ON Securities : Securities Lawyer & Attorney for Corporate Governance & Executive Compensation Matters

And the survey says . . . executives are still doing okay in this economy. Many media outlets have just released surveys of the 2009 compensation of public company executives. They generally reported higher cash compensation (especially bonuses) than for 2008, when many companies did not hit their earnings targets. Relative equity compensation value was harder to assess.

In “Median pay for Minnesota’s top CEOs dipped only slightly,” Christopher Snowbeck of the St. Paul Pioneer Press reported on these trends for Minnesota companies. He did a good job describing the bonus increase, which resulted from companies setting more realistic financial goals for 2009. He also spoke to me about the difficulty in assessing equity compensation levels from the Summary Compensation Table in proxy statements, and the need to look at the intrinsic value of the awards at the end of the fiscal year and over time. Check it out.

And you have to check out Chris’ Twitter feed. In his words, “Chris Snowbeck is so inspired by business news he writes haiku in response.” Seriously, haiku.

Bowne Conference Will Be Educational and Entertaining

I am excited to be presenting at the 2010 Bowne SEC Accounting, Compliance & Legal Issues Conference, to be held on May 27 in Minneapolis. My presentation is the Disclosure Update, where my panel will be providing tips on:

• Update on SEC Disclosure Requirements, including Climate Change Disclosure and Guidance on Non-GAAP Measures
• Securities Litigation and Enforcement Update - Bank of America Settlement, Lehman Brothers report and other developments
• Impact of heightened SEC enforcement
• Disclosure advice – what public companies should do to protect against liability

I’ll share some of the materials and tips in this Blog after the Conference – as well as the video clips we'll be showing to the attendees.

Also, if you can show up in person, I strongly encourage you to do so. This is always the biggest gathering of public company personnel in the Twin Cities, and it’s a great networking event. Nice lunch, too!
 

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Congressman Barney Frank, at an appearance in Minneapolis last weekend, predicted that President Obama will sign financial reform legislation into law by the end of June. The Frank Bill and the Dodd Bill (summarized in the ON Securities Cheat Sheet (PDF)) both include governance and compensation reforms that may change as they are reconciled in conference committee. However, both bills include similar requirements for Say-on-Pay, the requirement that all public companies hold an annual non-binding vote on compensation. Therefore, it’s pretty clear that Say-on-Pay will be adopted this year and will likely be required for all public companies by next year’s proxy season.

Congressman Frank, an entertaining speaker with an impressive grasp of the financial system, spent most of his speech discussing the need for financial institution regulation. However, he also emphasized the importance of Say-on-Pay. He believes executive compensation has gotten out of line with the concept of paying the amount necessary to regain good management. Congressman Frank pointed out that Say-on-Pay has been used in the United Kingdom for a number of years.

The speech was sponsored by the Caux Round Table, an international network of business leaders based in St. Paul, Minnesota. This group works with business and political leaders worldwide to promote good governance practices. Caux Round Table has produced the Principles for Responsible Business (published in twelve languages), which address corporate responsibility issues, including some compensation and disclosure principles, and make interesting reading.

Another Company Loses Say-on-Pay Vote

In the RiskMetrics Blog under “Occidental Also Fails to Get Majority Support on Pay”, Ted Allen reports that Occidental Petroleum lost a shareholder advisory vote on compensation last week. This is the second major company to lose such a vote; as I reported last week, Motorola also recently lost its advisory vote.

Of course, these votes are purely advisory and have no direct impact on compensation practices. However, they may have a major indirect impact. For any company that loses a Say-on-Pay vote, RiskMetrics and other proxy advisory services are more likely to recommend a “withhold” vote against members of the compensation committee at a future annual meeting unless the company makes significant changes in its compensation practices. This will increase the pressure on compensation committees.

The threat of a large withhold vote against directors may have an even bigger impact in the future, because under the current version of the Dodd Bill, companies listed on stock exchanges (including Nasdaq) will also be required to adopt “majority voting” policies in director votes. If this provision is included in the final law, a director’s failure to receive a positive majority vote will result in a requirement that the director resign. Therefore, the current financial reform legislation could create a big incentive for board members to cater to the wishes of institutional investors, particularly on executive compensation issues.
 

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New Item 402(s) under Regulation S-K requires public companies to assess whether risks arising from the registrant’s compensation policies and practices are reasonably likely to have a material adverse effect on the registrant. If so, the company must make a variety of disclosures about the company’s compensation practices as they relate to risk management. Smaller reporting companies are exempted from the requirement.

In making the assessment, the companies generally consider the features of the compensation program that mitigate risk. As previously reported in this blog in a post called "Disclosures of Compensation Risk: A Brisk Discussion of Risk," companies have generally concluded that their compensation policies are not reasonably likely to have a material adverse effect. Even though this conclusion makes disclosure unnecessary under Item 402(s), many (if not most) companies have voluntarily elected to include a disclosure in their proxy statements. Generally this consists of a few paragraphs, disclosing that the compensation committee or the full board made the risk assessment, the factors they considered, and some conclusion about the risk profile of the company’s compensation. Other companies have been silent, as permitted by the rules.

Mark Borges has reported in his Proxy Disclosure Blog (subscription service) that the SEC staff has started to issue comments to companies that are silent about compensation risk in their proxy statements. The staff comments request additional information on the risk assessment. In fact, some companies have received the comment even if they included a statement in the proxy statement about their conclusion but did not describe the risk assessment process.

Comment: Borges concludes, and I agree, that the staff is not requiring every company to make a disclosure. However, I think it is a good idea for public companies to include some disclosure on the process and the conclusion. Not only does this reduce the likelihood of a staff comment, but it shows investors that the compensation committee and/or the board engaged in a thorough and thoughtful process to assess compensation-related risk.

Say-on-Pay Proposals May No Longer Be a Slam Dunk

Last year, in a post called “Say-on-Pay Play-by-Play,” I reported that Say-on-Pay, a shareholder advisory vote on executive compensation, often results in an overwhelming vote for approval of the compensation. I reported on the election results for some companies that held advisory votes last year, mainly financial institutions that, as TARP recipients, were required to hold such advisory votes. The percentage vote in favor of approval ranged from 70 percent to 93 percent.

However, the landscape for Say-on-Pay votes may be changing. In “Investors Reject Motorola’s Pay Practices” in the RiskMetrics Blog, Ted Allen reported this week that in Motorola’s advisory vote, just 46 percent of the vote was in favor of the proposal, resulting in the proposal being defeated. In another post, Allen reported that American Express received a 37% negative vote and Wells Fargo received a 27% negative vote (compared to a 7% negative vote a year earlier).

Further, as Broc Romanek reported in “Proxy Season Look-In: How Say-on-Pay is Faring So Far” in TheCorporateCounsel.net Blog, the affirmative vote would have been even lower if brokers had not been able to cast discretionary votes for the proposals. Romanek notes that one of the provisions of the Restoring American Financial Stability Act of 2010 (1,410 page PDF) (the “Dodd Bill”), would eliminate brokers’ ability to cast discretionary ballots in such an advisory vote. Brokers would be required to receive timely instructions from street name holders in order to vote the shares for such a proposal. This change would make it even more difficult in the future to get approval for Say-on-Pay votes.
 

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