You can still register for our always-popular conferences – the “Proxy Disclosure & 19th Annual Executive Compensation Conferences” – to be held virtually Wednesday, October 12th – Friday, October 14th. With new SEC rules, record numbers of shareholder proposals, and relentless regulatory & investor scrutiny, your proxy disclosures – and the actions that support them – are more important than ever. Our Conferences provide practical guidance about rule changes, Staff interpretations, emerging disclosure risks, investor and proxy advisor positions, executive pay expectations, the board’s role, and more.
Here’s who should attend:
– Anyone responsible for preparing and reviewing proxy disclosures – including ESG and executive pay disclosures and responses to shareholder proposals.
– Anyone responsible for implementing executive and equity compensation plans or who counsels or advises boards on their oversight responsibilities, including CEOs, CFOs, independent directors, corporate secretaries, legal counsel, HR executives and staff, external reporting teams, accountants, consultants, and other advisors.
For more details, check out the agenda – 18 panels over 3 days. Our speakers are fantastic and this is truly a “can’t miss” event for anyone involved with proxy disclosures, corporate governance, and executive compensation.
Conference attendees will not only get access to our unique & valuable course materials (coming soon) – we’ll also be making video archives and transcripts available after the conference, so that you can refer back to all of the practical nuggets when you’re grappling with your executive pay decisions, disclosures and engagements. Plus, our live, interactive format gives you a chance to earn CLE credit and ask real-time questions.
Register today! In addition, check out the agenda for our “1st Annual Practical ESG Conference” – which is happening virtually on Tuesday, October 11th. This event will help you avoid ESG landmines and anticipate opportunities. You can bundle the Conferences together for a discount.
In its recent “Proxy Season Briefing,” Glass Lewis shares these takeaways from meetings through June 30th (see my Proxy Season Blog on TheCorporateCounsel.net for highlighted takeaways on their director recommendations):
– Say-on-Pay: Glass Lewis recommended in favor of 84.3% of resolutions. Common concerns that led to “against” recommendations included excessive grants/compensation (41.6%), poor program or award design structure (34.9%), pay & performance disconnect (34.7%), other concerning pay practices (16.7%) and insufficient response to shareholders (15.8%). The report notes that many companies within the wave of new listings gave their executives outsized awards, which contributed to proxy advisor objections. There was also an uptick in retention one-time awards.
– Equity Plans: Glass Lewis recommended in favor of 85.7% of equity plan resolutions. Common concerns that led to “against” recommendations included evergreen provisions (44.7%), repricing provisions (27.3%), pace of grants/excessive grants (12.4%), cost of plan (13.0%) and excessively dilutive/high overhang (6.8%).
The report also notes that average compensation for CEOs of S&P 500 companies has continued to tick upwards year-over-year.
Join us virtually October 12-14th for our upcoming “Proxy Disclosure & 19th Annual Executive Compensation Conferences,” where we’ll be covering how to position disclosures for favorable proxy advisor recommendations, and how to avoid common areas of concern. Here are the full agendas – 18 action-packed sessions over the course of 3 days. To register, you can sign up online, email sales@ccrcorp.com, or call 1-800-737-1271.
Under newly effective amendments to Sections 152, 153 and 157 of the Delaware General Corporation Law, companies now have greater flexibility in equity grant procedures. The amendments – as set forth in proposed form in this Skadden markup – clarify the ability of the board to delegate authority for stock issuances (Section 152) and for options and other rights (Section 157) – and harmonize these sections so that they’re finally consistent with each other. Under both sections, the delegating resolution needs to include:
– A maximum number of shares, rights or options that may be issued (including the maximum number of shares that can be issued pursuant to the rights or options);
– A time period during which the shares, rights or options may be issued (including the time period for issuing shares upon exercise of the rights or options); and
– A minimum amount of consideration for which the shares, rights or options may be issued (including the shares issuable upon exercise of the rights or options) – which may be based on a formula or other “facts ascertainable” that are set forth in the resolution – e.g., trading price on a particular date.
The person or group receiving the delegated authority also can’t grant equity to themselves. Check out this Troutman Pepper memo for more details. Even though the newly consistent treatment and flexibility is a welcome change, anyone drafting minutes and documenting equity awards still needs to be careful to observe the technical requirements, since foot-faults can invalidate grants.
Companies are currently grappling with a volatile market, with many companies seeing their stock prices decline substantially over the past few months. At the same time, the SEC continues to push ahead with compensation-related rule proposals – which raises the stakes for compensation committees approaching executive compensation planning in a rocky environment.
For guidance on navigating these issues, join us tomorrow at 2pm Eastern for our webcast – “Executive Compensation & Equity Trends in a Volatile Environment.” Hear from Compensia’s Mark Borges, Morrison Foerster’s Dave Lynn, Gibson Dunn’s Ron Mueller and Semler Brossy’s Greg Arnold, as they share insights on:
– Handling Equity Grant & Rule 10b5-1 Plan Practices in Uncertain Environment
– Key Issues & Considerations for Option Repricing
– Hedging & Pledging Issues
– Executive Pay Structuring Considerations in Volatile Market
– Use of Retention Awards and One-Time Grants
– Disclosure and Shareholder Engagement Planning around Compensation Decisions
– Maintaining Equity Plans Under Pressure
– Other Emerging Compensation Trends During Market Volatility
After giving commenters two new bites at the apple – and releasing a DERA memo to analyze costs & benefits – the SEC is aiming to (finally) adopt clawback rules this fall. The end result of the rules will be that listed companies will need to adopt & disclose policies for recovery of incentive compensation that exceeds what would have been paid in the absence of an accounting restatement. It sounds like a simple concept, but it’s very, very complicated. And the topic hasn’t gotten any more straightforward since 2010, when it was first mandated by the Dodd-Frank Act.
I blogged earlier this year about notable comment letters that pointed out these challenges. New research from two accounting professors reinforces that notion (although I’m not sure that’s entirely the point they set out to prove).
The professors started out by measuring the “severity” of voluntarily adopted clawbacks, as disclosed in 821 SEC filings for non-financial companies from fiscal years 2007 to 2010. I was struck by the fact that the data set is a dozen years old, but apparently that’s because they wanted to leave a cushion of time to detect a subsequent restatement announcement. Their measurement is based on 27 attributes across these 8 categories:
1. Span of employees covered (e.g., current and/or former CEOs, CFOs, key executives);
2. Retrospective number of years the clawback applies to (i.e., the look-back period);
3. Trigger events (e.g., financial restatement);
4. Absence of hurdles inhibiting a clawback (e.g., absence of proof of materiality);
5. Compensation subject to recovery (e.g., short-term, long-term);
6. Reach of compensation subject to recovery (e.g., excess compensation, full compensation);
Here’s where things get interesting. The professors not only found a wide variation in the strength of clawback policies, but that the more stringent policies tended to exist at companies where directors were paid in cash & stock awards, rather than stock options. They suggested that directors who receive stock options are more motivated to focus on short-term performance and implement weaker clawbacks.
They also looked at unintended consequences: specifically, R&D spend. They conclude that clawbacks can be a “double-edged sword” because management may decrease R&D spend to overcome an earnings decrease due to financial misreporting. Other unintended consequences that weren’t part of the study could include the delay of bad news or ineffective changes to compensation structures.
Lastly, the analysis suggests that some boards are “giving the illusion of good governance to placate stakeholders, as their window-dressed clawbacks lack teeth.” In other words, all clawbacks are not created equal – and that may not come through in the DERA analysis.
Reading this research paper reminded me of a conversation I had with a benefits lawyer when these rules were first proposed. She told me she didn’t even want to think about all the complications here and that she hoped she would be retired by the time they went into effect (it does not appear her wish will come true). While we do have a “Clawbacks” Practice Area for members and guidance in the “CD&A” chapter of Lynn & Borges’ Executive Compensation Disclosure Treatise about how to disclose policies & related forfeitures, I think a lot of folks have shared that sentiment and have understandably been sticking their heads in the sand on this issue, while we all “wait & see” what happens with the rules.
Now that SEC action appears to be imminent, it’s time to get up to speed. If you want the crash course, register for our “Proxy Disclosure & 19th Annual Executive Compensation Conferences” – we have a session on “Clawbacks: Preparing for Final SEC Rules” with Davis Polk’s Kyoko Takahashi Lin, Gibson Dunn’s Ron Mueller, Hogan Lovells’ Martha Steinman, and our very own Mike Melbinger. Plus, 17 other panels, including an interview with Corp Fin Director Renee Jones. The Conference is being held virtually over 3 days – October 12th – 14th. Sign up online (via the conference drop-down), email sales@ccrcorp.com, or call 1-800-737-1271.
John blogged earlier this week on TheCorporateCounsel.net about whether buybacks are truly evil – or just misunderstood. One of the recurring criticisms of share repurchases is that they unfairly benefit executives in two ways: (1) by inflating stock prices on which awards are based, and (2) by providing executives with shares that they can resell at those inflated prices. John notes a recent study from three finance profs, which found little evidence for this. Here’s more detail:
It is well known that CEO pay increases in firm size and revenues and that bonuses are tied to accounting performance (Healy, 1985; Core et al., 1999; Murphy, 2013). Therefore, it is not surprising that the above-median repurchase firms’ CEOs earn more pay than the smaller, no-repurchase firms. Whether this difference represents excess pay for the above-median repurchase firms can be evaluated using the pay model described above. As reported in Table 4, the estimated excess pay for the CEOs of the above-median repurchase firms is $71,000. This amount is economically small, only about 0.9% of the average CEO’s total pay, and statistically insignificant.
Compared to the no-repurchase firms’ CEOs, the above-median firms’ CEOs earn $51,000 more excess pay on average (= $71,000 – $20,000). However, this difference is not statistically significant and is also economically small in relation to the average CEO’s pay. Overall, the small difference between the above-median firms and no-repurchase firms, the even smaller difference between all firms and no-repurchase firms, as well as the lack of a monotonic relation across the groups, collectively suggest that repurchases are not associated with excessive CEO pay.
In a recent WSJ article, Rick Wartzman & Kelly Tang of the Drucker Institute analyzed whether high pay ratios drag down the health of businesses, as Peter Drucker, “the man who invented management,” had predicted. Using the Drucker Institute’s measure of management effectiveness (which looks at 34 indicators of customer satisfaction, employee engagement & development, innovation, social responsibility, and financial strength), they arrived at this result:
The pattern that emerged was clear and consistent: The higher the pay ratio, the higher the average scores in our rankings. This was true for overall effectiveness, as well as for every one of the five areas we gauge.
Wartzman & Tang were surprised by this result: Drucker himself had said that resentment & falling morale would set in for ratios above 20:1, but the most “effective” companies in this analysis clocked in with a median pay ratio of 481:1. They note:
A key reason, we suspect, is that the majority of CEO pay comes in the form of stock and stock options, and the most effectively managed companies in our rankings have, by and large, watched their shares perform very well in recent years, easily outpacing the benchmark Dow Jones U.S. Total Stock Market Index.
To be sure, when exploring different variables than we do, other experts have produced evidence more in line with Mr. Drucker’s thinking. For example, a 2016 study by MSCI Inc. indicates that when pay imbalances between the CEO and everybody else are greater, labor productivity is lower. And a 2017 study by Harvard University’s Ethan Rouen found that “pay disparity matters to employee satisfaction, with consequences for firm performance”—specifically, year-ahead, industry-adjusted return on net operating assets.
Notwithstanding the correlation here, the authors aren’t advocating for higher CEO pay. They caution that the resulting income inequality risks tearing society apart, which would probably wipe out most of those market gains.
I blogged last week about a rulemaking petition that the “Working Group on Human Capital Accounting Disclosures” submitted to the SEC – which, among other things, urged the SEC to require companies to disaggregate labor costs on their income statements. This blog from Cooley’s Cydney Posner says that the FASB also recently revived a project to disaggregate income statement expenses – including labor costs. At a late-July meeting, the FASB considered feedback on the topic from both preparers & investors. Cydney’s blog summarizes the discussion from the meeting. Here’s an excerpt:
At this point, a loose consensus appeared to form around a two-pronged hybrid approach (somewhat similar to the approach being taken by the IASB): a prescriptive component that would require disaggregation of some specific costs, including labor, depreciation and amortization and, in some cases, materials or purchases; and a principles-based component for disaggregation of other costs, which might involve management judgment or a quantitative threshold or backstop. More elusive perhaps may be a simple approach to addressing inventory and capitalized expenses.
The staff plans to perform analysis and develop alternatives for discussion at a future Board meeting. Clearly, there’s still a way to go here, but the project does appear to be moving forward. Separately, the FASB is working on a proposal to require more granularity about segments.
The attention on “labor cost” transparency follows two years of new disclosure under the principles-based human capital disclosure rules that the SEC adopted in 2020. A recent academic study (from accounting professors Demers, Wang & Wu) found that, at least in Year 1, Form 10-K HCM disclosures tended to focus on qualitative info and be phrased optimistically. If you’re preparing these disclosures, you should know that someone out there is measuring your word count and “positive tone.” Here’s more detail (cleaned up):
– The mean (median) HC disclosure consists of 501 (420) words. The length of the HC disclosure varies considerably across firms, ranging from 37 words at the 5th percentile to 1,305 words at the 95th percentile.
– In relative terms, HC disclosures represent 8.59% (5.53%) of Item 1 for an average (median) firm. The proportion of Item 1 represented by HC disclosures varies greatly across firms, however.
– “Numerical intensity” is low – just 3.87% (2.61%) for an average (median) firm in the sample – 5% of firms provide less than one number for every one hundred words in their HC disclosures,
whereas the 5% with the highest numerical intensity provide approximately one number for every 10 words.
– Firms use approximately four times as many positive words as negative words in their HC disclosures.
The professors concluded that the new disclosures lacked comparability and weren’t very informative to investors:
Our results confirm that, in the absence of detailed guidance, corporate HC disclosures are extremely heterogeneous in terms of their length, numerical intensity, tone, readability, and similarity with peer firms; they are generally not very numerically intensive, but they are very positively toned; and they inherit many of the properties of the firm’s other Item 1 disclosures.
Firms with higher levels of institutional investors have longer and more net positively-toned HC disclosures, but these disclosures are not necessarily more informative as they are not more numerically intensive nor more specific. More profitable firms tend to have more idiosyncratic disclosures, whereas firms with lower ROA tend to provide more boilerplate disclosures. Firms for which HC is strategically important, on the whole, do not appear to provide superior HC disclosures.
Finally, time trends suggest that firms have learned over the first year of the non-directive regulation to provide HC disclosures that are longer and more optimistic, but less informative (i.e., more similar or boilerplate, less specific, and less numerically intensive). Overall, our comprehensive descriptive evidence suggests that, consistent with widespread criticism, the SEC’s new principles-based rule has generated HC disclosures that are likely to be grossly insufficient for investors’ needs.
It will be interesting to see whether the new HCM disclosure that the SEC intends to put forth this fall will swing the pendulum all the way to the “prescriptive” side of the spectrum, which seems to be the direction that the tea leaves are pointing. I’m sure I’m not the only one who finds the criticisms of early disclosures a little unfair, when companies were scrambling to navigate an 11th-hour rule.
That said, now is the time to get out in front of the next round of rulemaking, because your future disclosures also will be picked apart. Our “Proxy Disclosure & 19th Annual Executive Compensation Conferences” will provide loads of practical guidance. That includes get the very latest on what you need to be doing to prepare for new HCM disclosures that the SEC plans to require – and in the meantime, meet continuously advancing investor demands.
With so much SEC rulemaking on the horizon, our Conferences are a “can’t miss” event for anyone who is preparing SEC disclosures, engaging with shareholders, or advising compensation committees or boards. Check out the agendas – 18 fast-moving, practical sessions held virtually over 3 days – October 12th – 14th. Sign up online, email sales@ccrcorp.com, or call 1-800-737-1271. With human capital also being a very relevant topic to anyone navigating ESG issues, you can also add on our “1st Annual Practical ESG Conference” for a bundled discount! Tell your colleagues, and save even more for multi-seat registrations…
We recently received the following member question on our “Q&A Forum” (#1414), which John also noted on TheCorporateCounsel.net:
Should the compensation of NEOs be approved or ratified at an annual stockholders meeting? I believe it should be ratified because the Board previously approved it and now the stockholders are ratifying and approving the board’s action.
This was John’s response:
I think the general practice is to ask shareholders to “approve” the compensation. I think there are a few reasons for that. First, it’s an advisory vote, not one that is intended to have the legal effect associated with ratifying board action under state corporate statutes. Second, the relevant rule uses the term “approve.” Rule 14a-21 requires companies to “include a separate resolution subject to shareholder advisory vote to approve the compensation of its named executive officers, as disclosed pursuant to Item 402 of Regulation S-K.” Finally, the Instruction to Rule 14a-21 includes a non-exclusive sample of an acceptable resolution, which also speaks in terms of shareholders “approving” the compensation. Here’s the text:
“RESOLVED, that the compensation paid to the company’s named executive officers, as disclosed pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis, compensation tables and narrative discussion is hereby APPROVED.”
When it comes to other say-on-pay questions, don’t forget to consult our “Executive Compensation Disclosure Treatise” – a comprehensive, well-organized resource on executive compensation disclosure that is available online to members of CompensationStandards.com.
I blogged last week on TheCorporateCounsel.net about BlackRock Investment Stewardship’s annual stewardship report – which details its engagement & proxy voting stats and the rationale for voting decisions. On the one hand, the report had some good news for companies when it came to the asset manager’s view of corporate ESG progress. The picture wasn’t as rosy for executive compensation, though. At S&P 500 companies, BlackRock’s support for say-on-pay proposals has declined continuously over the past 5 years.
When it came to Americas-based compensation-related proposals (primarily say-on-pay & incentive plan proposals), BlackRock supported management 89% of the time – compared to 92% past year. For say-on-pay specifically, it supported 91% of management proposals this year compared to 94% last year – with the most significant decline happening at S&P 500 companies (BIS supported proposals at 87% of those companies this year, compared to 90% at the rest of the Russell 3000). It says that the main reasons for diminished support include cases of:
– Lack of clarity regarding the alignment of performance metrics and their weightings with company strategy;
– Concerns regarding performance goal rigor;
– Awards that were not aligned with sustained long-term performance; and
– Front-loaded awards without a compelling rationale for long-term shareholders.
The report provides case studies of say-on-pay “no” votes on page 42 and a success story on page 43. BlackRock also voted against 382 directors in the Americas to signal compensation-related concerns.