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

With 2011 behind us, it’s interesting to look back at the results of public companies’ “Say When on Pay” shareholder advisory votes regarding the preferred frequency of Say-on-Pay votes, as required under the Dodd-Frank Act. Numerous commentators, including me, spent a lot of time last year “watching the scoreboard” last year – would companies recommend an annual, biennial or triennial vote, and how would the shareholders ultimately vote?

Mark Borges recently published his tally (as of year-end) of 3,149 companies’ proxy statements in his Proxy Disclosure Blog on compensationstandards.com (subscription site). According to Borges’ tally, these companies recommended as follows in their “Say When on Pay” shareholder advisory votes on frequency:

Annual Say-on-Pay vote recommendation: 1,686 companies (54%)

Biennial Say-on-Pay vote recommendation: 83 companies (3%)

Triennial Say-on-Pay vote recommendation: 1,297 companies (41%)

No recommendation: 83 companies (3%)

Borges also reported that, as of the end of the year, of the 1,270 companies where the Board of Directors has recommended that future Say-on-Pay votes be held every three years, 624 (49%) have seen their shareholders indicate a preference for annual "Say on Pay" votes. Interestingly, this means that at around half of the companies where the Board recommended a triennial vote, the shareholders went along with that preference, despite predictions that shareholders would overwhelmingly favor annual votes. Some of these companies represented special cases (majority of shares controlled by a handful of shareholders, etc.), but this does not explain the large number of cases where the triennial recommendation carried the day.

I would guess that we won’t hear much about Say When on Pay votes in 2012, because most companies have now made their decision about how often to hold their Say-on-Pay votes. However, I am still curious about two Say When on Pay questions:

• For companies where the Board recommended a triennial vote but the shareholders expressed a preference for an annual vote in a close vote, will any of them try to achieve a different result with another Say When on Pay vote this year? Note that the Say When on Pay vote must be held at least once every six years, but there is no limitation on how often the vote may be held.
• The shareholder advisory firm Glass Lewis last year stated that, where the Board of Directors recommended a triennial Say-on-Pay vote, they would look at these proposals on a case-by-case basis. This contrasts with the approach of ISS, which has a policy of always favoring an annual vote. Did Glass Lewis actually support any board’s recommendation for triennial votes?

If anyone can shed light on either of the above questions, send me an e-mail (I won’t publish your name without permission) or post a comment.

ON Securities Blog Named a Minnesota Top Blawg – Again!

I am pleased to report that, for the second straight year, ON Securities Blog was named as a “Top 25 Minnesota Blawg” by the editors of the Legal News Digest and the Minnesota State Bar Association’s Practice Blawg. Here is the complete list of the Top Blawgs.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

In the next few weeks, more public companies will hold their annual meetings, which will include the shareholder advisory votes on compensation required under the Dodd-Frank Act. One of these votes allows the shareholders to select the desired frequency of Say-on-Pay votes. Under this frequency vote, sometimes called “Say When on Pay,” shareholders may express a non-binding preference for whether Say-on-Pay votes should be held on an annual, biennial or triennial basis. After the annual meeting, the company will be required to report on the frequency with which it will actually hold Say-on-Pay votes, in light of the results of the shareholder vote – see new Item 5.07(d) of Form 8-K (PDF).

Therefore, once the annual meeting is held, the board of directors will need to report their response to the non-binding shareholder vote. So, what steps should the board of directors take following the Say When on Pay vote? Of course, if the shareholders chose the alternative that the board had recommended in the proxy statement, the determination is pretty easy. If the shareholders chose a different alternative, it’s a little more complicated. The process will be different for every company, but here is a checklist of governance steps and tips to consider:

• The rule gives you five months – take it. Item 5.07(d) gives the company 150 days to file the 8-K that includes the response (but no longer than 60 days before the deadline for submission of shareholder proposals for the next year’s annual meeting under Rule 14a-8). The consideration of this determination should be put on the agenda for a future board meeting in advance of the deadline for reporting.
• Consider the factors listed in the proxy statement. Many companies included in their proxy statement a list of factors they considered that caused them to conclude that the recommended frequency was in the best interests of the company and it shareholders. At the meeting, the board should discuss these factors once again, and balance them against the will of the shareholders expressed in the vote.
• Consider the strength of the views expressed in the shareholder vote. Presumably, a strong majority vote in favor of one of the alternatives should be given more weight than a close vote where none of the three alternatives received a majority. In either case, it is perfectly appropriate for the board to follow the preference of the shareholders despite the board’s prior recommendation of a different alternative.
• Consider having the compensation committee make a recommendation. Especially if the compensation committee initially recommended to the board the frequency expressed in the proxy statement, it may be appropriate to have the committee recommend the ultimate frequency of the Say-on-Pay vote to the board for its approval.
• Document the deliberations carefully. Make sure the minutes reflect the matters considered by the board and/or the compensation committee in making its determination.

Frequency Vote Update

Mark Borges just published his updated tally (as of April 15) of 1,976 companies’ proxy statements in his Proxy Disclosure Blog on compensationstandards.com (subscription site). According to Borges’ tally, these companies recommended as follows in their “Say When on Pay” shareholder advisory votes on frequency:

Triennial Say-on-Pay vote recommendation: 839 companies (includes 36 smaller reporting companies)
Biennial Say-on-Pay vote recommendation: 66 companies (includes two smaller reporting companies)
Annual Say-on-Pay vote recommendation: 1,009 companies (includes 11 smaller reporting companies)
No recommendation: 62 companies (includes six smaller reporting companies)

As for the results of the votes to date, Borges provided a good summary:

. . . . 252 companies [have] reported the voting results from their annual meeting of shareholders.
Here are the shareholder preferences for the frequency of future "Say on Pay" votes:

- Of the 15 companies that have recommended a biennial vote, 11 have seen their shareholders express a preference for annual votes.

- Of the 145 companies where the Board of Directors has recommended that future "Say on Pay" votes be held every three years, 63 (or 43%) have seen their shareholders indicate a preference for annual "Say on Pay" votes. That number decreases to 42% - 52 of 125 companies) when you exclude smaller reporting companies.

- Of the nine companies where the Board of Directors has made no recommendation at all with respect to the frequency vote (excluding smaller reporting companies), eight have seen their shareholders state a preference for annual "Say on Pay" votes.

And, at one company, Qualstar Corporation, where the Board of Directors had recommended annual "Say on Pay" votes, shareholders expressed a preference for a triennial vote.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Should a public company board of directors be watching the “scoreboards” of previous “ballgames” when making a recommendation on this year’s frequency vote (“Say When on Pay”)? I’m referring to the tallies of the frequency votes of public companies that have already held their annual meetings this year. Keeping track of these votes, almost in real time, reminds me of watching ESPN’s BottomLine sports ticker. The conventional wisdom seems to be that boards of directors should base their recommended frequency on what they see on the sports ticker. I don’t agree, at least not in all cases.

It’s been widely reported that shareholders are generally casting a majority of votes in favor of an annual Say-on-Pay vote, even though the boards of directors in most cases have recommended a triennial vote. Many large shareholders have followed the advisory firm ISS’s blanket recommendation in favor of a vote for annual frequency, adding momentum to this trend. Last week, Mark Borges reported on these voting results in the Proxy Disclosure Blog on CompensationStandards.com (a subscription site). He reported that a majority of companies recommending a triennial vote have had the shareholders vote in favor of annual votes. His statistics show that this trend toward an annual vote is even stronger at large companies – virtually no larger public companies have yet succeeded in bucking this trend (except a handful that have a single large shareholder who would agree with the board). He predicts, probably accurately, that this trend will continue.

How should the board respond? Here is Borges’ analysis:

So, at this point, is there any reason to make a triennial vote recommendation? My instinct says no - why put the board of directors in the position of having to make a difficult decision if - and when - the vote goes against you? I guess that a triennial recommendation still makes sense in two situations: one, if you're confident that your shareholders are in agreement with the recommendation, or, two, if you want to put shareholders on notice that, absent a near unanimous vote by shareholders, you prefer and intend to proceed with a triennial vote. Otherwise, I'm not sure that, at this stage, we aren't seeing the handwriting on the wall.

And Broc Romanek, in a recent post on The Advisors’ Blog on CompensationStandards.com, agreed:

I agree wholeheartedly with Mark Borges' blog . . . . I'm not sure why companies continue to recommend triennial now that the early meeting results bear out that shareholders will often reject that frequency . . . . It's a reminder of what shareholder engagement is all about - listen to your shareholders and act on what they say. Clearly, many companies are choosing to operate in a bubble.

I have to respectfully disagree with Mark and Broc. The board should make recommendations based on its judgment about what is in the best interests of the company and its shareholders, after considering all relevant factors. For a company with stable management, sound pay practices and a long-term perspective on compensation, the board may legitimately believe that a triennial vote is the best option. And some large shareholders, notably the United Brotherhood of Carpenters, BlackRock Institutional Trust Company and Wellington Management Company, agree with this approach and will generally favor a triennial vote. Should the board ignore their viewpoints, especially if they are large shareholders?

Borges argues that, with a triennial recommendation, after the annual meeting it will be a “difficult decision” for the board to reverse course and recommend the annual vote favored by shareholders. Again, I disagree that this should be the deciding factor. The board can believe that a triennial vote is the best approach but later report that it has considered, and will follow, the preference expressed by the shareholders. I don’t see that as such a bad declaration by a board. However, it’s important that the board consider the right factors in advance, to avoid surprises:

• Recognize that the triennial choice is an uphill battle in the best of circumstances.
• If there have been, or will be, major changes in management or compensation practices, or other signs of instability, it is more difficult to conclude that a triennial vote is in the best interests of the shareholders. Recommend an annual vote.
• Assuming that the actual vote is reasonably close, the board should carefully analyze the results in reaching its conclusion. Did the annual vote get a clear majority of the votes, or win by a narrow plurality? Did large shareholders who voted for an annual vote disclose the reasons for their vote to management? The final advisory vote rules under the Dodd-Frank Act give the company 150 days after the annual meeting to report a final decision on frequency. Take your time.
• If the board doesn’t feel comfortable having the above discussion, then by all means the board should recommend an annual vote. But recognize that it’s not the only possible course of action.

I’ve talked to a number of in-house attorneys at companies of various sizes about this, and none of them believed that the above discussion was too difficult, or that it would cause great embarrassment to accept the will of the shareholders, or that somehow such a reversal by the board would embolden large shareholders more than they are already emboldened. Certainly, not every board will want to “go there” – everyone recognizes that the equation will be different for every board and every company. That’s one of the things that has made this issue so interesting.

Keep watching the sports ticker. Let’s just hope not every company will decide to forfeit based on the score of someone else’s game.
 

• Email This
• Print
• Comments (1)
• Trackbacks
• Share Link

I thought Valentine’s Day would be a great time to talk about engagement.

In this case, I’m talking about “engagement” by public companies with their shareholders. A lot of commentators these days are talking about engagement in the context of the new shareholder advisory votes regarding executive compensation (Say-on-Pay and the frequency vote) required under the Dodd-Frank Act.

In his Byrd Watch report released last week, “The Permanent Engagement Campaign for Say on Pay/Say on When Votes,” Francis Byrd of Laurel Hill Advisory Group gave a nice summary of engagement issues to be considered by public companies. After he discusses concrete steps companies should consider he describes his concept of a “permanent engagement campaign” – i.e., one that doesn’t end on the date of the annual meeting:

Once upon a time, shareholders voted in accordance with management and the logistics of the proxy vote was the greatest difficult companies faced in electing directors and approving corporate actions. Those days are gone forever. There are no routine annual meetings. Whether your SOP vote is approved by a wide or narrow margin (or defeated) you will need to maintain your engagement teams and continue on-going dialogue with your investors.

Another interesting document is the set of Global Corporate Governance & Engagement Principles published by BlackRock, a major asset manager and institutional investor. The document lists BlackRock’s general global policies for evaluating governance of its portfolio companies. I thought the interesting part was the last section, where BlackRock talks about its own internal oversight of its decisionmaking progress as it relates to voting shares. In other words, this describes how a large shareholder responds to engagement by its portfolio companies.

The New, Slimmed-Down Version of the Say-on-Pay Rules

The SEC just released the Federal Register version of its final rules on Say-on-Pay, the frequency vote and Say on Parachutes. This version, thankfully, is only 39 pages (including the cover page), compared to the 152-page beast that was available previously. Always a relief – the same useful information, but much lighter in my briefcase. On Valentine’s Day, I can once again truly say I love the SEC . . . .
 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

It’s early February, and everyone has their eyes on the score in the biggest game of the year. I don’t mean the Super Bowl (especially after the season the Minnesota Vikings had, which we’d all like to forget). I mean this year’s annual shareholders meeting for every public company. This year, the annual meeting is a whole new ball game, because for the first time, most public companies are facing two new shareholder advisory votes required under the Dodd-Frank Act: the frequency vote (“Say When on Pay”) and the Say-on-Pay vote itself.

This year so far, I’ve spent a lot of time focusing on the frequency vote, because it involves several tactical decisions for boards of directors, and new language to be drafted. Now the voting results are starting to come in. It’s becoming clear that the choice for an annual Say-on-Pay frequency has “The Big Mo” on its side, fueled by the recommendation of the shareholder advisory service ISS to support an annual frequency, and the stated preferences of a large number of institutional shareholders for an annual vote. According to the Proxy Disclosure Blog (subscription site) by Mark Borges of Compensia on CompensationStandards.com earlier this week:

If you're keeping score, of the nine companies that recommended a triennial vote and have so far announced their voting results, five have seen their shareholders express a preference for annual votes. This week should help determine whether this early trend is going to hold.

I’ve advised companies to keep their eye on the ball, though. That means focusing more attention on the Say-on-Pay vote itself. Ultimately, the results of this vote will have more impact than the frequency vote. Borges reported the following earlier in the week:

There were 18 annual meetings of shareholders held this past week where shareholder advisory votes were conducted . . . . Of the 10 companies reporting the voting results from their annual meetings, nine reported that their executive compensation programs had been approved via "Say on Pay" votes, with passage rates ranging from 65.8% (Monsanto) to 99.4% (Tech/Ops Sevcon - a smaller reporting company). One company - Jacobs Engineering Group - disclosed that its "Say on Pay" vote had failed, with only 45.5% voting in favor of its executive compensation program.

Of course, I’ll continue to watch, and comment on, the scores at upcoming annual shareholders meetings. And I guess I’ll watch the Super Bowl too – it has much better commercials.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

As widely reported, on Tuesday the SEC in a 3-2 vote (again) adopted its final rules to implement the shareholder advisory vote requirements under Section 951 of the Dodd-Frank Act, including Say-on-Pay, the frequency vote, and Say-on-Parachutes. The final rules are similar to the proposed rules issued in October 2010. There are a few notable changes:

• The final rules defer the advisory requirements for smaller reporting companies until shareholders meetings on or after January 21, 2013.
• As in the proposed rules, public companies will need to disclose, in light of the shareholders’ frequency vote, how frequently they will conduct Say-on-Pay votes until the next frequency vote. Under the proposed rules, the disclosure generally would have been in the Form 10-Q for the quarter in which the vote was conducted. Under the final rules, the disclosure is required 150 calendar days after the annual meeting date (but not less than 60 days before the deadline for shareholder proposals for the following year). This gives the company around five months after the annual meeting to make the disclosure, compared to around three months under the proposed rules.
• As proposed, Rule 14a-8 has been amended so that the company can exclude future shareholder proposals on the frequency of Say-on-Pay, but only if the board follows the wishes of the shareholders expressed in the frequency vote. Under the proposed rules, the company could exclude the shareholder proposal if it followed the alternative (annual, biennial or triennial) that received the most votes on a plurality basis. Under the final rule, the company can only exclude the proposal if one of the alternatives gets a majority vote and the company follows this alternative.
• Consistent with the proposed rule, the final rule does not mandate specific language for the Say-on-Pay resolution, but Rule 14a-21(a) now includes an example that provides some guidance. On the language of the frequency vote resolution, the final rule doesn’t provide an example or much detail on the required language. No significant change here.
• There are no major changes from the proposed rules on the say-on-parachutes vote and the new Item 402(t) disclosures of change in control payment arrangements. The final rule on these matters is effective for merger proxies filed on or after April 25, 2011. I will discuss the say-on-parachutes rules in more detail in a future post.

Of course, the ON Securities Cheat Sheet has been updated to summarize the final rules, as well as some recent changes to the SEC’s published timetable in adopting rules under the Dodd-Frank Act. Better yet, it still prints out on two normal pages, and I haven’t had to resort to a microscopic font size! Check it out.

The First Frequency Votes Are In; What Do They Mean?

The other major development regarding the frequency vote is that, this week, the first shareholder votes under Dodd-Frank are occurring, and the results will be reported by next week. A majority of companies so far have recommended triennial votes, and we will soon get an idea of the power of ISS’ “one-size-fits-all” policy to always recommend an annual vote. Yesterday, Monsanto held its annual meeting, and it reported a 63% vote for an annual frequency, even though management had recommended the triennial alternative. Results of other meetings should be reported on Form 8-K filings by next week.

Ted Allen of ISS, writing in RiskMetrics Group’s Risk & Governance Blog, speculated that, if the first several companies have similar results, this will cause many calendar year companies to consider recommending an annual vote in the first place: “If investors at other large-cap firms follow suit in the next few weeks, it appears likely that these results may sway boards at companies with late spring meetings to recommend annual votes. More results like today's vote at Monsanto may prompt undecided institutions to back annual votes as well.”

However, I think it’s important not to over-emphasize the importance of the first few votes. Monsanto had around 33% voting “no” on Say-on-Pay, and their financial results in 2010 did not appear to be very good. I would guess that the shareholders’ demand for an annual vote has something to do with the fact that shareholders don't fully trust the compensation committee’s judgment on compensation matters and want a forum every year. I'm still guessing that, if a company has built trust with shareholders, the shareholders will be more likely to support a triennial request, and that not all the shareholders will buy in to ISS's blanket recommendation for an annual vote. Also, I would predict that a small or mid-cap company is more likely to be able to get a triennial vote, because they are more likely to be able to “fly under the radar.”

I asked Francis Byrd, an officer of Laurel Hill Advisory Group and the author of the Byrd Watch Corporate Governance & Proxy Review, for his opinion on the above matters, and his response was interesting:

Voting results on frequency and the SOP vote will reflect, to a greater or lesser extent, the performance of the company, the quality of pay and how it is derived, and the ISS vote recommendation (which accounts for as much as 20-25% at some larger issuers). While I can’t comment directly on Monsanto, I would posit that those companies with greater trust and more open relationships with their shareholders will fare better with their frequency and SOP vote request.

If a company has had a history of poor pay practices (as defined by ISS), battles with large shareholders over compensation and poor financial returns, those headwinds may likely to be too much for the board’s frequency vote recommendation to overcome. A shareholder vote of 65% or more against a board recommendation cannot be entirely laid at the feet of ISS – the amount and quality of engagement (on both frequency and the advisory vote itself) with shareholders prior to the annual meeting and the stock’s total return may well have played a larger role in the defeat.

I believe it is still much to early in the season to determine how later filers will behave. Not all the filers seeking triennial votes may be routed. Irrespective of the Monsanto outcome, companies need not be victims. Positive SOP votes are about doing the homework and building in the time to conduct an investor outreach program that properly identifies shareholders and addresses their pay concerns.

On your last point about smaller filers and those with large retail share ownership it may be easier for some to “fly under the radar” but only if their top holders are supportive of the pay and frequency and if they can capture the retail holder votes they need. Remember, SOP will not be as familiar to retail shareholders voting this item – who likely to have not heard of it – and they may require some education efforts to bring them up to speed on an issue where they are likely to be supportive of management. For some small and mid-size companies this will necessitate calling campaigns to reach and educate their investors.

Regardless of the prospects, this is all uncharted territory. Companies that recommend a triennial vote do need to be prepared for the possibility that the shareholders will disagree. If that happens and a company goes with the wishes of its shareholders, there should be no negative consequences of an initial recommendation for a triennial vote. Further, if this happens, the company can always try again in a year or two, to see if they can persuade shareholders to support a triennial vote going forward.
 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Effective communication. Engagement. Getting constituents to ignore the “noise” and buy in to your message. These are all important challenges faced by public companies this year as they prepare for the two new shareholder advisory votes required at their annual meetings under the Dodd-Frank Act: Say-on-Pay and the frequency vote.

These challenges are also important themes of the two best films of 2010: “The Social Network” and “The King’s Speech”. I loved both movies, although I agreed with the Golden Globes voters who gave “Social Network” the Best Picture nod last night. But I hadn’t focused on the connection between the two films until I read “Top Two Films Offer Lessons on Life and Media”, a very insightful commentary in the Minneapolis StarTribune by editorial writer and media commentator John Rash. As Rash points out, both films address the challenges of connecting with people in a new age of media:

In “Social Network”, the main character’s personality and his approach to relationships create difficulties in his business and personal dealings. Nevertheless, he finds a way to tap into the basic human desire for connection, creating a medium that has been adopted by 500 million (and counting) people.

In “King’s Speech”, the advent of radio presents a daunting challenge to a new king afflicted with a stammer. His ability to communicate with the masses ultimately depends on his personal friendship with a commoner from Australia.

As Rash puts it:

The Internet, and in particular social networks, have accelerated the rise of personality over policy. . . .

Ultimately both films are fundamentally about friendship - about how it's human, not wireless, connections that count. . . . Both films show how human bonds can be built or broken by the new challenges and opportunities of the new media age. Either way, the results are often consequential . . . .

Interesting observations. So can the films teach any lessons to public companies facing shareholder advisory votes for the first time? Maybe that, even in an age of new media, personal connections will continue to be important - possibly more important than ever. I’m working with numerous companies that are starting to worry about convincing large shareholders to support the company’s recommendations. Much of this process will be done one-on-one, through meetings and phone calls rather than over the Internet. The personal touch may be one way to combat negative feelings about corporate governance and executive compensation, fueled by the new media in the past couple of years.

One way or another, if you haven’t seen both films, don’t miss them.

The Big 1-0-0!

As I enter this post into the ON Securities website, the site tells me that this is the 100th post! The past year and a half has been an eventful period in securities law, corporate governance and executive compensation for public companies, and I have enjoyed the opportunity to comment on these events and get feedback from readers. During the time frame for the next 100 posts, and beyond, the developments should be just as interesting.

In this earlier post, I commented on another very good film: “Julie and Julia”. This was not only a well-acted portrait of Julia Child and a modern day follower, but it was also the first mainstream movie about blogging. As I said in that post, I welcome your continued feedback and hope the blogging process can be a two-way street.

Thank you for reading.
 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

As has been widely reported, the Towers Watson compensation consulting firm recently released the results of a survey asking 135 public companies how often they expect to hold the Say-on-Pay advisory votes required under the Dodd-Frank Act. The survey results:

Triennial Say-on-Pay vote expectation: 39%
Biennial Say-on-Pay vote expectation: 10%
Annual Say-on-Pay vote expectation: 51%

Interestingly, the picture painted by this survey is quite different from that presented by the proxy statements filed so far in 2011. Mark Borges just published his updated tally (as of January 7) of 87 companies’ proxy statements in his Proxy Disclosure Blog on compensationstandards.com (subscription site). According to Borges’ tally, these companies recommended as follows in their “Say When on Pay” shareholder advisory votes on frequency:

Triennial Say-on-Pay vote recommendation: 45 companies (52%)
Biennial Say-on-Pay vote recommendation: 9 companies (10%)
Annual Say-on-Pay vote recommendation: 25 companies (29%)
No recommendation: 8 companies (9%)

So what’s the explanation? Why are the actual recommendations of filing companies (mostly triennial) so different from the expectations expressed in the Towers Watson and Romanek surveys (mostly annual)? In a post on thecorporatecounsel.net Blog, “Poll Results: Say-on-Pay Recommendations”, Broc Romanek speculated that the survey results provide the more accurate reading, with the difference in the actual results caused by the “limited experience” with companies that have filed so far. (In fact, Romanek conducted his own informal survey, with results very similar to Towers Perrin’s: fifty percent of his respondents preferred an annual vote).

I have a different theory – I think the results of the surveys might have been affected by the demographics of the companies that responded. I checked in with Towers Perrin, and as it turns out, their 135 survey respondents tended to be larger companies. Eighty-three percent of the respondents had revenues of $1 billion or more, including forty-seven percent that had revenues of $5 billion or more. In other words, it appears that a sizeable majority were Fortune 1000 companies. Anecdotally, I believe larger companies are more likely to recommend annual votes, because the larger companies are more typically concerned about negative reactions from institutional investors, or about obtaining positive recommendations from the proxy advisory firms such as ISS.

Therefore, I think the recommendations of the companies that have filed proxies to date are more representative of the recommendations of the companies that will file in 2011. Certainly there is a broader range of companies represented by these filers (twenty percent of these filing companies have been  smaller reporting companies.) Of course, it’s just a theory – the “final score” at the end of the year will tell. One other unknown factor is the number of companies that will recommend a triennial Say-on-Pay vote but be faced with a shareholder plurality vote favoring an annual Say-on-Pay vote. One way or another, 2011 will be an interesting year.
 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

To quote the old Virginia Slims ad, we’ve come a long way, baby.

As we close out a very eventful year, it’s interesting to look back on how far corporate governance and executive compensation reforms have come since the end of 2009. I pulled out a copy of the December 23, 2009 version of the ON Securities Cheat Sheet (PDF) and was reminded that, a year ago, there were almost as many reform bills suspended in Congressional committees as there are members of Congress. That version of the Cheat Sheet summarized the provisions of the “Schumer Bill,” the “Frank Bill” (which was a repackaged version of the Obama Bill), and several other bills. The bills contained diverse but overlapping restrictions and limitations, responding to the fact that the near-collapse of the banking system and the worldwide economy was still fresh in everyone’s mind.

As we all know, after a long and tangled legislative process, what resulted was the Dodd-Frank Act. [For a musical lesson on how a bill makes its way through the legislative process, see this previous post, which in turn links to the “I’m Just a Bill” episode of the Schoolhouse Rock television show.]

In turn, the Act resulted in a long laundry list of anticipated SEC rulemaking projects, continuing into 2011. For a status report on the SEC’s rulemaking progress, see the latest version of the Cheat Sheet (PDF) (always available by clicking the box at the right side of the home page). As the Cheat Sheet shows, we’re waiting for proposed and final SEC rules on a variety of Dodd-Frank Act provisions. We’re also waiting for the results of the legal challenge to the proxy access rule, as described in this previous post.

I just updated the Cheat Sheet to reflect that the SEC did not meet its announced timetable for proposing independence standards for compensation committees and their advisors. These proposed rules were scheduled for December, but the Dodd-Frank rulemaking timetable on the SEC web site has been changed and now lists the proposed rules in the January-March 2011 time frame.

One More Frequency Vote Scoreboard in 2010

One last time in 2010, here is an updated scoreboard of the proxy statements filed so far that include the shareholder advisory votes required under the Dodd-Frank Act, including the ‘Say When on Pay” frequency vote. Based on Mark Borges’ updated tally (as of December 23) of 58 companies’ proxy statements in his Proxy Disclosure Blog on compensationstandards.com (subscription site), here’s the score:

Triennial Say-on-Pay vote recommendation: 32 companies
Biennial Say-on-Pay vote recommendation: 6 companies
Annual Say-on-Pay vote recommendation: 14 companies
No recommendation: 6 companies

The above tally included thirteen smaller reporting companies (7 triennial recommendations, 2 biennial recommendations and 4 annual recommendations).

Happy New Year

I want to wish all of you a safe New Year’s celebration and a happy and prosperous year in 2011!
 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (PDF), signed by President Obama on December 17, extended existing tax rates through 2010. The Act avoided changes that would have caused a flurry of planning activity at year end. Still, this is the last chance for a last-minute consideration of any year-end tax planning considerations.

The subscription service mystockoptions.com recently came out with two helpful web articles:

“What impact does the new 2010 Tax Relief Act have on stock compensation and year-end financial planning?”

“Ten Ideas For Year-End Tax Planning With Stock Options And Company Stock”

I found these articles to be a useful and comprehensive checklist for stock plan professionals – good for issue-spotting, if nothing else (even though some of the links represent content that can’t be viewed without a subscription). The discussion of alternative minimum tax (AMT) rates is especially helpful.

By the way, the new tax law is only 30 pages long. After all the times I have linked to the 800 page-plus Dodd-Frank Act, a 30 page law is a pleasant surprise.

ISS Issues FAQs on Frequency Vote and Other Policies

Last week, the shareholder advisory service ISS issued Frequently Asked Questions on its 2011 compensation policies, including several questions on the frequency vote. As reported in this previous post, ISS is recommending that shareholders vote in favor of an annual Say-on-Pay vote. Mark Borges of Compensia, in his Proxy Disclosure Blog on compensationstandards.com (subscription site), offers some useful observations on the FAQs:

Question No. 2: Would a management recommendation of a two-year or three-year frequency trigger a negative recommendation from ISS on other proxy items? Answer: We have no policy concerning management's recommendation for the say on pay frequency. [Borges] Observations: In other words, during the 2011 proxy season (or, at least, the next four or five months) a recommendation of the board of directors for a biennial or triennial ‘Say on Pay’ vote will not have adverse collateral consequences on other compensation-related proposals (or the election of directors) that are slated for consideration at the annual meeting of shareholders. . ..

Question No. 4: In the event that a company's board decides not to adopt the say on pay vote frequency supported by a plurality of the votes cast, what are the implications in terms of ISS' voting recommendations at subsequent meetings? Answer: This policy has not been determined. The policy will be decided after review of the first year of voting results and after consultation with ISS's clients, and will be included in the policy updates for 2012. [Borges] Observations: . . . While ISS could go in many different directions, I expect that, where a board of directors selects a frequency for future "’Say on Pay’ votes that differs from the frequency supported by a plurality of the votes cast, it will consider that a basis for recommending a "withhold" or "against" vote for compensation committee members (and, potentially, all directors). Of course, the analysis of the board's decision may not always be that straightforward. . . . Ultimately, I suspect that whether ISS considers this important enough to warrant a formal policy will depend less on the vote results themselves, but on how companies respond to those results.

Happy Holidays from Maslon!

Here is the Holiday greeting from Maslon Law Firm - I wanted to share it with all of you. Have a wonderful holiday season, and safe travels!

Image: flikr

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Melissa Gleespen, Senior Counsel, Securities and Corporate Law at Owens Corning has created this great computer-animated video as part of an internal training program on compliance with Regulation FD, the SEC’s prohibition against selective disclosure of material non-public information:

In a podcast interview with Broc Romanek on thecorporatecounsel.net (content by subscription), Gleespen reported that the video was very easy and inexpensive to create on xtranormal.com – she simply made some selections from a menu and typed in a script. This seems like an easy way to enhance a compliance training program, on Regulation FD or any other topic.

Compliance training is even more important now than ever, given the SEC’s expanded enforcement activity. In an article in insideinvestorreletions.com, “Office Depot case highlights value of Reg FD policies,” Tim Human points out that Office Depot recently received a steep fine from the SEC for Regulation FD violations. The SEC cited Office Depot’s lack of a Regulation FD policy and failure to provide training on Regulation FD. By contrast, Human reports that the SEC let American Commercial Lines off the hook in a Regulation FD action against its CFO, with the SEC commending that the company had cultivated a culture of compliance through training.

With tools like the animated video above, you don’t have to be a Fortune 50 company to provide effective training.

Updated Scoreboard on the Frequency Vote (“Say When on Pay”)

In last week’s post, I provided a scoreboard of the proxy statements filed so far that include the shareholder advisory votes required under the Dodd-Frank Act, including the ‘Say When on Pay” frequency vote. Based on Mark Borges’ updated tally of 15 companies’ proxy statements in his Proxy Disclosure Blog on compensationstandards.com (subscription site), here’s the score:

Triennial Say-on-Pay vote recommendation: 9 companies
Biennial Say-on-Pay vote recommendation: 1 company
Annual Say-on-Pay vote recommendation: 4 companies
No recommendation: 1 company

I wouldn’t be surprised if the final score at the end of proxy season is in the same proportions shown above. Fortunately, this is one scoreboard we can keep watching from the safety of our offices, without the risk of an inflatable dome collapsing above our heads. . . .
 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

I’m getting a lot of questions from public companies lately that involve “keeping score.” In Say-on-Pay votes, what are other companies doing about drafting the resolution and the corresponding section in the proxy statement? In the frequency vote, are other companies recommending that shareholders approve holding the Say-on-Pay vote every one, two or three years? Of course, companies recognize that they need to make their own decisions. But no one wants to be an outlier. Plus, many companies with a calendar fiscal year end are holding board meetings in December, and management and in-house counsel want to be prepared if the directors ask, “What’s the score so far?”.

I know of at least six companies so far that have filed proxy statements (mostly preliminary proxies) that include the resolutions for Say-on-Pay and the frequency vote required under the Dodd-Frank Act: Johnson Controls, Inc., Visa Inc., Beazer Homes USA, Tyco Electronics, Woodward Governor Company and Ashland, Inc. And here’s the score.

Say-on-Pay: I don’t think there is anything unexpected in these six proxy statements. Pretty much all of the companies included some bullet points in the Say-on-Pay proposal describing some of the positive aspects of their pay practices, or the changes they have made in the past year to improve their programs. I’m sure there will be a lot of variations as more companies file in the next few months. However, I’ll bet a lot of the Say-on-Pay proposals will end up looking a lot like the ones already filed by these companies.

Frequency vote: The score for management recommendations is, three companies recommending a triennial vote; two companies recommending an annual vote. Interestingly, one company (Tyco) declined to take a position, stating that the Board “. . . has decided to consider the views of the company's shareholders before making a determination.” I think most companies will choose to recommend either a triennial or an annual vote. I think fewer companies will recommend biennial votes, which some perceive to have the appearance of a compromise.

Thanks to Mark Borges, who has been keeping track of proxy filings in his comprehensive Proxy Disclosure Blog on CompensationStandards.com (subscription site).

Broadridge Says It’s “Prepared” to Include Four Choices on the Proxy Card

In its proposing release for the frequency vote rules (PDF), the SEC reported that some service providers might not be prepared to accommodate a proxy card with four choices (annual, biennial, triennial or abstain). Currently, IT systems for shareholder votes are set up for three choices (for, against or abstain). In response to concerns expressed by Broadridge Financial Solutions, Inc. and other vendors, the SEC indicated in the release that companies could include three choices on the proxy card (annual, biennial or triennial) if their vendors’ systems could not yet accommodate four choices.

Broadridge recently filed a comment letter (PDF) on the SEC’s proposed frequency vote rules. The letter says that modifications to the Broadridge systems to accommodate four choices are “well underway.” Broadridge says it estimates that the initial effort will require an investment of over 18,400 people hours, and that is prepared to support use of the new rules for shareholder meetings that occur on or after the January 21, 2011 effective date.

Of course, even the investment of 18,400 hours won’t guarantee that the vote will go off without a hitch. I have heard transfer agent representatives express concern that the data received by the transfer agent from Broadridge may be in a different format or difficult to tabulate. This should be an interesting year.
 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

In a post in the ISS Insights Blog, “After Election Day, Governance Observers Expect Status Quo,” Ted Allen reports that the recent Congressional elections are unlikely to have a major impact on corporate governance reform under the Dodd-Frank Act. However, Republican control of the House of Representatives may mean that the SEC has fewer resources and a brighter spotlight on its activities:

Professor James Cox, a securities law professor at Duke University, said the SEC likely will receive substantially less funds than were authorized in Dodd-Frank Act. "This will likely starve the SEC's efforts to step up the size and experience of its staff to carry out inspections, which is frightening, considering the addition of thousands of investment advisers to the inspection mission of the SEC," Cox said.

While the prospects for any investor-friendly or pro-regulatory legislation are now "dead," Cox said, "It is unlikely that the House can push through reversals of any major legislation, including approval for proxy access." However, he said Congress may try to pass legislation to make "technical corrections" to the Dodd-Frank Act, and there may be some provisions that concern investors. Cox said House Republicans may await the outcome of the lawsuit filed by the U.S. Chamber of Commerce and the Business Roundtable before addressing proxy access.

There may be some uncertainty about the impact of the federal elections, but at least we know the results. Unlike the governor’s race in Minnesota, where we seem destined for an eternity of recounts. . . .

Useful Resource Analyzes Shareholder Preferences In the Frequency Vote

Nothing in the Dodd-Frank Act is currently raising more questions than the frequency vote, or “Say When on Pay.” Under the Act, at the first annual meeting on or after January 21, 2011, public companies must hold a separate non-binding vote in which shareholders will express their opinion on whether the Say-on-Pay vote should be held annually, biennially, or triennially. The frequency vote must be held at least once every six years. After their annual meetings, companies must disclose on Form 10-Q whether they will abide by the shareholders’ preference on frequency. Many public companies have asked me about the optimal frequency to recommend, as I addressed in this prior post.

One factor that companies should consider is the preferences expressed by their major shareholders. Phoenix Advisory Partners, a proxy solicitation firm, recently released a report entitled “Say on Pay Frequency: Annual, Biennial or Triennial – Considerations in Making Your Recommendation (PDF).” The most interesting thing about the report is that it is based on conversations with large institutional investors. For example, the report lists the names of a number of institutional investors who support annual Say-on-Pay: Walden Asset Management, AFCSME, etc. Phoenix also reports that the Council of Institutional Investors supports annual Say-on-Pay votes. On the other hand, T. Rowe Price has indicated that it may not take a blanket approach, but may tailor its recommendations based on the compensation practices of individual companies.

Image: Flikr

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The SEC yesterday issued proposed rules (PDF) under Section 21F of the Securities Exchange Act of 1934 (Section 922 of the Dodd-Frank Act), which provides a bounty to whistleblowers who disclose securities law violations leading to large monetary sanctions. This press release issued by the SEC summarizes the new rules. In order to qualify for a bounty under Section 21F, the whistleblower must “voluntarily” provide the SEC with “original information” that “leads to” successful enforcement in which the SEC obtains monetary sanctions totaling more than $1 million. The proposed rules clarify these concepts. The rules also define a number of types of individuals who are not entitled to the bounty, including the wrongdoers, persons with a pre-existing duty to report the information or attorneys or accountants in certain cases.

My main concern about Section 21F is that the bounty program will encourage employees and other potential whistleblowers to bypass the internal reporting systems public companies have carefully set up in the past decade to comply with the provisions of the Sarbanes-Oxley Act of 2002. The SEC has tried to address this concern in the proposed rules, which would facilitate and encourage internal reporting in the following ways:

• The rules allow an employee to report information internally as a whistleblower and still get credit for original reporting to the SEC as of the same date – as long as the employee provides that same information to the SEC within 90 days of that date. According to the SEC, “ . . . employees will be able to report their information internally first while preserving their ‘place in line’ for a possible award from the SEC.”
• The rules provide that the SEC may consider higher percentage awards for whistleblowers who report internally first, as long as the company has an effective compliance program.

Comment. The proposed SEC rules are an improvement over the provisions of the Dodd-Frank Act. However, there are still concerns that the bounty program will encourage whistleblowers to “take no chances” and report any questionable information to the SEC. The potential financial rewards for a whistleblower are huge.

Also, there are numerous reports that plaintiffs’ employment attorneys are actively encouraging whistleblowers to file reports. Broc Romanek in a post in thecorporatecounsel.net Blog referred to this recent article, “Get Snitch Quick,” by Kaja Whitehouse in the New York Post about a lawyer who is playing a commercial in New York movie theaters before showings of “Wall Street: Money Never Sleeps.” The commercial directs viewers to go to his website, SECSnitch.com, to get information about whistleblower reporting. In the words of Gordon Gekko, “Greed is good. . . .”

In light of the bounty program, public companies will need to refine their whistleblower policies and training programs. This is only one of the aspects of Dodd-Frank in which we corporate lawyers will need to partner with our colleagues who specialize in employment law. Just wait until listed companies need to draft new clawback policies, under SEC and stock exchange rules expected in 2011, which will require companies to recover incentive compensation from former as well as current officers. . . .

ISS Recommends Annual Say-on-Pay Vote

In this draft policy recommendation, the shareholder advisory service ISS recommends that Say-on-Pay votes be taken annually as a way of providing the most meaningful communications between shareholders and public companies. Assuming the final ISS policy is to recommend an annual vote, this is one more consideration for boards of directors in deciding whether to recommend an annual, biennial or triennial vote, as described in this prior post.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Maslon Law Firm has just released our memorandum (PDF) on the three new shareholder advisory votes required under the Dodd-Frank Act and the SEC’s recently proposed regulations (PDF): the Say-on-Pay vote, the frequency vote and the Say-on-Parachutes vote. We took it as a challenge to make the memo as user-friendly as possible for public companies and their advisors. The memo starts with an executive summary about the requirements, and the remainder consists of Frequently Asked Questions about each of the required shareholder votes. Here’s the executive summary:

Key provisions in the Act’s advisory vote requirements, as interpreted by the proposed SEC rules:

Say-on-Pay Vote: Public companies must hold a non-binding shareholder vote on executive compensation (the “Say-on-Pay vote”) at the first annual meeting on or after January 21, 2011. Pursuant to this vote, shareholders will be asked to approve the executive pay described in the proxy statement (including CD&A and the compensation tables). This vote must be held no less frequently than once every three years.

Frequency Vote: Also, at the first annual meeting on or after January 21, 2011, public companies must hold a separate non-binding vote (the “frequency vote”) in which shareholders will express their opinion on whether the Say-on-Pay vote should be held annually, biennially, or triennially. The frequency vote must be held at least once every six years. After their annual meetings, companies must disclose on Form 10-Q whether they will abide by the shareholders’ preference on frequency.

Requirements Not Subject to Adoption of Final SEC Rules: The above requirements to hold the Say-on-Pay vote and frequency vote at the first annual meeting on or after January 21, 2011 are effective regardless of whether the final SEC rules have been adopted.

Parachutes Disclosure and Say-on-Parachutes Vote: The proxy materials to approve any merger, sale of assets or similar transaction must include enhanced disclosure of the golden parachutes compensation to executives related to the transaction, including a table and narrative disclosure. The proxy materials must also include a separate shareholder advisory vote on the parachute compensation (the “Say-on-Parachutes vote”), unless the enhanced disclosure was part of a prior Say-on-Pay vote and there are no new arrangements. The parachutes disclosure and Say-on-Parachutes vote requirements are not effective until the final SEC rules go into effect.

Cheat Sheet Updated

The ON Securities Cheat Sheet (PDF) has now been updated to include a shorter summary of the advisory vote requirements. The Cheat Sheet also features a summary of all of the Dodd-Frank compensation and governance provisions, and a description of the proxy access rule, Rule 14a-11, the effectiveness of which has been stayed as a result of a legal challenge. True to form, the Cheat Sheet is still only two pages long!

Useful Resource on Risk Assessment

As stated in this previous post, it is important for public companies to focus this year on their assessment of risks related to their compensation programs. The proxy disclosure requirement in Item 402(s) of Regulation S-K is not limited to executive compensation programs, but the assessment need only cover compensation programs that might create a material risk for the company. One of the challenges for compensation committees and compliance officers is the creation of a reasonable process to select the compensation programs to examine and to assess the relationship of the compensation programs to risks that might face the enterprise.

Mike Melbinger, in his Executive Compensation Blog, has posted his comprehensive chart that outlines a very detailed process a public company can use for assessing risk. The chart contains many good ideas, so it is a helpful resource, even if you don’t intend to follow the entire 20-step action plan (for some companies, maybe a “12-step program” will do!).
 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (848-page PDF) requires that any public company, at its first shareholders meeting on or after January 21, 2011, hold a separate vote “to determine whether Say-on-Pay votes will occur every 1, 2 or 3 years”. This vote has been called the frequency vote or “Say When on Pay.” The Say When on Pay vote must be held no less frequently than once every six years. In a previous post, I described some mechanical issues with offering all three choices of frequency (i.e., an annual, biennial or triennial Say-on-Pay vote). 

But what frequency should companies recommend for Say-on-Pay votes – annual, biennial or triennial? Most public company officials will quickly react that they prefer a triennial vote. The advantages are obvious – Say-on-Pay votes create some additional drafting, solicitation and shareholder relations issues, and a triennial vote allows the company to avoid these issues in two out of every three years.

Are there any advantages to annual or biennial votes? In a webcast (subscription only) sponsored by CompensationStandards.com, compensation consultants Mark Borges of Compensia and Mike Kesner of Deloitte brought up a few factors that should at least be considered before settling on a triennial vote recommendation:

• Some companies are coming to the conclusion that an annual vote is preferable, on the theory that an annual non-binding vote will seem routine after the first year – somewhat like the annual vote to approve the company’s auditors.
• Also, biennial or triennial votes may present a disadvantage because there will be “off years” with no vote. If ISS or other shareholder advisory services want to send a signal to the board about compensation in an off year, their only choice is to recommend a withhold vote against compensation committee members.
• It’s not clear whether the shareholder advisory services such as ISS will recommend annual votes or some other cycle. Companies should also be mindful of any stated preferences of their large shareholders.

On the last point, companies should not assume that institutional investors will all prefer an annual vote. In a post on Altman Group’s Governance and Proxy Review, “Open Questions on Dodd-Frank: Say-on-Pay Implementation (SOP) and Proxy Access,” Francis H. Byrd reports that many institutional investors have feared the prospect of being flooded by annual advisory votes for all of their portfolio companies. Such investors may be happy to vote for biennial or triennial advisory votes. Byrd also points out a common justification by companies for triennial votes – that many companies’ pay plans are crafted around three-year periods, and triennial votes allow investors to better judge the value of these plans.

In any event, the Say When on Pay vote presents a variety of strategic considerations, and public companies should start thinking about these considerations now.

Image: Flikr

• Email This
• Print
• Comments
• Trackbacks
• Share Link