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

My plans for New Year’s Eve are saved! I don’t need to sit at home on Saturday night waiting for the SEC’s to-be-issued proposed and final rules under the Dodd-Frank Act that have been long been listed on the SEC's Dodd-Frank web page under the category “December 2011 (planned).” I checked again today, and I found that the caption above those items has now been changed to “January – June 2012 (planned).” Further, the items that had been labeled “January – June 2012 (planned)” have been changed to “July – December 2012 (planned).”

Therefore, public companies have a lot to look forward to from the SEC in 2012, subject to the possibility that the agencies best-laid “plans” will go astray again:

• Proposed and final rules for disclosure of pay vs. performance and pay equity (Dodd-Frank Section 953).
• Proposed and final rules disclosing the company’s policy toward hedging (Section 955).
• Independence standards for the compensation committee and standards for compensation committee advisors (Section 952).
• Recovery of incentive compensation – rules directing the exchanges to require listed companies to implement clawback policies in connection with accounting restatements (Section 954).

Not to mention an interesting second proxy season involving say-on-pay advisory votes, and the possibility of shareholder proposals under Rule 14a-8 regarding proxy access. Stay tuned. As always, the ON Securities Cheat Sheet has been freshly updated to reflect all of the new “planned” dates and is always available at the right side of the home page. 

A Look Back at 2011

Here is an informal list of some of my posts in 2011 that fostered a lot of comments or might be useful to review:

“Boards’ Recommendations on the “Say When on Pay” Vote: The Debate Continues,” in which I was part of a national debate on the recommendations Boards of Directors should make on the “Say When on Pay” frequency votes.

“If the Shareholders Say "Nay-on-Pay", Get Ready for "Sue-on-Pay," which described the very interesting “Sue on Pay” lawsuits based on failed advisory votes on compensation. This subsequent post also described the Cincinatti Bell case, which I maintain was a “game changer.”

“How to Encourage Internal Reporting By Whistleblowers,” with some good practical tips.

“Payback Time: How to Prepare for Required Clawbacks Under Dodd-Frank.”

And here are some 2011 posts that were simply fun to share with readers:

“How Do Top Films Relate to the New Shareholder Advisory Votes?”, which related the films The Social Network and The King’s Speech to the world of Say-on-Pay votes.

“’Too Big to Fail’ Doesn't Fail to Educate or Entertain,” a review of the movie Too Big to Fail.

“More Proxy Advisor Insights: Through The Looking Glass (Lewis),” including an “alternate version” of Glass Lewis’s “Proxy Talk” service, if it were moderated by Mike Myers as a “Coffee Talk with Linda Richman” segment.

“Why Am I Inspired By the Songs of Stephen Sondheim?” - including my musical offering illustrating the title of the post.

I wish all of my readers a wonderful and safe New Years celebration and a happy, healthy, prosperous and inspiring 2012!

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As I said in my last post, the theme of the Maslon Law Firm’s holiday project is “Inspiration – Pass It On”. My inspiration – “Studying the Songs of Sondheim.” So why am I inspired by the songs of Stephen Sondheim? And can he teach any lessons to those of us who draft disclosure and communication documents for a living?

I’ve been a fan of musical theater at least since high school, when I got a chance to play Tevye in Fiddler on the Roof. I still love the classic musicals, but I find the shows of Sondheim to be more funny, moving and ultimately challenging than those of any other composer. From the twisted fairy tales of Into the Woods to the revenge of the murderous barber, Sweeney Todd, to the life and art of painter George Seurat in Sunday in the Park With George, Sondheim brings rich characters to life through his songs.

Sondheim’s songs are complex and work on many levels, making them fascinating and satisfying to study. While his music is often beautiful or stirring, the lyrics are always paramount and feature some of the greatest rhymes ever. For example, from Company:

When a person’s personality is personable,
He shouldn’t oughta sit like a lump.
It’s harder than a matador coercin’ a bull
To try to get you off of your rump.

Or, from A Little Night Music (note the two rhymes per line):

DeMaupassant's candor would cause her dismay.
The Brontes are grander but not very gay.
Her taste is much blander, I'm sorry to say.
But is Hans Christian Andersen ever risque?

But rhymes are only one example of Sondheim’s amazing choices of words. Consider the line in “I’m Still Here” from Follies in which the character reminisces: “Then you career from career to career.” And sometimes the lyrics are literally inspiring, as in “Our Time” from Merrily We Roll Along: “It’s our time, breathe it in, Worlds to change and worlds to win.”

I heard Sondheim speak a few years ago, and it struck me how much he loves wordplay – the challenge of finding that perfect combination of words to communicate precisely and economically what is going on. In the Preface of his 2010 book of collected lyrics and commentary, “Finishing the Hat,” Sondheim articulates his three principles of lyric writing:

They were not immediately apparent to me when I started writing, but have come into focus via Oscar Hammerstein’s tutoring, Strunk and White’s huge little book The Elements of Style and my own sixty-some years of practicing the craft . . . . In no particular order, and to be inscribed in stone:

Content Dictates Form

Less is More

God is in the Details

all in the service of

Clarity

without which nothing else matters.

Not to trivialize Sondheim’s art, but doesn’t the above describe the best principles for drafting disclosure documents? Don’t you wish the writers of more 10-Ks, press releases and proxy statements would think more about Sondheim’s principles? For example, as the Compensation Discussion and Analysis sections of many proxy statements approach (or exceed) 20 pages, wouldn’t it be great if the writers practiced “Less is More” and always had “Clarity” as their mantra?

Anyone Can Whistle

In addition to being inspired listening to Sondheim’s music and reading the lyrics, I am also “Studying the Songs of Sondheim” in my voice lessons. Thanks to the magic of karaoke background tracks, here is my rendition of one of my favorite Sondheim songs, “Anyone Can Whistle”.
 

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Compensation attorney and fellow blogger Mike Melbinger recently gave an excellent presentation in Minneapolis on the clawbacks required under the Dodd-Frank Act. His message – start getting prepared now for some complex and sensitive issues. His presentation was sponsored by the
Twin Cities Chapters of the National Association of Stock Plan Professionals and the Society of Corporate Secretaries and Governance Professionals.

Melbinger’s presentation, “Payback Time: Issues and Answers on Clawback Provisions” (PDF), at page 7, includes the operative language of Section 954(b)(2) of the Dodd-Frank Act requiring the SEC to adopt rules that will require listed public companies to recover compensation from executives in the event of a financial restatement. The SEC has not yet proposed its rules under Section 954, although the SEC’s website still states that the proposed rules are planned for December 2011, with final SEC rules planned for January-June 2012. However, even when the final rules are adopted, the requirements will not be effective until the New York Stock Exchange, Nasdaq and other exchanges adopt their own rules incorporating clawbacks into their listing requirements. This could take several additional months.

However, now is the time to consider how to prepare for the requirements. Melbinger’s “Compensation Committee Action Items” include the following:

• Take an inventory of all plans, programs and arrangements that provide for incentive compensation tied to financial metrics.
• Review the structure of compensation packages.
• Review who within the company should be subject to the clawback policy – i.e., just the present and former executive officers required under Section 954, or others, such as directors, senior finance personnel, or all participants (possibly limiting the last category to those actually at fault)?
• Check indemnification and mandatory arbitration clauses for clawback litigation issues.
• Check enforceability of choice-of-law provisions – this may be especially important for employees in states such as California with wage and hour laws that may affect the employer’s ability to recover compensation.
• Include clawback language that references Dodd-Frank to incorporate the final rules into any new executive compensation grants and agreements – until the rules are final, this language need not be very specific, but it will help document the parties’ intention to incorporate the final rules into all executive arrangements.

Melbinger reported an interesting development – at least one insurance company is offering director and officer liability coverage to insiders in some cases of clawback liability. Obviously, if the individual was involved in misconduct, public policy would prevent them from being indemnified or insured, but this policy might not apply if the individual is not at fault.

Melbinger also touched briefly on tax issues involved in clawbacks, and suffice it to say that the tax treatment will not be simple. Generally, the clawback will be invoked in a later year than the year the compensation was earned, and applicable rulings will prevent the executive from amending the prior year’s return. Further, it will be tricky to offset the clawback obligation against future deferred compensation owed the executive, because this could lead to an inadvertent violation of the rules under Code Section 409A.

All in all, clawbacks will create interesting issues for corporate counsel and headaches for public companies and possibly executives. Melbinger showed this video as an illustration of what a “clawback” might feel like.

Happy Holidays, and Sharing Inspiration, from Maslon

I wanted to share with my readers the Maslon Law Firm's holiday greeting: “Inspiration – Pass It On”. Check it out – all 85 Maslon attorneys have shared their thoughts about what inspires us. For each of the first 200 submissions (including the attorneys’), Maslon is donating $25 to the Minneapolis Institute of Arts' Art Adventure Program, which facilitates arts education to nearly 100,000 K-6 students across the state. We have already received a total of 118 submissions, and it’s fun to see what everyone came up with. Please feel free to share your inspiration on the site.

So what inspires me? “Studying the Songs of Sondheim” – I’m a fanatic fan of Broadway composer Stephen Sondheim. In a future post, I’ll share some of my favorites, and lessons we can all learn from the master lyricist.

Happy Holidays to all!

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As I reported in this prior post, the recent Proxy Disclosure Conference sponsored by CompensationStandards.com (subscription site) featured a session called “The Proxy Advisors Speak”, featuring insights from representatives of ISS and Glass Lewis on how to gain their positive recommendations. This is critically important in the upcoming season of Say-on-Pay advisory votes on executive compensation.

David Eaton, the Glass Lewis representative, made these points:

• Glass Lewis, like ISS, evaluates its Say-on-Pay recommendations on a case-by-case basis. Glass Lewis focuses on four key issues: compensation structure; disclosure of policies and procedures; amounts paid; and the link between pay and performance.
• In evaluating pay for performance, Glass Lewis uses a proprietary formula (PDF) and grades each company “on an A to F forced curve.” They also do a qualitative analysis of program design and implementation, compensation mix and the appropriateness and balance of the metrics used.
• Glass Lewis focuses strongly on the quality of compensation disclosures, grading each company on a Poor/Fair/Good scale. For the S&P 500, the quality ratings for disclosure improved significantly from 2010 to 2011. “Poor” ratings declined from 19% to 5%, and “Good” ratings increased from 15% to 22%.
• Eaton cited the following companies’ disclosures as good examples of the use of CD&A to provide a rationale and justification for committee decisions, not just the requisite facts and figures: Entergy Corp., PartnerRe Ltd., Coca-Cola, W.W. Grainger, Waste Management and Newmont Mining.
• The primary change in Glass Lewis’ policies for 2012 relates to companies that received high negative votes in 2011, generally indicated by a greater-than-25% negative vote (compared to the 30% threshold used by ISS in its updated policies). For these companies, Glass Lewis “. . . will look for language in the proxy that the compensation committee is taking last year’s vote seriously and have engaged with large shareholders. We will hold compensation committee members accountable for a failure to respond.” Their policy is less specific than ISS’s new policy for such companies (see my most recent post), but it places similar importance on engagement and disclosure of the engagement.
• Glass Lewis is open to meeting with any company outside of the solicitation period and “proxy season blackout periods.” Further, they publish their reports an average of three weeks before the annual meeting, allowing for sufficient time to revise reports in the event of errors or omissions.

“Proxy Talk”

Eaton also reported that Glass Lewis hosts “Proxy Talk” conference calls to discuss a shareholder vote or issue in depth. These calls are generally used when there is a major issue, such as a proxy fight or shareholder proposal, but Glass Lewis offers this vehicle generally as a way to facilitate engagement between public companies and institutional investors. If the company requests a call, Glass Lewis’ research team representatives serve as moderators, and shareholders can submit questions, providing an open forum “. . . to provide further color on specific issues”. 

This all sounds great, but when I heard about Proxy Talk, all I could think of was “Coffee Talk with Linda Richman,” Mike Myers’ classic creation on Saturday Night Live. Imagine if Glass Lewis hired Linda Richman to host “Proxy Talk”: 

Linda: Hello, and welcome to Proxy Talk. I’m Linda Richman, filling in this week for my good friends at Glass Lewis. Long story short, on this week’s show, we’re going to interview the CEO of General Electric, Jeffrey Immelt. Welcome to Proxy Talk, Jeff.

Jeff: It’s a pleasure to be here.

Linda: First, I just want to say that I’m very excited to talk to you, because GE owned NBC until last year. And of course, NBC is the network that broadcast “Barbra Streisand: The Concert” in 1995. Just thinking about it, I’m dying. Now I’m getting a little verklempt. Talk amongst yourselves. I’ll give you a topic. The Dodd-Frank Act wasn’t about anyone’s dad, and it was neither "frank" nor an "act". Discuss. [Pause.] 

Linda: There, I feel better. Now, we’ll take a call from a stockholder. The number is 555-4444. Give us a call, we’ll talk, you know, no big whoop.

Caller: Hello, Linda, what do you think of Barbra’s new CD?

Linda: Are you kidding? It’s like buttah. Each song is like a stick of buttah. It’s to die for. Do you have a question about GE’s proxy statement?

Caller: What do you think of GE’s CD&A section?

Linda: It’s also to die for. In fact, Glass Lewis gave it a grade of “Like Buttah.” And Jeff, I love the part about how you renegotiated your stock options last year before the Say-on-Pay vote. You’re beautiful. Don’t go changing just to please me. But I still can’t believe you sold NBC to a cable TV company. The only good part is that Comcast has several channels that show “Yentl”. No big whoop.

Now, wouldn’t that spice up proxy season?
 

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As discussed in my last post, the proxy advisory firm ISS recently issued its 2012 Updates to its U.S. Corporate Governance Policy (PDF). One important change relates to the board’s response to a high negative vote. For companies that experienced a lot of “thumbs down” votes from shareholders at the last annual meeting, ISS’s evaluation of the board’s responsiveness will affect ISS’s recommendation on the upcoming Say-on-Pay vote. Not only that, but this evaluation will also inform ISS’s voting recommendations for compensation committee members in the election of directors.

The new formulation is much more specific than in the previous Policy. ISS will evaluate responsiveness on a case-by-case basis if the previous Say-on-Pay proposal received less than 70% of the votes cast. Therefore, ISS has for the first time specified the “red zone” range where the negative votes are high enough to create significant concern. For these under-70% companies, ISS’s evaluation will take into account the company’s responsiveness to the negative votes, including:

• Disclosure of engagement efforts with major investors;
• Actions to address issues that contributed to the low level of support and other recent compensation actions;
• The recurring or isolated nature of the issues raised;
• The company’s ownership structure; and
• Whether support was less than 50%, which requires the highest degree of responsiveness.

In its “Rationale for Update,” ISS specifies the disclosures it will look for in the proxy statements of these companies that received under 70% the previous year:

. . . At companies that fail to receive a meaningful level of support on their say-on-pay proposals, shareholders will seek substantive and meaningful disclosure in determining whether the company has taken sufficient actions to address the compensation issues that contributed to the low level of support. Companies should discuss their outreach efforts to major institutional investors and provide the specific actions that they have taken to address the compensation issues that resulted in a significant opposition votes. These specific actions should ideally be new rather than a reiteration of existing practices. Companies should refrain from providing boilerplate disclosure, as it does not enable shareholders to gauge the level of effort taken by the company. Placement of such information should be readily identifiable.

For the companies in this situation for their upcoming annual meeting, it is important to be making explicit engagement efforts now rather than waiting until after the proxy statement is mailed. These engagement efforts should be aimed at determining the reasons for the negative votes. These efforts should be completed far enough in advance of the annual meeting to plan specific actions to address shareholder concerns, and to draft appropriate disclosures in the proxy statement. Note that ISS is looking for proxy descriptions of specific new actions taken by the board and expects the information on engagement and responsiveness to be in a readily identifiable place in the proxy.

For more thoughts on the joys of “engagement” with shareholders, see my special Valentine’s Day post on engagement. Love is in the air!
 

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