So argues Jones Day’s Manan Shah in this recent New York Times piece:
The problem is even worse for companies facing shareholder opposition to its pay policies. These corporations tend to incur even greater costs to proxy advisers, compensation consultants, lawyers and other advisers — and even more costs should the vote fail. This is likely to cause financial damage to the company through wasted assets and potential reputational harm, which could far outweigh the costs of the perceived “excessive” executive pay.
It is also unclear if the compensation changes recommended by proxy advisers are in the best interests of shareholders. A July 2012 working paper by the Rock Center for Corporate Governance found that revisions made by companies to their compensation programs in an attempt to conform to guidelines issued by proxy advisory firms actually produced a net cost to shareholders.
As reported in the New York Times here, on March 3, Swiss voters approved a new law that gives shareholders of companies listed on the Swiss stock exchange binding “say-on-pay” votes over executive compensation. The law also bans golden parachute and golden handshake arrangements and imposes civil (a fine of up to 6 years of salary) and criminal penalties (up to 3 year in prison) on violators.
Switzerland is the second developed nation (following the Netherlands) to require mandatory, binding sharheolder “say-on-pay” votes. Australia has a variant “two-strikes” rule that requires the entire board of directors to stand for reelection if at least 25% of shareholders vote against executive compensation at two consecutive meetings. The UK has proposed making “say-on-pay” votes binding but the proposal has not yet been adopted.
On Feb. 22, in the same decision in which it enjoined Apple from holding shareholder votes on certain “bundled” amendments to its articles of incorporation, the federal district court for the Southern District of New York rejected a shareholder’s effort to enjoin Apple’s say-on-pay vote, as discussed by James Morphy here:
The “say-on-pay” complaint received by Apple is similar to those a number of companies have received in recent months. Similar complaints have also sought to enjoin votes on the approval of new or amended equity compensation plans, arguing that insufficient detail was provided in the description of the plan. While a small number of companies have entered into settlements or put out supplemental disclosure to avoid the risk of a delay of their annual meeting, most courts that have considered the issue have sided with the issuer and denied the request for an injunction.
Going on to note the Brocade decision as the exception that proves the rule.
Georgeson, the proxy solitication firm, published its Annual Corporate Governance Review which contains a survey of shareholder proposals for the S&P 1500 in 2012. Here are some items that I found interesting.
As you would expect, executive compensation issues (59 proposals) figure prominently at 22% of all proposals. Almost half of those proposals (27) related to requiring equity to be retained and 17 of those proposals were made by individual shareholders (rather than institutional shareholders). The average vote for those proposals was 24% with 35% as the highest percentage for a proposal.
The next most common proposal was to eliminate accelerated vesting on termination or change in control with 11 proposals. All of these proposals were made by unions or institutional shareholders. The average vote for these proposals was 37% with 42% as the highest percentage.
The only executive compensation proposal that received a majority of support was one proposal to require a shareholder vote to approve golden parachutes. That company also lost the say-on-pay vote by a substantial margin.
Without doing any statistical correlations, it appears that most companies had a lower vote for an executive compensation proposal than the negative vote percentage in their say-on-pay vote. That may support the theory that negative say-on-pay votes are as much about corporate performance as they are about executive compensation.
Wall Street Journal, “Anxiety Stalks Proxy Season,” 2/5/2013
Skadden, “How to Prepare for Annual Meeting Litigation,” 2/7/2013
Wachtell, “The New Wave of Proxy Disclosure Litigation,” 2/7/2013 & “Say-on-Pay Litigation: Part Deux,” 12/29/2012
Davis Polk, “Recent Developments in Executive Compensation Litigation,” 2/5/2013
Latham, “Update on Proxy Vote Injunctions and Lawsuits and Investigations,” 2/5/2013
D&O Diary, “Are the New Wave of Say-on-Pay Lawsuits ‘Gaining Steam’?,” 12/3/2012
Reuters, “Insight: Lawyers gain from ‘say-on-pay’ suits targeting US firms,” 11/30/2012
Katten Muchin, “‘Say on Pay’ and Executive Compensation Litigation: Plaintiff’s New Racket,” 10/31/12
On January 11, the SEC approved the proposed listing standards of the NYSE, Nasdaq and other exchanges relating to the independence of compenstion committee members and their advisers.
The SEC approved the rules substantially as proposed in October 2012 (see related items here and here), including recent amendments to the proposals which made a few minor changes (including extending the phase-in schedule for issuers that cease to be smaller reporting companies and clarifying that assessing the independence of compensation advisers is not required for advisers whose roles are limited to consulting on broad-based, nondiscriminatory plans or providing non-customized data).
The standards relating to the compensation committee’s authority to retain independent advisers and to receive adequate funding for such, and its obligation to examine the independence of the advisers it selects, go into effect on July 1, 2013. NYSE committees will generally need to amend their compensation committee charters before July 1, 2013 to address these specific new requirements. Nasdaq committees technically have until the full compliance deadline in 2014 to adopt or amend their charters but most will want to accomplish this by the July 1, 2013 implementation deadline as well.
The remaining standards relating to the independence of compensation committee members themselves generally go into effect on the date of the issuer’s 2014 annual meeting (or Oct. 31, 2014 a the latest).
On December 12, Nasdaq filed an amendment to its proposed listing standards regarding compensation committee and compensation adviser independence, delaying the implementation of the requirements relating to the committee’s authority to retain and supervise compensation advisers and its obligation to consider the independence of selected advisers until July 1, 2013. Previously, as discussed here, these requirements had been scheduled to go into effect immediately upon SEC approval, which is currently expected to occur on or about January 13, 2013, unless the deadline gets extended again.
In case you missed it, here is our recent client alert regarding the fast-approaching December 31 deadline for adopting Section 409A “release timing” amendments. The article also discusses considerations (including potential 409A restrictions) for accelerating into 2012 compensation that would otherwise be payable after 2012, in order to avoid the income, FICA and capital gains tax increases that are expected to kick in on January 1.
Today, ISS released its final 2013 proxy voting policy updates. Key changes in the corporate governance and executive compensation areas for US companies include:
- Share Hedging/Pledging: Hedging of company stock in any amount (through covered call, collar, or other derivative transactions) and “significant” pledging of company stock by directors and/or executives will be considered failures of risk oversight that could lead to against/withhold votes against individual directors or the board as a whole in extraordinary circumstances (rather than, as originally proposed, to against votes on a company’s say-on-pay proposal). In assesing whether share pledging should lead to against/withhold votes, ISS will consider the relevant facts and circumstances, including specifically (i) whether the company has an anti-pledging policy; (ii) the magnitude of pledged shares as percentage of total outstanding shares or market value or trading volume and the trend in this magnitude over time; and (iii) whether the company excludes pledged shares from any stock ownership guidelines it maintains.
- Majority-Supported Shareholder Proposals: Whether a proposal has received majority shareholder support will begin to be evaluated on the basis of votes cast at the last meeting (as opposed to total shares outstanding) — thus making it easier for a proposal to receive majority support – and ”responding” to the proposal will generally mean full implementation of the proposal.
- Pay-for-Performance Evaluation: A company’s self-selected peers will be factored into ISS’s peer group methodology (however there will not be a complete overlap), and, for large cap companies only, a comparison of “realizable pay” to grant date pay may be included as part of the qualitative evaluation of pay-for-performance alignment when the quantitative analysis indicates a pay-for-performance disconnect. ISS is defining “realizable pay” as the actual value of earned awards and the target value of unearned awards granted in the relevant period based on a company’s share price at the end of the period. However the “realizable” value of stock options and SARs will be based on their updated black scholes value (rather than their intrinsic value).
- Legacy Golden-Parachute Agreements: Existing change-in-control arrangements (not just new or extended arrangements) with named executive officers will be included in ISS’s analysis of say-on-golden-parachute proposals and arrangements with multiple problematic features (such as 280G tax gross ups or single trigger payments) will receive added scrutiny.
The addition of share hedging in any amount as a problematic practice, coupled with the SEC’s forthcoming rules regarding disclosure of companies’ share hedging policies under the Dodd Frank Act, should lead companies that don’t currently have an anti-hedging policy to consider adopting one.
The D&O Diary’s Kevin LaCroix notes that yet another federal district court has affirmed the SEC’s authority under SOX section 304 to claw back bonuses and stock sale proceeds from CEOs and CFOs who have not personally been alleged to have engaged in any wrongdoing in connection with their company’s financial restatements. He also highlights the implications this has for the Dodd Frank Act clawback provision and the soon-to-be-forthcoming rules under same:
The question of the SEC’s clawback authority has even broader implications in the wake of the enactment of the Dodd-Frank Act, which makes a much broader range of corporate officials potentially subject to clawback liability…. [U]nder Section 954 of the Dodd-Frank Act, the national securities exchanges are required to promulgate rules requiring reporting companies to adopt and disclose procedures providing for the recovery of any amount of incentive based compensation paid to any current or former executive that exceeds the amount which would have been paid under an accounting restatement in the three years prior to the date on which the company was required to prepare the restatement. The Dodd-Frank provision is quite a bit broader than Sox Section 304, as it extends to all executives and it reaches back three years and to all incentive based compensation.