench trials have pre- and post-trial briefing and post-trial argument, and this one happens on Tuesday, February 21st at 1:30pm Eastern, and you and me, kid, we can dial-in and listen.
– Liz Dunshee
Growing up in the shoe biz, I can empathize with retailers right now. Ongoing disruptions to business models & the economy have created long-term uncertainty for growth – which casts doubt on whether typical incentive plan metrics & goals are still workable. What’s a compensation committee to do? A recent Semler Brossy blog shares recommendations for goal-setting in light of these issues. Here are the key takeaways:
– 2023 goal setting uncertainty. Particularly in the retail industry, recent economic and market uncertainty are expected to impact fiscal year 2022 incentive plan outcomes and create goal setting challenges in 2023 and beyond.
– Approaches to address risks. Establish wider performance and/or payout curves, introduce strategic or operational metrics, separate or shorten performance periods, and consider using more relative metrics.
– Ensure future durability. In contrast with the temporary actions taken to immediately respond to the pandemic, retailers should consider the long-term durability of any incentive plan changes in response to a more prolonged period of uncertainty.
On that last point, the pandemic showed that shareholders and proxy advisors don’t look fondly upon reactionary adjustments that end up creating perceived windfalls for executives. With last month’s consumer spending data being surprisingly favorable for retailers, durability is key – don’t overcorrect.
– Liz Dunshee
If you’re putting the finishing touches on your HCM disclosures, it’s worth taking a look at this recent Gibson Dunn survey. The 11-page memo covers “human capital” disclosure trends among the S&P 100 – reflecting practices now that companies have been through two reporting cycles since the SEC adopted “principles-based” rules in 2020. Here’s an excerpt with key takeaways:
The overall takeaway from our survey, which categorized disclosures into 17 topic areas, was that companies are generally expanding the length of their disclosures, covering more topics, and including slightly more quantitative information in some areas. We note the following trends regarding the S&P 100 companies’ disclosures compared to the previous year:- Seventy-nine companies increased the length of their disclosures, though the increases were generally modest.
– Sixty-six companies increased the number of topics covered.
– The prevalence of 16 topics increased and one remained the same.
– The most significant year-over-year increases in frequency involved the following topics: talent attraction and retention (67% to 91%), employee compensation (68% to 85%), quantitative diversity statistics on race/ethnicity (43% to 59%) and gender (47% to 61%), workplace health and safety (51% to 65%), and pay equity (30% to 41%).
– The only topic that did not see an increase in frequency was succession planning, which remained at 17%.
– Eight-five companies included more qualitative details in their disclosures compared to the previous year, including information relating to diversity, equity, and inclusion (“DEI”) initiatives and programs and the board’s role in overseeing human capital initiatives, although the depth of the additional detail provided varied greatly between companies.
– In this most recent year, DEI was discussed by 96% of companies (89% in the previous year), and 37% of companies (22% in the previous year) went beyond qualitative DEI information and disclosed quantitative data regarding the breakdown of DEI statistics by job type or level (executive level, etc.).
– Disclosure regarding the role of the board (or a human capital-focused committee) in overseeing human capital jumped to 44% of companies this most recent year from 26% the previous year.
– The topics most commonly discussed this most recent year generally remained consistent with the previous year. For example, DEI, talent development, talent attraction and retention, COVID-19, and employee compensation and benefits remained the five most frequently discussed topics, while succession planning, full-time/part-time employee split, quantitative pay gaps, culture initiatives, and quantitative workforce turnover rates continued to be the five least frequently covered topics.
– Within each industry, the trends that we saw in the previous year regarding the frequency of topics disclosed generally remained the same.
The memo looks at the prevalence of common disclosure topics, trends by industry, and disclosure formats – as well as Corp Fin comment letter correspondence. It notes that SEC Chair Gary Gensler has signaled a plan to propose more prescriptive HCM disclosure rules sometime this year – which will undoubtedly draw a lot of commentary if & when it happens. The Gibson Dunn team suggests these steps for the current reporting season:
– Confirming (or reconfirming) that the company’s disclosure controls and procedures support the statements made in human capital disclosures and that the human capital disclosures included in the Form 10-K remain appropriate and relevant. In this regard, companies may want to compare their own disclosures against what their industry peers did these past two years, including specifically any notable additional disclosures made in the past year.
– Setting expectations internally that these disclosures likely will evolve. As shown by the measurable increase in disclosure in the second year of reporting, companies should expect to develop their disclosure over the course of the next couple of annual reports in response to peer practices, regulatory changes, and investor expectations, as appropriate. The types of disclosures that are material to each company may also change in response to current events.
– Addressing in the upcoming disclosure, if not already disclosed, the progress that management has made with respect to any significant objectives it has set regarding its human capital resources as investors are likely to focus on year-over-year changes and the company’s performance versus stated goals.
– Addressing significant areas of focus highlighted in engagement meetings with investors and other stakeholders. In a 2021 survey, 64% of institutional investors surveyed cited human capital management as a key issue when engaging with boards (second only to climate change at 85%).
– Revalidating the methodology for calculating quantitative metrics and assessing consistency with the prior year. Former Chairman Clayton commented that he would expect companies to “maintain metric definitions constant from period to period or to disclose prominently any changes to the metrics.”
– Liz Dunshee
The annual “Corporate Governance & Executive Compensation Survey” of the 100 largest companies from Shearman & Sterling is out! This is always a “hot ticket” item, perhaps because it’s one of the oldest. Last year, I blogged about data on clawbacks – which is covered on page 83 of this year’s survey.
We’ve posted this year’s survey in our “Sustainability Metrics” Practice Area due to the comprehensive article that begins on page 28 about whether investors will ever be satisfied. It notes that there are signs of discontent with the level & quality of ESG metrics.
The survey also has data on equity plans, say-on-pay, perquisites, golden parachutes & more. Check it out!
– Liz Dunshee
On Friday – after much anticipation & nail-biting – Corp Fin issued 15 “Regulation S-K” CDIs to address common questions under new Item 402(v), which is the “pay versus performance” disclosure rule that was adopted in late August and for which disclosure will be required in proxy statements filed this spring. Dave Lynn is going to be covering these interpretations in-depth in the next issue of The Corporate Executive – if you aren’t already subscribed to that essential newsletter, email sales@ccrcorp.com and arm yourself with expert analysis to tackle these disclosures.
To help you see which CDIs are relevant to you, I’ve paraphrased each of them below – and thanks to the direct links that Corp Fin provided, you can also use this list to easily read your favorites in full:
1. Question 128D.01 – Item 402(v) information is not required in Form 10-K, and will not be deemed incorporated by reference, except to the extent that the registrant specifically does so.
2. Question 128D.02 – When calculating Compensation Actually Paid, companies need to include the change in value of a first-time NEO’s awards during the executive’s tenure as a NEO – even if the NEO received those awards as an employee, before being an NEO.
3. Question 128D.03 – Footnote disclosure of each of the amounts deducted and added pursuant to Item 402(v)(2)(iii) – for years other than the most recent fiscal year included in the Pay Versus Performance table – would be required only if it is material to an investor’s understanding of the information reported in the Pay Versus Performance table for the most recent fiscal year, or of the relationship disclosure provided under Item 402(v)(5). However, in the registrant’s first Pay Versus Performance table under the new rules, the registrant should provide footnote disclosure for each of the periods presented in the table.
4. Question 128D.04 – Aggregation of pension value adjustments and equity award adjustments isn’t permitted in the required footnotes.
5. Question 128D.05 – For purposes of pay versus performance disclosure, companies can use a “peer group” disclosed in CD&A, even if it is not used for “benchmarking” in the CD&A.
6. Question 128D.06 – If the class of securities was registered under Section 12 of the Exchange Act during the earliest year included in the “Pay Versus Performance” table, the “measurement point” for purposes of calculating TSR and peer group TSR should begin on such registration date.
7. Question 128D.07 – Companies need to present the peer group total shareholder return for each year in the table using the peer group disclosed in the CD&A for such year, including if the CD&A peer group changed from 2021 to 2022.
8. Question 128D.08 – GAAP “net income” is required in the Item 402(v) table.
9. Question 128D.09 – The Company-Selected Measure can be any financial performance measure that differs from the financial performance measures otherwise required to be disclosed in the Item 402(v) table, including a measure that is derived from, a component of, or similar to those required measures.
10. Question 128D.10 – It’s appropriate to use stock price as Company-Selected Measure only if it directly links compensation actually paid to company performance – e.g., as a market condition applicable to an incentive plan award – not if it just has a significant impact through affecting the fair value of a time-based share award.
11. Question 128D.11 – The Company-Selected Measure cannot be a multi-year measure – it must relate to the most recently completed fiscal year.
12. Question 128D.12 – In a “bonus pool” where payouts depend on achievement of a financial performance measure along with discretion, companies must identify that financial measure in the Tabular List and provide the required disclosure about the Company-Selected Measure and the related relationship disclosure.
13. Question 128D.13 – Companies can aggregate the compensation of multiple PEOs for purposes of the narrative, graphical or combined comparison between CAP & TSR, net income, and the Company-Selected Measure – to the extent the presentation will not be misleading to investors. Remember that separate columns for each PEO are required in the table.
14. Question 228D.01 – If a company changes its fiscal year during the time period covered by the Item 402(v) Pay Versus Performance table, provide the disclosure required by Item 402(v) for the “stub period,” and do not annualize or restate compensation.
15. Question 228D.02 – For purposes of the requirement in Item 402(v)(2)(iv), a company that has emerged from bankruptcy and issued a new class of stock under the bankruptcy plan may provide its cumulative total shareholder return and peer group cumulative total shareholder return using a measurement period that begins when the post-bankruptcy class of stock began trading.
– Liz Dunshee
We’ve posted the transcript for our recent webcast – “The Latest: Your Upcoming Proxy Disclosures” – in which Mark Borges of Compensia and CompensationStandards.com, Alan Dye of Hogan Lovells and Section16.net, Dave Lynn of Morrison Foerster and TheCorporateCounsel.net, and Ron Mueller of Gibson Dunn covered the waterfront of issues to consider as you prepare your upcoming proxy disclosures – with lots of attention to pay vs. performance. Check out the transcript for info on:
1. Pay vs. Performance Disclosures
2. Meeting Format
3. Clawbacks
4. Say-on-Pay Trends
5. Showing “Responsiveness” to Low Say-on-Pay Votes
6. CD&A Updates
7. CEO Pay Ratio Considerations
8. Perquisites Disclosure
9. Shareholder Proposals
10. ESG Metrics & Disclosures
11. Proxy Advisor & Investor Policy Updates
12. Status of Other Pay-Related & Human Capital Management Rulemaking
– Liz Dunshee
A few pay versus performance disclosures are starting to roll in! This is something that we’ve all been eagerly awaiting – and I send my condolences to those who have had to be brave and take the first leap. These are from smaller companies – we continue to await a large-cap example. Thanks to Aon’s Corporate Governance & ESG Advisory Group for alerting us!
– CSI Compressco Information Statement (pg. 8) – The most “mainstream” of these examples.
– Praxis Precision Medicines Form 10-K (pg. 136) – It is unclear to me why the company included this disclosure in a Form 10-K – as this Goodwin FAQ points out, the SEC rules only require pay vs. performance disclosure in proxy & information statements; it isn’t required in Form 10-K even when other Item 402 disclosure is included. But I didn’t read this filing or the company’s filing history in-depth to understand whether there is a reason they might have wanted to go ahead with it here.
– Panbela Therapeutics Form S-1/A (pg. 72) – Seems to have missed some of the disclosure requirements, but has the distinction of being the first to report under the new rule.
– Liz Dunshee
When say-on-frequency votes roll around every sixth year, one of the questions that has been asked repeatedly in our “Q&A Forum” is what voting standard to apply. State law and governing documents typically state that all matters are governed by majority votes (with the exception of the election of directors, which at some companies is still determined by a plurality vote). But on this “multiple choice” ballot item, you may end up in a situation where none of the options receive majority approval.
Last week on TheCorporateCounsel.net, Dave pointed out that you don’t need to prescribe a particular standard in the proxy statement:
How do I determine which frequency “wins” the vote?
The Say-on-Frequency proposal is unusual because the issuer is not asking the shareholders to “approve” a specific proposal or resolution. Instead, shareholders are being to select one of three frequency options or abstain from voting. In footnote 121 of the adopting release from 2011, the Commission stated: “Because the shareholder vote on the frequency of voting on executive compensation is advisory, we do not believe that it is necessary to prescribe a standard for determining which frequency has been ‘adopted’ by the shareholders.”
Notwithstanding that disclosure leeway, as John shared in his response to Question #858 on our Form, when your board moves on to actually determine the frequency with which it will submit the say-on-pay resolution, the directors likely do need to consider which of the say-on-frequency options received a plurality vote. That’s because Glass Lewis has embedded the plurality concept into its policy on say-on-frequency. The proxy advisor says that it will recommend votes against all members of the comp committee if the board adopts a say-on-frequency other than the one approved by a plurality of the company’s stockholders.
As I blogged last fall, more than 90% of Russell 3000 companies conduct an annual say-on-pay vote – so this has become a largely irrelevant exercise, but we have to do it anyway.
See Dave’s blog – and the November-December 2022 issue of The Corporate Counsel newsletter – for even more reminders on annual season items. Dave also shared guidance on handling the Form 8-K for this voting item. We also have practical guidance on this topic in the “Say-on-Pay Disclosure Issues” chapter of the Lynn & Borges’ Executive Compensation Disclosure Treatise.
– Liz Dunshee
Last week, ISS further updated its “Equity Compensation Plans” FAQs – to provide more info about their burn rate calculation. Question 15 now includes this additional color:
The VABR calculation values grants in each fiscal year separately, based on the applicable QDD date and associated QDD data in that fiscal year. In calculating grant valuations in a specific fiscal year, the “stock price” in the formula above (both in the numerator and the denominator) refers to the 200-day average stock price as of the applicable QDD date in that fiscal year. The option valuation inputs are similarly as of the applicable QDD date in that fiscal year.
This new document adds to the FAQs that John blogged about last month. The updated ISS FAQs document highlights all year-over-year changes. We’ll be posting it in our “Proxy Advisors” Practice Area.
– Liz Dunshee
Recently, the Corp Fin Staff issued a series of Compliance & Disclosure Interpretations to address some of the open questions on the Dodd-Frank clawback rules. Dave blogged last week on TheCorporateCounsel.net about each topic:
– Exchange Act Rule CDI 121H.01 – Dave wrote that, just in the nick of time, the Staff has clarified that “while the check boxes and other disclosure requirements will be in the rules and forms in 2023, we do not expect issuers to provide such disclosure until they are required to have a recovery policy under the applicable listing standard.”
Many interpret this CDI to mean that you are not required to mark the checkboxes, but you still need to put the text of them on the cover page – to match the new version of Form 10-K that’s posted on SEC.gov. However, there’s a concern among some practitioners that it could be misleading (particularly for the first checkbox) to put the text on the cover page and not mark the box if there had been a restatement. So, does the Staff want companies to put the text of both checkboxes on the cover page and include a note to say that it’s not applicable to this Form 10-K? Or not include them at all, despite the Form?
By the end of the Northwestern Pritzker School of Law’s Securities Regulation Institute last week, this issue earned its own name: “The Great Checkbox Debate of 2023.” Despite what some folks apparently heard or wanted to hear, Corp Fin Director Erik Gerding did not publicly give a response beyond what was in the CDI. We hope that the Staff is able to clear this up with further guidance – but as I blogged last week, they are not going to be making Enforcement referrals on foot-faults. This is a fleeting issue and it’s probably not worth getting too worked up about it.
– Exchange Act Rule CDIs 121H.02 and 121H.03 (as well as Exchange Act Forms CDIs 110.08 and 112.03) – As Dave blogged, these CDIs address how the term “named executive officer” is to be interpreted for foreign private issuers filing on Forms 20-F and 40-F, given that foreign private issuers do not provide disclosure under Item 402 of Regulation S-K, which includes the definition of “named executive officer.” This interpretation will come into play when a company completes the financial restatement that triggered the company’s clawback policy and needs to provide related disclosure about recovery of erroneously awarded compensation from NEOs.
– Exchange Act Rules CDI 121H.04 – This CDI says that the clawback rule is intended to apply broadly. Your Rule 10D-1-compliant clawback policy could reach compensation in compensation plans other than tax-qualified retirement plans – such as long term disability, life insurance, SERPs, or any other compensation that is based on the incentive-based compensation. See Dave’s blog for more detail.
– Liz Dunshee