Header graphic for print

Just Compensation

Focusing on Issues and Trends in Corporate Governance and Executive Compensation

Citigroup sued after say-on-pay failure – more will be coming

By Steven D. Kittrell on Posted in Compensation Committee, Derivative Suits on Compensation, Executive Compensation Litigation, Say-on-Pay/Say-on-Frequency

As inevitable as May flowers after April showers, Citigroup, its board and senior officers were sued following its well-publicized negative vote by shareholders on say-on-pay last week.  With the suit filed days after the shareholders’ meeting, the plaintiff obviously did not make a demand on the board.  However, one repeated allegation is the board’s failure to act in response to the negative vote.  The purpose of this allegation seems to be to bolster the claim that a pre-suit demand would have been futile.  Given the precedents in other say-on-pay litigation, avoiding a demand would not seem likely to prevail. 

While say-on-pay suits have not been numerous enough to become boilerplate, this complaint does not seem to offer much new.  The specific causes of action are becoming pretty standard:

  • The proxy was misleading due to statements about a “pay for performance” philosophy.
  • The failure to apply a pay for performance standard was a breach of fiduciary duty.
  • The failure to act based on the negative say-on-pay vote was a breach of fiduciary duty.
  • The executives were unjustly enriched.
  • A nebulous claim of damages from false statements in the proxy about pay for performance.

One point on timing.  Citigroup must have known for several weeks that the say-on-pay vote would be close and was ready to react.   On a Citigroup blog issued the day after the shareholder meeting, Citigroup announced that its compensation committee and management would consult with shareholders about their compensation concerns and consider their input.  This action may end up being evidence that a pre-suit demand on the board would not have been futile.

Citi loses say-on-pay vote?

By G. William Tysse on Posted in ISS/Institutional shareholders, Say-on-Pay/Say-on-Frequency

Some caution is in order since the vote tallies are preliminary, but multiple media reports have surfaced that Citigroup lost its say-on-pay vote at today’s annual shareholder meeting, garnering only 45% of the vote (compared to a sweeping 92.9% victory last year).  If true, Citi would become the biggest company so far to fail its say-on-pay vote. 

Both ISS and Glass Lewis had apparently recommended “no” votes this year. Unlike some other companies, however, Citi appears not to have filed any supplemental proxy materials responding to the proxy advisory firms’ “no” vote recommendations.

Compensation committees and consultants may be hearing from auditors

By Steven D. Kittrell on Posted in Compensation Committee, Compensation Consultants, Executive compensation

The PCAOB has proposed a new auditing standard for related parties that would result in discussions between compensation committees, compensation consultants and auditors for the company.  The new standard would require auditors to obtain an understanding of a company’s executive compensation practices “sufficient to identify risks of material misstatements.”  The motivation of the PCAOB  is sufficiently explained by the proposing release mentioning Enron and Tyco in the first paragraph about the reasons for the new standard.

One of the new steps to evaluate the potential risks of executive compensation is a requirement that the auditor “consider” talking to the chair of the compensation committee and to any compensation consultants for the compensation committee or the company.  Given the tone of the PCAOB release, it seems likely that most auditors will move from consideration to talking very quickly and that both the compensation committee chair and the compensation consultants will be on the list. 

These standards are scheduled to be implemented for audits of fiscal years beginning on or after December 15, 2012.  If the standards are adopted, companies may want to give the compensation committee chair an extended briefing on the executive compensation risk assessments done by the company.  Increasing the budget for compensation consultants also would be in the cards.

JOBS Act exempts new public companies from many compensation disclosures

By G. William Tysse on Posted in Compensation Disclosure, Legislation, Say-on-Pay/Say-on-Frequency

Yesterday, President Obama signed into law the Jumpstart Our Business Startups (JOBS) Act, which I previously noted had cleared the House and Senate.  For additional information about the significant new exemptions from public compensation disclosures for qualifying “emerging growth” companies, please click here.

Conference Board surveys influence of proxy advisory firms for say-on-pay

By Steven D. Kittrell on Posted in Compensation Committee, Dodd-Frank Act, Executive compensation, ISS/Institutional shareholders, Perks, Say-on-Pay/Say-on-Frequency

A Conference Board survey on the influence of proxy advisory firms in say-on-pay voting reveals that the influence may be more measureable on institutional investors than on companies’ executive compensation programs.  While 70% of responding companies said that proxy advisory firm policies influenced their programs, the areas that were influenced do not look like a compensation revolution is happening.  The top five areas of influence by percentage of respondents (respondents could select multiple areas) were:

  1. Enhanced proxy disclosure (32%)
  2. Reduction or elimination of certain severance practices (i.e., single trigger parachute payments or excise tax gross-ups) (24%)
  3. Reduction or elimination of perks (16%)
  4. Adoption of stock ownership guidelines (13%)
  5. Introduction of performance-based equity awards (9%)

The one area that the sponsors of Dodd-Frank hoped would be most affected by say-on-pay was at the bottom of the list:

     10.  Reduction in total executive compensation levels (1%)

 

Early trends in 2012 proxy season

By G. William Tysse on Posted in ISS/Institutional shareholders, Say-on-Pay/Say-on-Frequency

An interesting report from the Manhattan Institute’s James Copland highlighting some early trends in the 2012 proxy season, including shareholder proposals, the early results of 2012 say on pay votes and the role of ISS.  Money quote (citations omitted):

Among the 11 Fortune 200 companies to have held shareholder votes on executive compensation to date in 2012, a majority of shareholders approved pay packages at each company.  Actual vote totals varied significantly, however, and this variation demonstrates the substantial role being played by ISS in such voting. ISS recommended that shareholders vote against executive pay at four of the 11 companies—Johnson Controls, Navistar, Qualcomm, and Walt Disney—and these companies received, on average, 64 percent support from shareholders in advisory executive-pay votes, ranging from 71 percent at Navistar to 57 percent at Disney.  In contrast, the other seven companies, for which ISS supported pay packages, received, on average, 94 percent support….

An unintended side effect of the Dodd-Frank-mandated shareholder advisory votes on executive compensation would thus seem to be giving a significant and far-reaching “gatekeeper” role over executive pay to ISS, a single private firm giving nonpublic shareholder-vote advice to institutional investors….

It is questionable whether moving all large-company executive-pay methodologies into ISS-approved packages is for the better, whether or not ISS is generally correct in its executive-pay assessments. Evaluating ISS’s role here is complicated by the fact that the firm’s recommendations and analyses are not public, and this opacity is of even greater concern given that many of the firm’s clients—who pay its bills—are shareholders such as labor-union pension funds and social-investing funds that may be motivated by issues other than maximizing shareholder value. 

Senate clears IPO “say on pay” exemption

By G. William Tysse on Posted in Dodd-Frank Act, Say-on-Pay/Say-on-Frequency

As Ted Allen notes, the Senate voted today to clear the “Jump-Start Our Business Startups (JOBS) Act” by a vote of 73-26.  The bill (which passed the House two weeks ago by a vote of 390-23) now heads back to the House where, as noted in this LA Times story, swift approval is expected.  If enacted, the bill (previously discussed on this blog here) would exempt start-up companies with annual revenues less than $1 billion (and annual market caps less than $750 million) from say-on-pay and other Dodd-Frank-related disclosure requirements for the first five years following their public offering.

U.S. district court dismisses say-on-pay suit

By G. William Tysse on Posted in Executive Compensation Litigation, Say-on-Pay/Say-on-Frequency

As reported in multiple outlets, last week the U.S. District Court for the District of Maryland dismissed the shareholder-derivative say-on-pay suit against the board of directors of Biomed Realty Trust, Inc. for failure to state a claim.  The plaintiffs had alleged that BioMed’s failure to alter its executive compensation program in the wake of a failed say-on-pay vote was a breach of the board members’ fiduciary duties to the company’s shareholders.  BioMed, citing the Oregon district court’s decision in the Umpqua Holdings case (which was decided under Delaware law), successfully argued that plaintiffs had failed to make a demand on the board and that demand would not have been futile under Maryland law.

Two new say-on-pay reports

By G. William Tysse on Posted in Say-on-Pay/Say-on-Frequency

For those keeping track, here are links to two new analyses of the 2011 say-on-pay season, one by Equilar analyzing the influence of inside votes on say-on-pay results, and one by the Conference Board and others analyzing the influence of ISS and other proxy advisors on the design of executive compensation programs.   Enjoy.

Lawmakers push pay ratio disclosure rules

By G. William Tysse on Posted in Dodd-Frank Act

Last week, 20 members of Congress signed a letter to the SEC urging it to prioritize rulemaking for the “pay ratio” disclosure that was included as part of the Dodd-Frank Act.  According to the SEC’s website, the SEC plans to propose rules for this and the other remaining Dodd-Frank compensation-related requirements by June 2012.   The letter to the SEC can be found here, and an ABC news report here. 

Of all the Dodd-Frank Act compensation-related requirements — say-on-pay included — this innocuous-seeming provision has generated the most controversy by far; not so much because of its content, which most companies are resigned to dealing with, but because of the absurd and unnecessary complexity involved in having to calculate the total “annual compensation” (as defined for SEC proxy reporting purposes) — which requires, among many other things, specialized calculations for equity-based grants, fringe benefits and increases in the present value of pension benefits — of every single employee in the firm on a worldwide basis every year so as to arrive at a “median” figure.  Company personnel facing the herculean task of gathering and shaping the data necessary to perform this calculation will get a sardonic chuckle from the letter’s assertion that the “calculation should not be difficult for any well-organized company.”

The SEC has stated repeatedly that its hands are tied by the statute, but companies are keeping their fingers crossed that it will be able to come up with a way to lessen the administrative burden.