: say-on-pay : ON Securities

New Brand of "Sue-on-Pay" Litigation Targets Annual Meetings

Posted on November 15, 2012 by Martin Rosenbaum

Call it “Sue-on-Pay – The Sequel.”

In 2011, several public companies faced lawsuits after losing their Say-on-Pay shareholder advisory votes on executive compensation mandated by the Dodd-Frank Act. As reported in this prior post, a few of these first generation “Sue-on-Pay” lawsuits resulted in settlements, while many since that time have been dismissed. However, in early 2012, a new round of compensation-related lawsuits began, and these lawsuits use a new tactic that presents real dangers. Companies need to use caution in preparing proxy materials for annual meetings, especially in certain cases as described below.

The plaintiffs in this new round of cases have sued over 20 companies prior to their annual meeting, seeking to enjoin shareholder votes based on purported incomplete or misleading disclosures. See “‘Say on Pay’ and Executive Compensation Litigation: Plaintiffs’ New Racket”, posted on the D&O Diary blog by securities litigation attorneys Bruce Vanyo, Richard Zelichov and Christina Costley of the Katten firm. The cases focus on two types of shareholder vote: (1) the Say-on-Pay vote and also, very often, (2) a separate shareholder vote to increase the share authorization of an equity plan (a “share authorization vote”). The attempt to delay vital corporate activities through litigation is similar to the tactic that has been used successfully over the past several years by plaintiffs’ lawyers in merger and acquisition-related litigation. If the litigation threatens the timing of the important events, the defendant company will often be willing to agree to a settlement to end the litigation so life can go on. For a new comprehensive discussion of the impact of the M&A litigation, see “The Trial Lawyers’ New Merger Tax” (download) issued by the U.S. Chamber Institute for Legal Reform.

Vanyo, et al. report that several companies have settled the compensation-related cases in 2012, notably Brocade Communications Systems, Inc. In that case brought in California state court, plaintiffs claimed various disclosure deficiencies in the proxy statement, including failure to include projections of future stock grants under the plan and planned share repurchases, as well as the failure to include the board’s peer group analysis of share usage under the plan. The court issued an order enjoining the share authorization vote. In the ensuing settlement, the company had to delay for a week the portion of the annual meeting involving the share authorization vote. The company was forced to file a supplemental proxy statement in which it disclosed, among other things, the board’s internal projections regarding future stock grants. As is often the case in these types of settlements, the only cash payment was up to $625,000 in fees to plaintiffs’ counsel.

Comment. Reportedly, some of these second-generation Sue-on-Pay lawsuits have been brought solely in connection with the disclosure in the Say-on-Pay advisory vote. However, in Brocade and the other cases where plaintiffs have reportedly been successful in obtaining injunctions and/or achieving settlements, the common denominator is that the company was also seeking an increased share authorization for an equity plan. Although I don’t have access to the courts’ rulings or the settlement documents in all of these cases, I believe plaintiffs can present these share authorization vote cases in a more compelling way:

For many companies’ proxy statements in the past few years, the share authorization vote disclosures have been given less thought and scrutiny than the compensation discussion and analysis section that sets the stage for the Say-on-Pay vote. Often, the share authorization disclosure describes the equity plan in detail but gives little or no background on how the requested amount of the share authorization was chosen, the company’s share usage or the board’s intentions in connection with share usage going forward. Therefore, it is fairly straightforward for plaintiffs to pick apart these disclosures and point out alleged deficiencies.
The applicable SEC disclosure rule for share authorization votes (Item 10 of Schedule 14A) includes disclosure requirements that relate to some of the deficiencies claimed by counsel in Brocade. (In contrast, the rules for Say-on-Pay votes themselves include no substantive disclosure requirements, but rather refer to the other compensation disclosures, which are usually more polished.) For example, Schedule 14A requires that the proxy statement disclose the number of options to be received under the plan, “if determinable,” by executive officers as a group and other specified persons and groups. In practice, companies generally don’t include these disclosures, because the amounts are not considered to be determinable prior to the compensation committees’ actual decisions to make the awards. Even though the Brocade plaintiffs apparently did not base their argument on this point, a future plaintiff might be able to convince a court that the proxy disclosure rules were not followed adequately.

Therefore, it is reasonable to assume that plaintiffs will have better luck getting traction with cases that involve a share authorization vote than in cases that involve only a Say-on-Pay vote. In fact, there is some anecdotal evidence that lawsuits that relate solely to a Say-on-Pay vote may be defended more readily by the company with less likelihood of a delay in the annual meeting. For example, we have learned of two recent court cases involving annual meetings where there the only compensation-related item on the agenda was the Say-on-Pay vote - there was no share authorization vote. In both cases, plaintiffs’ motion for a TRO was denied by the court in time to hold the annual meeting as originally scheduled. This blog post by Cornerstone Research describes one of the cases, involving Symantec.

Recommendations. At least in the near future, it is likely that these lawsuits to enjoin shareholder votes will continue. Therefore, as other commentators have pointed out, companies should use caution and make sure their compensation disclosures are as complete and accurate as possible.

I would add that companies that intend to seek share increases in the share authorizations for their equity plans should be especially cautious. The proxy disclosures on this topic should be as complete as possible. If the board has considered analyses of share usage or projections of future grants, the company might consider including summaries of this information in the proxy statement. Further, practitioners should take a fresh look at Item 10 of Schedule 14A and err on the side of more disclosure.

For a company that is uncertain about whether to seek an increased share authorization in 2013, my advice would be to delay that vote until 2014 if possible. By that time, the litigation may have died down, or strategies to defeat such lawsuits may be clearer.

A Few Enhancements on the Way!

I'm delighted to announce that two of my partners in Maslon’s Business & Securities Group, Alan Gilbert and Paul Chestovich, will join me to write some of the posts for ON Securities going forward. Alan and Paul have each written guest posts in the past. Maslon attorney Leah Fleck provided research for this post and will continue to provide editorial assistance. I will continue to be the Blog’s Editor.

In the near future, we will also seek feedback from readers about the Blog, including subject areas you would like to see covered. Also, if any readers would like to write a guest post or contribute to the Blog in some other way, please send me an e-mail.

As always, I would like to thank our readers for their support and feedback over the past three and a half years!

Tags: Compensation Disclosure, Dodd-Frank Act, Executive Compensation, Litigation, compensation disclosures, say-on-pay

Program Provides Update on Dodd-Frank Act Requirements

Posted on July 25, 2012 by Martin Rosenbaum

This month, I participated in an executive compensation program for the Twin Cities Chapter of Financial Executives International (FEI). In “A Perspective on Executive Compensation After Dodd-Frank”, compensation consultant Eric Gonzaga of Grant Thornton LLP and I gave an update on Dodd-Frank Act requirements, including new and upcoming SEC rules, and Eric gave his perspective on the latest trends in performance-based compensation – see our presentation materials here (PDF).

Highlights of the Dodd-Frank Act update included the following:

General Update. I presented the latest version of the ON Securities Cheat Sheet, with updates on the latest compensation and governance regulations. The Cheat Sheet is always available at the right hand side of the home page of this blog. It no longer includes projected dates for proposal and adoption of the SEC rules, because (1) the SEC’s web page that lists upcoming rulemaking activities under Dodd-Frank no longer discloses projected dates and (2) the SEC kept missing/changing the dates anyway.

Say-on-Pay. There is not much new in connection with the non-binding shareholder advisory vote on executive compensation, and the vote on the frequency of the Say-on-Pay vote. The results in 2012 are very similar to those in 2011. Average shareholder support once again is over 90%, but a handful of companies continues to experience negative votes. ISS and other advisory firms continue to have significant influence, approximately 20% of the vote by some estimates.

Advisory Vote Requirements for Smaller Reporting Companies. One of the great things about speaking to the FEI gathering was that it forced me to look back at all of my Dodd-Frank materials from 2012. I realized that we are coming up on a major compliance date for Say-on-Pay and Say When on Pay: smaller reporting companies, after a two-year exemption, will finally become subject to these advisory vote requirements (PDF) for annual meetings starting on January 23, 2013. See the SEC's Small Entity Compliance Guide (PDF) for these rules. Smaller reporting companies have not previously been required to include a Compensation Discussion and Analysis (CD&A) section in their proxy statements, and this will not change as a result of Say-on-Pay. The advisory vote will cover whatever is actually disclosed in the proxy statement – generally, just the compensation tables and the description of severance benefits. Some smaller reporting companies already voluntarily include some form of CD&A in their proxy statements, including an explanation of the company’s compensation philosophy and the reasons for the levels and types of the executives’ compensation reported in the tables. Companies that are not making these disclosures should definitely consider adding some version of CD&A in 2013, as it will be helpful in achieving a positive Say-on-Pay vote.

Proxy Disclosure Trends. For larger companies that continue to be subject to Say-on-Pay votes, proxy statement disclosures have been focusing more and more on describing Pay for Performance (P4P). I pointed to the Coca-Cola proxy statement, with its color graphics, and the Exxon Mobil glossy mailing on executive compensation (with companion video) as examples of effective communication. Compensation disclosures are looking more and more like political campaign pieces.

Upcoming Disclosure Requirements. We’re still waiting for these new compensation disclosure requirements from the SEC:

Pay vs. performance chart: will require disclosure of executive pay compared to the company’s financial performance (likely measured by Total Shareholder Return).
Pay equity disclosure: will require a comparison of median annual compensation of employees vs. that of the CEO, a rule that will likely result in reporting burdens for public companies.

Clawbacks. We’re also waiting for proposed SEC rules on recoupment of compensation by companies listed on stock exchanges – clawbacks. As described in this prior post, the exchanges will be directed to adopt listing standards requiring a clawback policy for listed companies. The policy must require recovery of incentive compensation (including stock options) from current and former officers during the three years prior to a financial restatement, to the extent the compensation was based on erroneous financial data. I continue to believe that the clawback requirements will be the “sleeper” under Dodd-Frank, creating lots of interesting issues for listed public companies.

Tags: Dodd-Frank Act, clawbacks, compensation disclosures, say-on-pay

Say-on-Pay Update: How Does 2012 Compare With 2011?

Posted on June 7, 2012 by Martin Rosenbaum

It’s June, and the crush of annual meetings is, for the most part, finished. For most companies, this has been the second year in which a Say-on-Pay vote – an advisory shareholder vote on the company’s executive compensation – has been required under the Dodd-Frank Act. This is a good time to look at the shareholder votes to see if there has been a major change from 2011.

Semler Brossy’s latest Say-on-Pay Results report (PDF) reveals that not much has changed from last year. For the vast majority of companies, Say-on-Pay has passed with a significant margin of victory. Like last year, most companies have received greater than 90% approval.

It does appear that there will be more failed Say-on-Pay votes this year than last year. Mark Borges, in his Proxy Disclosure Blog on CompensationStandards.com (subscription site) reports that 40 companies have failed to achieve a majority of affirmative votes this year, about the same number as all last year. Therefore, there will almost certainly be more negative votes in 2012 – but it’s unlikely that there will be a huge difference.

Of course, for some companies the results will be much different this year. For example, as reported in this previous post, Citigroup failed to get a majority positive vote this year, even though it won by a large margin last year. And Chiquita Brands International slipped on a banana peel this year – Borges reported that Chiquita got less than 20% Say-on-Pay support this year, compared to an 86% positive vote last year.

The 2012 proxy season so far teaches these lessons:

Don’t get cocky. As Citigroup’s experience demonstrates, a company can take nothing for granted, even if it did great on the vote in the previous year.

Supplemental proxies don’t seem to have a major impact. According to Semler Brossy, company responses to an “against” recommendation from ISS, filed in the form of supplemental proxy statements, do not appear to have a material impact on vote results. [On the other hand, they can’t hurt.]

Sue-on-Pay is still alive. As reported in this previous post, Citigroup was sued shortly after the negative Say-on-Pay was defeated, with claims based on the negative vote.

Engage, engage, engage. Continue to engage with major shareholders and proxy advisory firms about executive compensation issues before, during and after proxy season. The day after the 2012 annual meeting, it’s not to early to start planning for 2013.

Tags: Dodd-Frank Act, Litigation, engagement, say-on-pay

Perspectives on Citigroup's Negative Say-on-Pay Vote

Posted on May 1, 2012 by Martin Rosenbaum

As the 2012 proxy season kicks into high gear, Citigroup’s negative Say-on-Pay vote a couple of weeks ago remains the big story. Because of Citigroup’s size and prominence, the vote received a lot of commentary in newspapers and blogs. As Mark Borges pointed out in the Proxy Disclosure Blog on CompensationStandards.com (subscription site):

This turns out to be Citigroup's fourth "Say on Pay" vote since 2009 - the first two were as a participant in the Troubled Asset Relief Program. I took a look at the support for the company's executive compensation program over this entire period, which went from 82% in 2009, 89% in 2010, and 93% in 2011 to just 45% in 2012. So it appears that there was a fairly consistent level of support for the program, which spiked in 2011 (the second consecutive year in which the company's CEO received essentially nominal compensation - $1 in 2010 and $128,000 in 2009) before the bottom fell out.

One lesson to be learned from the Citigroup experience: take nothing for granted. Because the vote was so positive the past several years, the company might have been blindsided by a wave negative shareholder reaction this year. As Borges pointed out, Citigroup’s CD&A disclosure this year matter-of-factly explained that the compensation committee viewed last year’s 93% support as an endorsement of its existing approach: “The committee considered the outcome of the most recent say-on-pay vote and stockholder perspectives [from stockholder engagement efforts] generally as factors in the 2011 compensation process. . . .”

In hindsight, maybe Citigroup should have anticipated tough sledding. Unlike 2009 and 2010, when the CEO, Vikram Pandit, had received compensation of $1 per year, in 2011 the story was very different, as Steven Davidoff pointed out in a DealBook post:

Last year, the Citigroup board paid Mr. Pandit almost $15 million, plus one-time retention awards with a potential value of $34 million, as calculated by I.S.S. The proxy advisory firm recommended against Mr. Pandit’s package because parts of his awarded pay were not based on Citigroup’s financial performance, Citigroup stock had declined by more than 90 percent in the last five years and Mr. Pandit’s pay package was not in alignment with that of his peers. . . . Citigroup in part defended this pay package by arguing that Mr. Pandit had not received a meaningful salary for the three previous years, being paid only a dollar a year. This was nice of Mr. Pandit, but it must be put against the fact that Citigroup paid about $800 million to acquire Mr. Pandit’s hedge fund, Old Lane, an investment that Citigroup subsequently wrote off completely. And Mr. Pandit received an $80 million payment from Citigroup last year as part of the Old Lane buyout. He’s not about to become part of the 99 percent anytime soon.

When ISS recommended a vote against Citigroup’s executive pay, the company could have filed and mailed supplemental proxy materials to tell management’s side of the story. As Semler Brossy points out in its latest weekly Say-on-Pay update (PDF), many companies, perhaps most, have responded to a negative ISS recommendation with supplemental proxy materials. Although Semler Brossy does question whether such supplemental materials have a material impact on the ultimate results of the vote, the practice does give the company an additional chance to tell its story.

Not that the Citigroup proxy statement was inadequate. It certainly seemed to follow many of the best practices of compensation disclosure, including a robust summary at the beginning of its CD&A disclosure. On the other hand, there’s a lot of information to digest in the summary, and they certainly did not follow the practices of some companies that are making effective use of graphics to make their point. Compare the proxy statement filed by Coca-Cola this year, which uses charts, tables and color captions really effectively to tell their story. Maybe graphics would not have been enough to save Citigroup’s Say-on-Pay vote, but they probably wouldn’t have hurt.

Future Trends in Proxy Materials as PR Pieces

Coca-Cola obviously put a huge amount of effort into its proxy filing, and I think that’s a trend that will continue in the future, fueled by examples of negative votes like Citigroup’s. I can envision public relations and graphics firms getting more involved, and proxy statements and supplemental materials will look more and more like political campaign mailings. For another example, see the graphics in this very impressive glossy supplemental piece, filed by Exxon Mobil as a companion to their proxy statement for the second year in a row.

Sue-on-Pay Is Still With Us

As has been widely reported, Citigroup was sued in federal court almost immediately after the negative Say-on-Pay vote. Mark Borges reported that this is the 11th “sue-on-pay” case based on a failed shareholder advisory vote. The sheer size of this case is likely to ensure that it will capture public attention.

Tags: Citigroup, Dodd-Frank Act, Litigation, say-on-pay

Say-on-Pay Votes: New Resources Make It Easy to Keep Score

Posted on April 1, 2012 by Martin Rosenbaum

The Semler Brossy compensation consulting firm is publishing a very useful resource for those of us who want to “keep score” on the results of Say-on-Pay votes in 2012. “2012 Say on Pay Results” is a weekly publication of the cumulative results of Say-on-Pay shareholder advisory votes at Russell 3000 public companies. The most recent report includes the following stats:

The majority of companies continue to pass Say-on-Pay in 2012 with substantial shareholder support. So far, 71% of these companies have passed with over 90% support.
The report analyzes how vote results have changed in 2012. Companies that were below 70% in 2012 have generally received increased vote support in 2012. So far, all companies that failed in 2011 have passed in 2012.
ISS has recommended an “against” vote at 25 of these companies (16%) in 2012, compared to 12% in 2011. On average, shareholder support was 27% lower at companies with an ISS “against” recommendation.
So far, two companies have failed to get a majority positive Say-on-Pay vote: Actuant Corp. and International Game Technology. The Semler Brossy report provides data such as the 1-year, 3-year and 5-year total shareholder return (TSR) levels for these companies.
In “Vote of the Week”, the report analyzes a particular (high profile) Say-on-Pay vote. The March 28 report analyzes the Disney vote and the possible reasons they got a 57% positive vote, a decrease of 20% from their 2011 result.

I recommend bookmarking the URL: http://www.semlerbrossy.com/sayonpay. The most recent weekly Semler Brossy PDF report will pop up, including the most up-to-date statistics throughout proxy season.

Another good resource for analyzing early results is this report by Towers Watson. In the last section, this report includes a discussion of the companies that have done supplemental proxy filings, generally to counter points raised by ISS or other proxy advisory firms. Over 100 companies filed such additional soliciting materials last year, and Towers Watson reports that over 10 companies have used such filings this year. The report also analyzes the impact of an ISS “for” or “against” recommendation on Say-on-Pay votes.

Thanks to Broc Romanek in his Advisors Blog on CompensationStandards.com (subscription site) for pointing out these resources.

Tags: Dodd-Frank Act, Proxy Advisory Firms, iss, say-on-pay

ISS 2012 Policy Updates, Continued: Board Response to a High Negative Vote

Posted on December 1, 2011 by Martin Rosenbaum

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!

Tags: Dodd-Frank Act, Proxy Advisors, engagement, iss, say-on-pay

ISS Policy Updates Shed Light on Pay-for-Performance Analysis

Posted on November 20, 2011 by Martin Rosenbaum

The proxy advisory firm ISS last week issued the 2012 Updates to its U.S. Corporate Governance Policy (PDF). The Updates outline this year’s changes to ISS’s policies in recommending investor votes at public companies’ shareholder meetings. Essentially, the policies say when ISS will act like the popular kids on Facebook and “like” a company’s postings – see this prior post. These recommendations are especially important in the upcoming proxy season, the second year of mandatory Say-on-Pay votes on public company compensation. ISS’s methodology and rationale also provide useful guidance for drafting compensation disclosures, as described below.

The 2012 Updates have been widely reported; for example, see these helpful summaries by the compensation consultants Frederic W. Cook & Co., Inc. (PDF) and Towers Watson. This post focuses on ISS’s pay-for-performance (p4p) methodology, which is critical in determining its Say-on-Pay vote recommendations. My next post will discuss another critical ISS policy – its evaluation of the board of director’s response in cases where the company experienced high levels of opposition in a previous Say-on-Pay vote.

P4P Methodology. Starting on page 9 of the Updates, ISS describes its new methodology for determining pay-for-performance alignment. This is described as a two-part test – first, ISS screens companies to identify the level of alignment between pay and performance over a sustained period; if a company shows unsatisfactory alignment, then ISS uses a second-stage qualitative analysis to arrive at a final recommendation.

For companies included in the Russell 3000 index, in the first phase ISS uses quantitative tests of alignment relative to a peer group and on an absolute basis. First, ISS compares the company’s TSR (total shareholder return) rank within a peer group, as measured over one-year and three-year periods, and the multiple of the CEO’s total pay relative to the peer group median. The peer group is generally comprised of 14 to 24 companies selected based on size and industry group. Second, the quantitative analysis also considers alignment on an absolute basis between the company’s trend in CEO pay over the past five fiscal years and the trend in the company’s TSR over the same period.

For companies not included in the Russell 3000 index, in the first phase ISS uses an undefined process to determine whether pay and performance are misaligned.

Where the first phase indicates unsatisfactory alignment, there is a second phase qualitative analysis that examines the following factors “to determine how various pay elements may work to encourage or to undermine long-term value creation and alignment with shareholder interests”:

The ratio of performance- to time-based equity awards;
The ratio of performance-based compensation to overall compensation;
The completeness of disclosure and rigor of performance goals;
The company's peer group benchmarking practices;
Actual results of financial/operational metrics, such as growth in revenue, profit, cash flow, etc., both absolute and relative to peers;
Special circumstances related to, for example, a new CEO in the prior fiscal year or anomalous equity grant practices (e.g., biennial awards); and
Any other factors deemed relevant.

ISS based its Policy Updates in large part on the results of its 2011-2012 Policy Survey (PDF). In its “Rationale for Updates”, ISS reports:

“. . . 94 percent of institutional respondents to ISS' 2009-2010 Policy Survey indicated that pay-for-performance is a critical or important consideration in their vote determinations. This year, another overwhelming majority of institutional respondents to ISS' 2011-2012 Policy Survey indicated two factors as relevant to evaluating pay-for-performance alignment: pay relative to peers is considered very relevant by 62 percent and somewhat relevant by 32 percent; and 88 percent believe pay increases that are disproportionate to the company's performance trend are very relevant to this evaluation (plus 11 percent who consider it somewhat relevant). . . .”

“In cases where alignment appears to be weak, further in-depth analysis will determine causal or mitigating factors, such as the mix of performance- and non-performance-based pay, biennial grant practices, impact of a newly hired CEO, and rigor of performance programs. For example, 81 percent of investor respondents to ISS' 2010-2011 Policy Survey said that the way a company's short-term and long-term incentive metrics relate to the company's business strategy is among their most important considerations in evaluating executive pay. If long-term alignment of TSR performance and CEO pay opportunities is weak, investors expect current pay and pay opportunities to be strongly performance-based.”

Comment. The Updates feature some welcome changes, including ISS’s more individualized approach to peer group identification, a longer-term approach through use of a five-year metric and a heightened focus on specific qualitative factors in the second phase of analysis.

Public companies should take heed of the survey statistics cited above and the resulting quantitative and qualitative factors to be considered by ISS in connection with its recommendations. In evaluating their compensation programs and their compensation disclosures, public companies should be mindful of these factors, which can serve as a checklist of compensation features and processes that should be highlighted in next year’s CD&A disclosures.

Tags: Dodd-Frank Act, Proxy Advisory Firms, iss, pay for performance, say-on-pay

What Should Public Companies Know About the Proxy Advisors?

Posted on November 13, 2011 by Martin Rosenbaum

In the second year of mandatory Say-on-Pay votes on public company compensation, the proxy advisory firms such as ISS and Glass Lewis will be like the popular kids on Facebook: it’s important to get them to “like” the company’s postings. In other words, their positive recommendations are an important factor in winning the Say-on-Pay vote by the widest possible margin.

Therefore, one of the best parts of attending the recent Proxy Disclosure Conference sponsored by CompensationStandards.com (subscription site) was attending the session called “The Proxy Advisors Speak”, featuring Carol Bowie of ISS and David Eaton of Glass Lewis. Seeing these individuals speak was like meeting the people behind the Facebook profile pictures.

These close encounters reinforced my conclusion that, whether or not you agree with their guidelines or recommendations, the representatives are serious professionals doing their best to navigate a flood of information and help institutional shareholders figure out how to vote. In other words, proxy advisors are people too.

Here are some of the important observations by Carol Bowie of ISS:

ISS has a team of trained analysts preparing for the proxy season, and every report passes through at least two analysts.
ISS tries to deliver research reports at least 21 days before the annual shareholders’ meeting; however, this can be 13 days during proxy season or less in contested meetings. S&P 500 companies receive draft reports shortly before publication to allow them to check the facts.
The compensation discussion and analysis (CD&A) section of the proxy statement should include an executive summary that outlines the overall structure of the compensation program. Also, it’s helpful if the CD&A provides key information in one place about short-term and long-term compensation programs, including why the company uses particular metrics; what were the targets and how were they determined; and what were the company’s financial results and the associated awards?
ISS is updating its policies for evaluation of Say-on-Pay votes in 2012, and the final policy updates will be released before Thanksgiving. As shown by its draft of the updated policies, ISS will still focus heavily on total shareholder return (TSR) (essentially, stock price) in evaluating the “performance” component of pay for performance. ISS is trying to strike a new balance between short-term and long-term factors, using a combination of one-, three- and five-year analyses.
In assessing compensation programs in 2012, ISS will focus a high level of scrutiny on companies whose proposals received less than 50% support from votes cast. In addition, for companies that received less than a 70% positive vote, surveyed institutional investors indicated that they expect an explicit response from the board with respect to shareholder engagement and actions taken as a result of the vote. ISS will likely give the Say-on-Pay votes of those under-70% companies more scrutiny as well.

In a future post, I’ll share observations of the Glass Lewis representative. Hopefully, these insights can help companies be “liked” in the upcoming proxy season.

Tags: Dodd-Frank Act, Executive Compensation, Proxy Advisors, iss, pay for performance, say-on-pay

Proxy Disclosure Conference Teaches the Importance of Pay for Performance

Posted on November 4, 2011 by Martin Rosenbaum

I have been attending the Proxy Disclosure Conference and Say-on-Pay Workshop sponsored by CompensationStandards.com (subscription site) in San Francisco. The Conference and Workshop were unique, in that the speakers included representatives of:

Proxy advisory firms, including ISS and Glass Lewis.
Institutional investors, including CalSTRS, T. Rowe Price and BlackRock.
Proxy solicitors, including Georgeson and Innisfree M&A
Compensation consultants, including Compensia and Towers Watson.

The panel discussions covered proxy statement drafting issues and compensation structure issues in the wake of the first year of Say-on-Pay. I will be blogging about key takeaways from several of the sessions.

However, one key point came out time after time. The key to a clear victory in the Say-on-Pay vote is being able to demonstrate that the company practices “pay for performance”. (Ira Kay, compensation consultant with Pay Governance, calls it “p4p”.)

Of course, nearly every company says it practices pay for performance. However, there are many possible definitions of both “pay” and “performance”. The key is to adopt definitions that make sense in light of the company’s business and situation, and to be able to explain the link between pay and performance in a clear and compelling way. This will be especially important for companies that failed to achieve a majority positive vote in 2011, or companies that ended up in what speakers called the “Red Zone” – a positive vote in the range of 51% to 80%.

Other distractions, such as the frequency vote (Say When on Pay) and the mechanics of the Say-on-Pay vote, will fall by the wayside in 2012. This will just highlight the importance of the biggest compensation and governance issue in the coming months – p4p.

Image: Flikr

Tags: Dodd-Frank Act, pay for performance, say-on-pay

Companies Disclose How They Considered Prior Say-on-Pay Votes In Setting Compensation

Posted on October 6, 2011 by Martin Rosenbaum

The first few companies have complied with a new proxy statement disclosure requirement relating to past Say-on-Pay votes. Item 402(b)(1)(vii) of Regulation S-K requires companies to disclose “ . . . [w]hether and, if so, how the registrant has considered the results of the most recent shareholder advisory vote on executive compensation . . . in determining compensation policies and decisions and, if so, how that consideration has affected the registrant’s executive compensation decisions and policies.” Mark Borges, in his Proxy Disclosure Blog on CompensationStandards.com (subscription site), recently reported that four companies have complied with this requirement so far, including three TARP-participating financial institutions that have been required to hold Say-on-Pay votes since 2009. The following are excerpts from Compensation Discussion and Analysis in the proxy statements:

Hemispherx Biopharma, Inc.: [After reporting that the stockholders voted not to approve executive compensation, in a close vote.] “The Compensation Committee reviewed the result of the vote on the non-binding resolution causing them to reflect on the various elements of the 2010 executive compensation program. While it remains the goal of the executive compensation program to support long-term value creation, the Committee moved to enhance the program to better align the compensation options with our stockholders’ interests in supporting long-term value creation. Accordingly, two elements have been added to the executive compensation plan . . . .” [The changes were different pricing for reload stock option grants, and inclusion of shares of stock as a component of non-executive compensation.]

City National Bancshares Corporation: [After describing key components of executive compensation.] “The Committee monitors the results of the annual advisory ‘say-on-pay’ proposal and incorporates such results as one of many factors considered in connection with the discharge of its responsibilities, although no such factor is assigned a quantitative weighting. Because a substantial majority (98.1%) of our stockholders approved the compensation program described in our proxy statement in 2010, the Committee did not implement changes to our executive compensation program as a result of the stockholder advisory vote. . . .”

Premier Financial Bancorp, Inc.: “In arriving at its decision on 2010 executive compensation, the Compensation Committee took into account the affirmative shareholder ‘say on pay’ vote at the previous annual meeting of shareholders and continued to apply the same principles in determining the amounts and types of executive compensation. The specific compensation amounts for each of Premier's named executive officers for 2010 reflect the continued improvement in the Company's financial performance. . . .”

And, as Borges puts it, “For brevity, it's difficult to beat the statement in Oak Valley Bancorp's Compensation Discussion and Analysis: ‘The Company considered the Shareholder vote approving the Company's executive compensation for 2010 in making its proposal for 2011.’”

Comment. City National Bancshares and Premier Financial, at least, each had a greater-than-90% positive Say-on-Pay vote the previous year. For companies with similar results, the following year’s proxy disclosure of the impact of the vote should be straightforward. However, for a company that fails to achieve a positive vote, or that receives a narrower majority of positive votes, this disclosure will require a great deal of thought the following year, and the thought process should start shortly after the annual meeting: Should the company change its compensation programs in response to the vote? What changes would send the appropriate signals to our shareholders? Should the company engage with its shareholders to attempt to determine the meaning of the shareholder vote? How will we craft next year’s proxy disclosure about our consideration of the vote? Even before each annual meeting, the company’s internal and external advisors should discuss these issues with the compensation committee, and determine what percentage vote will be considered to “send a signal” to the committee.

In the wake of the current down year in the stock market, next year it may be more difficult for companies to achieve an overwhelmingly positive Say-on-Pay vote, and more companies may well get negative or borderline votes. For these companies, the following year’s proxy language about consideration of the prior Say-on-Pay vote will be subject to a great deal of scrutiny. Given the incidence of “Sue-on-Pay” shareholder lawsuits, as described in this prior post, these disclosures should not be taken lightly, and companies should anticipate the issues and plan accordingly.

#ThankYouSteve

I was saddened to hear of the passing yesterday of Apple Inc. founder Steve Jobs. He was an amazing innovator and created a huge amount of prosperity for many in this country. He also created a great deal of enjoyment in a much broader range of people around the globe – enjoyment of great music and the arts on Apple devices, and enjoyment of the elegant design of the products themselves.

In this prior post, I described the disclosure issues created by Jobs’ health problems over the years. Interesting reading, but it’s hard to imagine any other executive whose ongoing health issues would rightfully create so much concern about the company’s well-being. Good luck to Apple, and to all of us. We’ll miss you, Steve.

Tags: Dodd-Frank Act, Steve Jobs, proxy disclosures, say-on-pay

If the Shareholders Say "Nay-on-Pay", Get Ready for "Sue-on-Pay"

Posted on June 27, 2011 by Martin Rosenbaum

A number of public companies this year have received a majority of negative votes in their shareholder advisory votes on executive pay (Say-on-Pay), required under the Dodd-Frank Act – see this prior post. In his Proxy Disclosure Blog on CompensationStandards.com (subscription site), Mark Borges reported yesterday that at least 36 companies have experienced “Nay-on-Pay” votes.

In a Reuters article, “Hercules execs sued over failed ‘say on pay’ vote,” Tom Hals reported recently that Hercules Offshore, Inc. became the sixth company to face shareholder derivative lawsuits based on a negative Say-on-Pay vote. The others are, in reverse chronological order, Umpqua Holdings Corporation, Beazer Homes USA, Inc., Jacobs Engineering Group, Inc., Occidental Petroleum Corporation and KeyCorp. There are generally multiple lawsuits involving each company in various state and federal courts. These “Sue-on-Pay” lawsuits have caused a great deal of consternation in boardrooms, partly out of fear that every negative Say-on-Pay vote has the potential to lead to expensive and distracting litigation.

My colleagues and I have taken a preliminary look at the cases and have some observations:

Timing. The KeyCorp and Occidental Petroleum lawsuits were filed in mid-2010, after the advisory votes at those companies’ 2010 annual meetings. Both of those cases have been settled. The KeyCorp settlement is discussed below. A blog post from the Davis Polk law firm reported that Oxy Pete settled one case and got two others dismissed. The lawsuits involving the other four companies have all been brought in 2011, based on failed Say-on-Pay votes at the companies’ 2011 annual meetings.

The Law Firms. A couple of plaintiffs’ firms each show up in several of these cases. In the KeyCorp, Oxy Pete and Jacobs Engineering cases, the Weiser Law Group in the Philadelphia area is listed as one of the plaintiffs’ law firms, and Weiser was lead counsel in the KeyCorp settlement. The Robbins Geller firm in San Diego is listed as counsel in the Oxy Pete, Beazer, Umpqua and Hercules cases. Other firms show up as well, but these two firms seem to be common threads. Both are well known plaintiffs’ firms.

The Claims. The lawsuits are all derivative claims, meaning the plaintiff/shareholders are bringing claims against the individual directors on behalf of the corporation. Not surprisingly, the claims in the various cases are very similar: the directors allegedly (i) breached their duty of loyalty by deliberately diverting corporate assets to the executives at the expense of the shareholders and aided and abetted each other in these actions; (ii) committed corporate waste and caused unjust enrichment; and (iii) breached their duty of candor and full disclosure by stating in the proxy statement that pay was based on performance, concealing the overpayments. Many of the complaints include lovely charts showing that compensation increased significantly in the preceding year, while shareholder return decreased significantly. The claims in these cases are based on both the board’s original approval of the preceding year’s compensation and the failure to make immediate changes to the compensation programs following the Say-on-Pay vote. Plaintiffs also generally claim that the negative Say-on-Pay vote rebuts the presumption in favor of the boards’ actions under the business judgment rule.

One interesting side note for compensation consultants: in every one of the six lawsuits, the consultants were named as defendants, on the theory that they aided and abetted the directors’ bad actions and breached their contracts with the company by allegedly giving lousy advice. PricewaterhouseCoopers and Frederic W. Cook & Co. are each named in two lawsuits, with Mercer and Pearl Meyer & Partners each named in one. This development cannot be welcome news in the executive compensation consulting world.

The Merits and Procedural Considerations. Strictly on the merits, there should be meritorious defenses to these claims. The board, not the shareholders, is charged under state law with making compensation decisions, and the presumptions in favor of the directors’ actions should not shift based on a non-binding advisory vote. This is especially true in light of Section 951(c) of the Dodd-Frank Act (848-page PDF), which specifically provides that “ . . . the shareholder vote . . . may not be construed . . . to create or imply any change to the fiduciary duties of such issuer or board of directors . . . [or] any additional fiduciary duties for such issuer or board of directors. . . .”

However, procedurally, getting a final determination on the merits of any case still takes time, at least a matter of months, and the Sue-on-Pay cases are scattered in a variety of state and federal courts. In the meantime, as plaintiffs get some settlements, this could embolden these same law firms or other plaintiffs’ firms to bring more claims.

The KeyCorp Settlement. In March 2011, KeyCorp reported that it had entered into a comprehensive settlement agreement for the legal actions based on its 2010 Say-on-Pay vote. Note that the Dodd-Frank Act requirement was not yet in effect for this vote, but KeyCorp held its vote under a similar requirement for TARP recipients, which includes language on fiduciary duties that is very similar to the Dodd-Frank language – i.e., the advisory vote does not change fiduciary duties. See Section 7001 of the American Recovery and Reinvestment Act of 2009 (PDF). Nonetheless, after months of wrangling, KeyCorp settled the case on terms that are pretty typical for derivative settlements. KeyCorp agreed to make numerous changes in its compensation practices and procedures, and also agreed to pay $1.75 million in fees to the plaintiffs’ law firms.

In one of my favorite provisions of the settlement agreement, the plaintiffs’ firms boldly stated that they intended to ask the court to approve the payment of cash fees to the named shareholder plaintiffs. These fees would be paid in recognition of these shareholders’ service to the company and all of its shareholders, and the amount of said fees, if approved, would be deducted from the plaintiffs’ firms’ fees. The aggregate amount of said fees to be requested: $5,000.

Comment. Regardless of the merits of these lawsuits, any company in danger of losing a Say-on-Pay vote should be prepared for a Sue-on-Pay action. Until courts in a number of jurisdictions rule on motions to dismiss (and any appeals from dismissals are decided), the plaintiffs’ law firms are likely to be emboldened by settlements like the KeyCorp agreement. Advisors should prepare the board members for the prospect of being named individually, and public companies should be prepared for the potential expense and distraction of a lawsuit.

In this litigious atmosphere, corporate counsel should be especially attuned to keeping appropriate records of the process followed in connection with any compensation decisions. Even if a company received an overwhelming vote of support this year, the shareholders may not be so generous next year if the stock takes a dive but reported compensation keeps flying high. Also, if the company is not confident in the result of an upcoming Say-on-Pay vote, it will be very important to react quickly to a failed vote. Does the compensation committee want to make immediate changes, if those changes are possible? Does the company want to announce changes right away? In light of the settlement by Key, preparation will be key.

Thanks to my securities litigation partner, Rich Wilson, and our summer associate, Kathleen Crowe of Georgetown Law Center, for their invaluable help on this post.

Image: Flikr

Tags: Derivative Suits, Dodd-Frank Act, Lawsuits, governance, say-on-pay

The Say-on-Pay World According to Broc

Posted on June 12, 2011 by Martin Rosenbaum

Broc Romanek, the editor of theCorporateCounsel.net and writer of the associated blog, spoke in Minneapolis last week at a meeting of the local chapter of the Society of Corporate Secretaries and Governance Professionals. His main topic was “Post-Proxy Season Wrap-Up,” and Broc gave practical advice on dealing with Say-on-Pay and other governance reforms during the remainder of this proxy season and in preparation for next year. He also talked about technology developments and offered some predictions on the impact of social media on investor relations.

There were several good takeaways from the program. How do I know? I was surrounded by in-house counsel, and I tried to take note of the times when everyone picked up their pens and scribbled notes on the handout. Here’s my list:

One big lesson: engagement with institutional shareholders is really difficult, especially for smaller companies that may have trouble getting their attention. This will continue unless and until the investors beef up their staffs big-time. How to deal with the issue? After proxy season is over, contact your big investors and ask how they want to be contacted (if at all) in the future. Get a dialogue going now.
The shareholder advisory service ISS has issued negative recommendations on Say-on-Pay for around 12% of companies so far this year. In other words, ISS has been friendlier to boards and management than many expected. ISS’s future direction is a little uncertain – the company has been sold several times, and Broc reported that it’s on the block again. But public companies shouldn’t wish for ISS to “just go away” unless it’s clear that any leading alternative would be better.
Companies need to be more careful about how they count the votes on Say-on-Pay and other matters. Broc cited data to the effect that a large percentage of companies are making mistakes in counting the votes (e.g., how will abstentions or broker non-votes be counted in determining whether a proposal was passed). Some companies are counting the votes in a way that does not match corporate bylaws and state corporate laws. Further, in some cases the voting results, as reported in Form 8-K, are not consistent with the previous proxy statement disclosures about how the votes would be counted. He urged professionals to double check the standards and the numbers.
Several companies have been sued after negative Say-on-Pay votes, with the complaint citing the vote as evidence of a breach of the board’s duties. The lawsuits may well be groundless, but boards of directors of these companies are reacting very strongly. Be sure to warn the board of the possibility.
Pay more attention to the investor relations page on your company’s web site. Company web pages are becoming more influential. Broc cited the writings of Dominic Jones on the IR Web Report blog, see “Stats show PR wires less effective than company web channels.” Google your company name and “executive compensation” and note the top 10 results – this provides clues about who is controlling the narrative. In this regard, pay attention to search engine optimization. For example, if you have an IR web page with “executive compensation” in the URL, the page’s search results will be improved. Keep tabs on services that make it easier for people to access your company’s information and provide feedback from mobile devices – soon, nearly everyone will be using tablets.
Broc expects shareholders meetings to become more like political campaigns. In a recent New York Times article, “Inciting a Revolution: The Investor Spring,” Gretchen Morgenson reported on a movement among the smaller shareholders of Celgene Corporation to organize a negative Say-on-Pay vote through social networking. Events like that are not yet common, but this is the wave of the future. Look at the IR web pages of European companies, where investor relations and shareholder meetings have been treated more like political campaigns, with video, etc.
On a related note, company personnel need to get conversant with Twitter fast, especially since many proxy solicitors don’t “get” social media yet. Institutional investors are reading tweets, and a majority of IR departments are on Twitter. Don’t get left behind. See Broc’s post from earlier this year, “Time for You to Consider Tweeting? The IR Pros Are....”

Broc also spoke effectively about the expanding use of social media, and the need for all of us to get more familiar with the new technology. I’ll blog about this in a future post.

Tags: Dodd-Frank Act, Investor Relations, Social Media, say-on-pay

GE Amends Terms of Existing Stock Options, Facilitates Positive Say-on-Pay Vote

Posted on April 28, 2011 by Martin Rosenbaum

Bloomberg reported on Wednesday that General Electric Company received a positive Say-on-Pay vote at its annual shareholders meeting. As disclosed in GE’s proxy statement filings, the company achieved this result, or at least increased the likelihood of an affirmative vote, through its recent restructuring of an existing equity award originally granted to the CEO in 2010. This may be a preview of things to come in the shifting balance of power between boards and shareholders, facilitated by the reforms under the Dodd-Frank Act of 2010. Here’s the time line:

On March 14, 2011, GE filed its annual meeting proxy statement. As required under the Dodd-Frank Act, the proxy statement included a non-binding shareholder advisory vote on executive compensation (Say-on-Pay).
On April 7, GE filed additional soliciting materials. The company disclosed that ISS, the shareholder advisory service, had issued a report recommending a “no” vote in GE’s Say-on-Pay vote. GE challenged ISS’s conclusions, including ISS’s valuation of the grant of 2 million stock options to CEO Jeffrey Immelt in March 2010. GE had valued the options at $7.4 million, while ISS valued the same options at $14.5 million. GE also challenged other aspects of ISS’s negative report.
On April 18, GE made an additional proxy filing reporting that the compensation committee, “with Mr. Immelt’s full support,” had modified the 2010 options to add performance-based vesting. Half of the options will now vest based on GE’s industrial cash flow, and the other half will vest based on the company’s total shareholder return compared to that of the S&P 500. GE reported that the change in the option award was based on “a number of constructive conversations with our shareowners.” In her Bloomberg article, “GE Ties CEO Options to Performance as Investor Meeting Nears,” Rachel Layne reported that, after the change in the options, ISS changed its negative recommendation and advised shareholders to support a positive Say-on-Pay vote.
On April 27, GE’s shareholders voted to approve the Say-on-Pay resolution, with 85 percent of the shares voted in favor of the resolution.

GE joined a number of companies this year that filed supplemental proxy materials challenging a negative recommendation by shareholder advisory services, as reported by Broc Romanek in TheCorporateCounsel.net Blog. At least one other company has made changes to its compensation programs in response to a negative recommendation. The Walt Disney Company eliminated tax gross-ups for golden parachute payments, which caused ISS to change its recommendation, as reported by Janine Sagar in Business Insider, and enabled a positive Say-on-Pay vote.

However, the GE saga marks a new era in direct communications about specific compensation terms that may be acceptable or unacceptable. It’s one thing for Disney to eliminate gross-ups, which are high on shareholders’ lists of unacceptable pay practices. It is another thing for GE to adjust, as part of a dialogue with shareholders, specific terms of a past award to base the payout on different performance metrics (i.e., industrial cash flow and relative shareholder return, rather than simple stock appreciation inherent in a stock option). This negotiation appeared to tip the balance in favor of a positive Say-on-Pay vote.

This back-and-forth dialog is the most obvious example yet of the increased power of shareholders, and shareholder advisory services, to limit or even define executive compensation under the Dodd-Frank Act regime.

Tags: Dodd-Frank Act, iss, say-on-pay, shareholder advisory services

Hewlett-Packard is the Latest Company to Lose a Say-on-Pay Vote

Posted on March 27, 2011 by Martin Rosenbaum

It’s a case of “Nay-on-Pay”, as Paul Hodgson described it in his post on The Corporate Library Blog, “Hewlett-Packard latest company to feel the heat of a Say on Pay defeat.” At its annual meeting last week, Hewlett-Packard became the fourth public company this year to lose a Say-on-Pay vote, now required under the Dodd-Frank Act, with 50 percent of the shares voting against the resolution and 48 percent voting yes. The no votes have also outnumbered the yes votes at Shuffle Master, Beazer Homes USA and Jacobs Engineering Group, as reported in Ted Allen’s post on ISS’s RiskMetrics Blog, “Investors Reject H-P’s Pay Practices.”

These latter three companies are quite a bit smaller than H-P, and at least two of them had fairly obvious “red flag” issues. Shuffle Master had a CEO severance agreement with a “single-trigger” provision, as described in Allen’s post. Beazer Homes has been faced with shareholder lawsuits over its compensation practices and was the subject of a successful “clawback” proceeding, as described in this Bloomberg article by Jef Feeley and David Beasley, “Beazer Homes Directors Sued by Teamsters Funds Over Executive Compensation.”

On the other hand, the lost Say-on-Pay vote at huge H-P, ranked number 10 in the Fortune 500, is sure to get the attention of corporate America. This may be the public company equivalent of Kansas losing today to Virginia Commonwealth in the NCAA Men’s Basketball Regional Finals. H-P did not have such obvious compensation red flags, and it certainly had the resources to mount a vigorous communications campaign. However, Allen’s post cites several aspects of H-P’s compensation that could not have made large shareholders happy, and which resulted in ISS’s recommendation against the resolution:

[New CEO Leo] Apotheker's pay arrangements include substantial up-front signing awards of cash and stock, and severance provisions that would result in sizeable payouts--including automatic vesting of all his time-based equity--upon his termination without cause. Many aspects of the company's incentive programs are subject to board discretion as well, and depend on the board exercising its authority objectively--e.g., the granting of discretionary bonuses and approval of higher-than-median pay benchmarking. The company has paid substantial discretionary awards and does not disclose goals for the key metrics that drive payouts under its annual and long-term plans, even retrospectively. Without complete disclosure, shareholders cannot ascertain the rigor of the goals relative to payouts.

Allen also points out that the company had provided “generous severance payouts after the board ousted former chief executives Mark Hurd and Carly Fiorina.” The Bloomberg article also reports that ISS cited Apotheker’s participation in selecting new board members, which it deemed “inappropriate.”

H-P’s compensation committee will need to communicate with shareholders to determine the cause or causes of the lost vote and deal with them in the coming year. Likewise, other companies’ boards should try to learn lessons from the defeat at such a high profile company.

Tags: Dodd-Frank Act, say-on-pay

The Say When on Pay Vote: What Should a Board Recommend?

Posted on February 24, 2011 by Martin Rosenbaum

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.

Tags: Dodd-Frank Act, board of directors, frequency vote, say-on-pay

Preparing for the Shareholder Advisory Votes, and the Concept of Engagement

Posted on February 14, 2011 by Martin Rosenbaum

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 . . . .

Tags: Investor Relations, engagement, frequency vote, say-on-pay

More Thoughts on Keeping Score: Shareholder Advisory Votes on Compensation

Posted on February 3, 2011 by Martin Rosenbaum

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.

Tags: Dodd-Frank Act, frequency vote, say-on-pay

SEC Adopts Final Rules on Shareholder Advisory Votes; Thoughts On the First Reported Frequency Votes

Posted on January 27, 2011 by Martin Rosenbaum

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.

Tags: Dodd-Frank Act, Say-on-Parachutes, frequency vote, say-on-pay

How Do Top Films Relate to the New Shareholder Advisory Votes?

Posted on January 17, 2011 by Martin Rosenbaum

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.

Tags: Blogging, Dodd-Frank Act, Investor Relations, frequency vote, movie review, say-on-pay

What Are Companies Recommending for the Frequency of Say-on-Pay Votes?

Posted on January 10, 2011 by Martin Rosenbaum

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.

Tags: Dodd-Frank Act, frequency vote, say-on-pay

Keeping Score: What Are Early Filers Doing About Say-on-Pay and Frequency Vote?

Posted on December 5, 2010 by Martin Rosenbaum

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.

Tags: Dodd-Frank Act, frequency vote, say-on-pay

Whistle While You Work! SEC Proposes Whistleblower Rules under Dodd-Frank

Posted on November 4, 2010 by Martin Rosenbaum

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.

Tags: Dodd-Frank Act, employment law, frequency vote, say-on-pay, whistleblowers

Memorandum on Say-on-Pay and Other Advisory Vote Requirements Includes Executive Summary and FAQs

Posted on October 28, 2010 by Martin Rosenbaum

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!).

Tags: Dodd-Frank Act, Say-on-Parachutes, frequency vote, risk assessment, say-on-pay

SEC Issues Proposed Rules on Say-on-Pay and Related Matters

Posted on October 18, 2010 by Martin Rosenbaum

The SEC this afternoon issued its proposed rules on Say-on-Pay, Say When on Pay, Say-on-Parachutes and related matters under Section 951 of the Dodd-Frank Act. Here is the proposing release (PDF).

The release answers some questions we have been pondering since the adoption of the Dodd-Frank Act (and in some cases raise more questions):

The SEC confirmed that it will not object if companies do not file a preliminary proxy statement for Say-on-Pay or Say When on Pay resolutions – the same treatment it gave to TARP recipients who were required to hold Say-on-Pay votes starting in 2008.
Regarding Say-on-Pay, no specific language is required, but the resolution has to cover all compensation required to be disclosed in the proxy statement.
Companies will be required to address in CD&A how their compensation policies and decisions have taken into account the results of past Say-on-Pay votes.
Regarding the frequency vote (Say When on Pay), the SEC will definitely require four choices on the ballot: one year, two years, three years or abstain. The proxy card has to have the four boxes, but there are some transition rules if the transfer agent can’t tabulate four choices.
The SEC is affirming that the Say When on Pay vote is advisory, but the issuer must disclose in its filings whether it will follow the results of the advisory vote. If it does not, the rules will permit shareholder proposals in future years to change the frequency.
The SEC is requiring additional tabular information on change in control payments in merger proxies with respect to the Say on Parachutes vote. An issuer may voluntarily include that information in its annual meeting proxy statements, and in that case the Say on Parachutes vote will not be required in a future merger transaction if there are no changes.
Under the proposal, smaller reporting companies will be required to hold Say-on-Pay and Say When on Pay votes, even though the SEC had the statutory authority to exempt them from the rules.

Comment. Here is an updated list of Say-on-Pay action items in response to the proposed rules:

Make sure compensation disclosures clearly describe the link between pay and performance, describe how the arrangements mitigate risk-taking behaviors, avoid misunderstandings on compensation design and prepare to explain any compensation structures or levels that may be unique to the company. Consider adding a summary section to CD&A.
The board should review any executive compensation arrangements that may be classified by investors and governance rating agencies as "poor" practices. If any feedback has been received from investors on executive compensation, the board should decide the appropriate level of proactive shareholder engagement in this area.
The board should think about the preferred frequency of periodic say-on-pay votes and determine how the board will recommend shareholders vote on this matter.
The company should work with its advisors to determine whether a bylaws amendment will be required to accommodate a frequency vote with four possible choices (albeit a non-binding advisory vote).
The company should work with its advisors to determine whether to include supplemental disclosures about golden parachutes in its annual meeting proxy statement, which may eliminate the need for a separate Say-on-Parachutes vote in connection with a future merger.

More questions will arise as we have more time to digest the 122 page release and as the SEC receives public comments on the rules. But this is a start.

Tags: Dodd-Frank Act, Say-on-Parachutes, say when on pay, say-on-pay

More Risky Business - Why the Compensation Risk Assessment Is Still Important

Posted on October 14, 2010 by Martin Rosenbaum

This year, for the first time, public companies have been required to include a disclosure in their proxy statement to the extent that “. . . risks arising from the registrant’s compensation policies and practices for its employees are reasonably likely to have a material adverse effect on the registrant.” In a blog post today on compensationstandards.com (subscription site), Andy Mandel and Larry Schumer of Buck Consultants described a study they completed (PDF) about the voluntary risk disclosures (or lack thereof) in the proxy statements of 200 large public companies.

They report some interesting findings:

Predictably, no companies reported that they found a reasonable likelihood that the compensation risk will have a material adverse effect. However, a majority of companies (67%) did include some voluntary risk assessment disclosure. Of these companies, a majority (63%) made an affirmative statement that there were no risks that created a material adverse effect.
Few companies described the process they used in their risk assessment. Instead, most of the disclosures focused on factors in their compensation programs that mitigate risk. The study lists the risk mitigation factors cited, including 58% of companies mentioning the balance of short-term and long-term incentives.
The SEC has started issuing comment letters asking for more detail on the assessment process. The authors reported that the SEC has issued such comments, not only to companies whose proxy statements were silent, but also to companies that stated their conclusion but did not include a discussion of the process.

Why is the risk assessment discussion an important consideration for the upcoming proxy season, when most companies will be dealing with the issue for the second time? Because this time, compensation disclosures will be the subject of a Say-on-Pay vote, and the risk assessment is an important factor that will be considered by many shareholders in casting their vote. At the recent Proxy Disclosure Conference sponsored by thecorporatecounsel.net, Patrick McGurn of ISS reported that risk mitigation is the third greatest compensation-related concern reported by investors (behind pay for performance and problematic pay practices). Investors want a robust explanation of what the risk assessment examined, and how the company ensures that pay practices don’t incentivize the wrong behavior. At the same conference, Mark Borges of Compensia suggested that the summary section of Compensation Discussion and Analysis highlight the risk discussion and refer to the place where it is discussed more fully.

For more information on risk assessments, see this previous post for a description of how a compensation committee might select which non-executive pay programs to include in its evaluation. And, for a comprehensive description of risk elements examined by one company, see the 2010 proxy statement of Brown-Furman Corporation under “Compensation Risk Assessment” starting on page 36.

Tags: Compensation Disclosure, compensation risk, say-on-pay

Talkin' Baseball and Proxy Statements Again: Compensation Risk and Director Qualifications Revisited

Posted on October 7, 2010 by Martin Rosenbaum

In the hope that it will bring the Minnesota Twins better luck in their upcoming trip to Yankee Stadium, I am providing this link to my post from March 29, 2010, entitled: “Talkin' Baseball, Joe Mauer and Proxy Statements: Hypothetical Disclosures of Compensation Risk and Qualifications.” In the post, I included “hypothetical” proxy statement language, as if Joe Mauer were the CEO of a public company. The language was meant to illustrate the following disclosures, which were required this year for the first time for public companies in their proxy statements:

A discussion of compensation-related risk under Item 402(s) of Regulation S-K, required if compensation is determined to create material risks. Of course, the “hypothetical” disclosure focused on the merits and risks of Joe’s then-newly signed $184 million contract.
A discussion of the qualifications of each member of the board of directors, including their special qualifications and skills. Of course, the “hypothetical” set of reasons read, in full, as follows: “HE’S JOE MAUER.”

Comment: In preparing for the upcoming proxy season, companies should focus anew on these sections of the proxy statement, even though they will generally be included for the second time:

Whether or not the Item 402(s) risk disclosure is technically required, many companies have chosen to discuss the process used by the Board or the Compensation Committee to analyze compensation–related risks. These discussions often include an analysis of features of the compensation program that mitigate risks. Such a discussion of risk mitigation factors will likely be one factor considered by shareholders in evaluating whether to vote in favor of the Say-on-Pay resolution on the ballot at the 2011 annual shareholders meeting. Therefore, the risk mitigation factors should be emphasized in the Compensation Discussion and Analysis section of the proxy statement.
The discussion of the qualifications of board members will take on added importance in future years (probably starting in 2012), when proxy access will likely give large long-term investors the ability to nominate director candidates and have them included in management’s proxy statement. It’s not too early to consider whether the reasons stated in the coming year’s proxy statement wlll provide shareholders a compelling reason to vote for management’s candidates in future years.

Image: Wikimedia Commons

Tags: Compensation Disclosure, compensation risk, director qualifications, proxy access, say-on-pay

Corporate Secretaries Group Makes Helpful Observations on Dodd-Frank Act Provisions

Posted on September 30, 2010 by Martin Rosenbaum

As public companies prepare for their first proxy season under the Dodd Frank Wall Street Reform and Consumer Protection Act (848-page PDF), I’m fielding many questions about implementation of the compensation and governance provisions of the Act. Unfortunately, given the broad language of the Act and the current absence of SEC regulations, there are not a lot of definitive answers.

However, the Society of Corporate Secretaries and Governance Professionals has provided a very thoughtful and helpful analysis. Darla C. Stuckey, Senior Vice President of the Society, in her testimony before the House Finance Committee last week, discussed the possible impact of various compensation-related provisions of the Act, as well as the Society’s “wish list” of possible regulatory clarifications. Ms. Stuckey’s testimony (PDF) makes interesting reading for anyone wrestling with preparation for the 2011 proxy season:

Say-on-Pay and Related Votes. The Society observes that the SEC is targeting January through March of 2011 for adoption of rules on Say-on-Pay and Say When on Pay. Since these votes are required at the first shareholders meeting on or after January 21, 2011, even January is too late to provide guidance for many affected companies. The Society requests that the SEC propose the rules in early October so the final rules can at least be adopted before January 21.

Advisory Firms. The Society also commented that the SEC should consider the power of proxy advisory firms (which would include ISS) in the Say-on-Pay process. A recent survey indicated that almost half of Society members reported 30% or more of the companies’ shares being voted in line with the advisory firms’ recommendations. Over 60% of respondents indicated at least one experience with an advisory firm’s recommendations being based on materially inaccurate or incomplete information, and of those recommendations, 60% were not corrected.

Comment. I have listened to several public company representatives complain about advisory firm recommendations based on inaccurate or incomplete information. Unfortunately, with the increased workload of the advisory firms in the coming year, this problem is not likely to get better.

Say When on Pay. The Society recommends that the SEC rulemaking should give weight to board recommendations on the frequency of Say-on-Pay votes. They suggest providing boards “a choice whether to offer a resolution with a single recommended choice (e.g., every two years), or a resolution that would give the board’s preference but ask for a vote on a one, two or three year frequency in a multiple-choice fashion.” The latter type of vote would involve a plurality vote of the shareholders.

Comment. The Society is asking the SEC to allow companies the discretion to offer When on Pay as a yes-or-no vote on a single recommended choice (e.g., an up or down vote on a triennial Say-on-Pay vote). I don’t believe it is clear that such a vote would be consistent with Section 951(a)(2) of the Act, which requires a separate resolution “to determine whether votes on the . . . [Say-on-Pay resolutions] will occur every 1, 2 or 3 years.” Ms. Stuckey included with her testimony a comment letter (PDF) on the Act to the SEC from the Center on Executive Compensation. That letter does make a cogent argument that the vote with a single recommended choice is consistent with the Act, but certainly doesn’t answer all questions about the SEC’s authority in this area. Ultimately, the SEC has to make a determination about its authority to permit a “single recommended choice” vote – and quickly, if it is to propose rules by early October, as requested by the Society.

If the SEC rules do allow an up or down vote on a single recommended choice, the rules will have to answer other questions. For example, if the shareholders vote against a triennial Say-on-Pay vote, what action will the board of a company be required to take in subsequent years – would the company then be required to hold annual Say-on-Pay votes, or could the board elect to hold biennial votes?

Internal Pay Ratio. The Act will require companies to present the median annual total compensation of all employees of the company (other than the CEO) and the annual total compensation of the CEO, then provide the ratio of these figures. These rules are expected to be in effect for the 2012 proxy season. Ms. Stuckey’s testimony makes it clear just how difficult and complex a task will be presented by the calculations. The Society recommends that the Act be clarified, either through a technical amendment or rulemaking, to provide that “all employees” be limited to full time U.S. employees, and that the total compensation amount exclude pension accruals, benefits and other non-cash items. According to an Alert from the Society dated September 28, 2010, Congressman Frank indicated his agreement with Ms. Stuckey on this issue.

The Society also commented on the Act’s clawback requirement, a subject I will address in a future post.

Legal Challenge Seeks to Invalidate the Proxy Access Rule

The U.S. Chamber of Commerce yesterday announced that the Chamber and the Business Roundtable filed a petition with the U.S. Court of Appeals challenging the SEC’s adoption of Rule 14a-11, the proxy access rule. This rule grants large shareholders the right to nominate directors in certain circumstances and have these nominees included in the company’s proxy statement. The petition claims, among other things, that the Rule is arbitrary and capricious and that the SEC failed to follow appropriate procedures. It’s not clear whether the petition will affect the Rule’s scheduled effective date of November 15, 2010.

Tags: Dodd-Frank Act, proxy access, say when on pay, say-on-pay

"Pay for Performance" is the Key Phrase in Compensation - NASPP Conference Notes

Posted on September 23, 2010 by Martin Rosenbaum

I just returned from the Annual Conference of the National Association of Stock Plan Professionals (NASPP) in Chicago, and I came home with a briefcase full of notes and materials on best practices in executive compensation, compensation disclosures and corporate governance. I’ll share thoughts from individual sessions over the next few weeks, but I came away with these general thoughts:

“Pay for Performance” was the mantra repeated by many of the speakers. The single most important factor in “getting to yes” in Say-on-Pay votes will be demonstrating the link between pay and performance. This must be done in the Compensation Discussion and Analysis (CD&A) disclosure in the proxy statement.
It will be important to craft the summary section of CD&A carefully. The section should summarize the pay for performance link and should highlight best practices explained in more detail elsewhere. In this first proxy season involving mandatory Say-on-Pay, advisory services such as ISS, as well as institutional investors, will be scrambling to sort out the practices of many companies in a short time. Issuers will want to make it easy for investors to determine quickly that the company has sound pay practices.
The Dodd-Frank Act will require a “Pay for Performance” proxy statement table. However, the enabling regulations won’t be adopted until April to July 2011, and the table will likely not be in effect until the 2012 proxy statement for most companies. The panelists speculated that the table will be based on a total shareholder return (TSR) measure. They recommended that companies consider whether other measures provide a better method for evaluating their performance relative to compensation (other metrics, peer group comparisons, etc.). If so, consider providing that data in the 2011 proxy statement as a “preemptive strike.”
Clawbacks will be tricky for many companies, particularly companies listed on exchanges who will need to adopt a clawback policy next year under expected new rules. Companies that previously adopted clawbacks should highlight this fact in their next proxy statement, as it is considered a best practice by institutional investors. All public companies will have some choices to make about the scope and structure of the clawback policies, as I will cover in an upcoming post.

SEC Publishes Rulemaking Timetable

The SEC recently posted this rulemaking timetable for its regulations under the Dodd-Frank Act. Only the rules for Say-on-Pay (shareholder advisory vote on executive compensation) and Say on Parachutes (shareholder advisory vote on severance in connection with changes in control) are scheduled to be adopted in time for the 2011 proxy season. Those regulations are scheduled to be proposed in October to December 2010 and adopted in January to March 2011.

The ON Securities Cheat Sheet has been updated to include the anticipated proposal dates for other regulations implementing provisions of the Dodd-Frank Act.

Watch Out For Those Claws!

Speaking of clawbacks, Mike Melbinger, in his presentation on clawbacks at the Conference, used the video below in his presentation to illustrate a true “clawback” (i.e., one involving actual claws!). Mike is the author of the Executive Compensation Blog.

Tags: Dodd-Frank Act, Executive Compensation, clawbacks, pay for performance, say-on-pay

More Tips on Preparing for Implementation of Compensation Provisions of the Dodd-Frank Act

Posted on September 16, 2010 by Martin Rosenbaum

Today I attended a terrific presentation by Don Nemerov and Eric Gonzaga, compensation consultants with Grant Thornton, LLP, to a meeting of the Twin Cities Chapter of the National Association of Stock Plan Professionals (NASPP). The program materials are available here. The presentation covered the new executive compensation and corporate governance requirements under the Dodd Frank Wall Street Reform and Consumer Protection Act (848-page PDF), and what public companies should be doing to prepare.

Don and Eric spent much of their presentation talking about mandatory Say-on-Pay, the requirement under Section 951 of the Act that public companies submit their compensation to an advisory vote of the shareholders starting with the 2011 annual meeting. Slides 12 through 14 of the presentation contain charts that outline “potential drivers of ‘no’ votes" under the guidelines of the two most influential proxy advisory firms – RiskMetrics/ISS and Glass Lewis. Interestingly, the speakers described RiskMetrics as having policies that are more quantitative, while Glass Lewis takes a more principle-based qualitative approach.

The presentation included the following interesting points:

Starting with slide 36, the presentation includes a list of action items for each compensation-related provision of the Dodd-Frank Act.
Management and the board should do due diligence right away to determine whether the company’s pay will be considered reasonable relative to its performance. Performance will likely be evaluated by reference to total shareholder return (TSR), particularly by ISS/RiskMetrics.
Communication will be absolutely critical, and companies should start now in determining how to communicate the reasons for the company’s pay policies and why pay is reasonable relative to performance. If shareholders should be considering performance factors other than TSR, including performance relative to peers, the company should be thinking about how best to communicate this.
The company’s investor relations personnel are critical in this process and should be consulted early, including on ways to make the CD&A more effective in telling the pay-for-performance story.

I’m attending the NASPP Annual Conference in Chicago next week, where national speakers will be providing input on the latest developments in SEC rulemaking under Dodd-Frank. I should be able to pass along further tips on how public companies should prepare.

The SEC’s Proxy Access Rules Will Be Effective November 15, 2010

As reported in this previous post, on August 25, 2010, the SEC adopted Rule 14a-11, the shareholder access rule that was originally proposed on June 10, 2009. The Rule was finally published today (September 16, 2010). Here is the convenient Federal Register version of the Rule (127 page PDF). Therefore, we finally know the effective date of the Rule, November 15, 2010 (60 days after today's publication).

The critical date, however, is March 15, 2010. If a company mailed its proxy materials this year before March 15, then it will not be subject to proxy access rule for the 2011 proxy statement. This is because on November 15, 2010, a shareholder of the company would not be able to provide notice that is 120 days before the first anniversary of the 2010 proxy mailing. On the other hand, any company that mailed its proxy materials on or after March 15, 2010 will be subject to proxy access for the 2011 proxy statement. As Broc Romanek said in today’s post in thecorporatecounsel.net Blog, beware “the Ides of March”.

In her blog, “The Filing Cabinet,” in Compliance Week today, Melissa Aguilar posted “Proxy Access Rules Effective Nov. 15 — Who’s Affected?”, in which I provided commentary on which companies will be affected by the rule in 2011, and on other aspects of the new rule.

Image: Picasa

Tags: Dodd-Frank Act, proxy access, say-on-pay

Should Management Automatically Recommend a Triennial Say-on-Pay Vote?

Posted on August 12, 2010 by Martin Rosenbaum

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

Tags: Dodd-Frank Act, Executive Compensation, frequency vote, say when on pay, say-on-pay

The "Say When on Pay" Vote Under Dodd-Frank - As Easy As 1-2-3?

Posted on July 29, 2010 by Martin Rosenbaum

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 two shareholder votes:

a shareholder advisory (non-binding) vote on the executive compensation disclosed in the proxy statement (Say-on-Pay), which must be held no less frequently than once every three years, and
a separate resolution “to determine whether Say-on-Pay votes will occur every 1, 2 or 3 years”.

The latter resolution has been called the Say-on-Pay frequency vote, or “Say When on Pay”. The Say When on Pay vote must be held no less frequently than once every 6 years. The SEC may adopt rules to exempt certain companies (including smaller companies) from these requirements.

The mechanics of implementing of the Say-on-Pay requirement are pretty clear. The shareholders get a yes-or-no advisory vote on all executive compensation disclosed in the proxy statement, which includes the compensation discussion and analysis section and the compensation tables.

The Say When on Pay vote raises a lot more mechanical issues and has created fierce debate among corporate lawyers. For example:

The language of the statute requires that all three choices (i.e., one, two or three years) be presented to shareholders. Can a vote with three choices (as opposed to a vote for or against a resolution) be accomplished consistent with state corporate law and the bylaws of particular companies?
If all three choices are presented, no one choice may get a majority. Can the bylaws specify a plurality vote, just as director elections are decided?
Rule 14a-4(b) under the Securities Exchange Act of 1934 requires that a public company proxy card allow shareholders to specify approval, disapproval or an abstention with respect to each matter being voted on, other than elections to office. Does this rule prohibit a single vote on all three choices and if so, will the SEC amend the rule to allow for such a vote?
Can a company consistent with the Act adopt a “default” frequency for Say-on-Pay in its bylaws (e.g., every three years) and provide that this frequency can only be overridden by a majority vote for one of the other alternatives?

The SEC may clarify the situation, but public companies should start reviewing their bylaws and state corporate law and think about how to deal with the Say When on Pay vote. As the SEC weighs in or there are further developments, I will report them here. Companies should also consider what frequency they are going to recommend for Say-on-Pay votes – annual, biennial or triennial. This issue needs to be considered carefully, as I will discuss in a future post.

Of course, there could be more interesting ways to decide among choices of “1, 2 or 3” than to have a shareholder vote. If only annual meetings could be held on the old “Let’s Make a Deal” set, with costumed shareholders being given the chance to select Door Number 1, 2 or 3 to decide Say When on Pay:

You don’t need to watch the whole seven minute video to get the idea – but if you don’t, you’ll miss some great 1970s-era prizes, like a refrigerator with a built-in tape player!

Tags: Corporate Governance, Dodd-Frank Act, Executive Compensation, say-on-pay

Say-on-Pay Provision of the Dodd-Frank Act Raises Many Questions

Posted on July 8, 2010 by Martin Rosenbaum

As I reported previously, the House-Senate Conference Committee has agreed on the final provisions of the Dodd-Frank Act (including the corporate governance and compensation provisions starting on page 207 of Title IX of the Act (PDF)). The provision that will probably have the greatest immediate impact on public companies is the requirement for regular shareholder advisory votes on executive compensation (Say-on-Pay).

In a pair of posts on his Proxy Disclosure Blog at CompensationStandards.com, Mark Borges of Compensia provided a great analysis of the Say-on-Pay requirements. He also discussed some open questions about how practical effect of the requirements. Borges’ blog is a subscription service, but he gave me permission to provide excerpts from his posts:

. . . New Section 14A(e) gives the Commission the authority, by rule or order, to exempt an issuer or class of issuers from the "Say on Pay" requirement. . . . . I don't expect the SEC to unilaterally exempt smaller reporting companies from the "Say on Pay" requirement without first soliciting input from the public; particularly the investor community. Consequently, this may be an issue that's assigned a low priority between now and year-end. . . .

This requirement [for Say-on-Pay] is to become effective for the first annual meeting of shareholders occurring after the end of the six month period beginning on the date the Act is signed into law. . . . As long as it is signed into law by Labor Day, the requirement will be in effect for the 2011 proxy season.

. . . One question that has surfaced is whether the advisory vote will necessitate the filing of a preliminary proxy statement. . . . Currently, Exchange Act Rule 14a-6 does not require the filing of a preliminary proxy statement in connection with a "Say on Pay' vote, but only in the case of a company subject to . . . [TARP]. While I expect the SEC to amend the rule to exempt the votes under Exchange Act Section 14A(a) from the preliminary proxy statement filing requirement, we'll have to wait and see how things unfold . . . .

While we've had plenty of time to consider the effects of the "Say on Pay" vote itself, the decision of the House-Senate Conference Committee to let shareholders determine the frequency of the vote - annually, biennially, or triennially - presents a host of questions that will play out over the next several months. Starting with the 2011 proxy season, companies will be required to conduct a shareholder vote to determine how often the "Say on Pay" vote will be held and, thereafter, to resolicit shareholder input on this matter at least once every six years. . . . It seems to me that, in drafting the resolution for shareholder consideration, a company should be permitted to structure the vote to be a choice between an annual vote and a periodic vote (that is, either every two or three years, in the company's discretion). In other words, the resolution should be a choice between two alternatives, since I'm not sure that the difference between a vote every two years or every three years is as significant as the difference between an annual vote and a less frequent vote.

However, the plain language of Section 14A(a)(2) appears to require that companies permit shareholders to choose between holding the vote every one, two, or three years. That is, I expect that the SEC Staff, if it chooses to address the question, is likely to require that shareholders be presented with all three choices. While that appears to be consistent with Congressional intent, it raises the possibility that the decision will be made by a plurality of shareholders (meaning that a majority of shareholders may not favor the choice that ultimately prevails). . . . As a reader pointed out, in many (perhaps most) states [including Delaware], the decision with respect to the frequency of the "Say on Pay" vote will require majority approval of the shareholders. . . . [W]hat happens if none of the three choices receive a majority? Proposed new Section 14A(a)(2) doesn't provide a default resolution. . . .

And, as Marty Rosenbaum of Maslon Edelman Borman & Brand has pointed out, it's not entirely clear whether the frequency vote (unlike the "Say on Pay" vote itself) is intended to be a binding vote - although it appears that it should be (otherwise it's pointless). If it is, then some sort of technical amendment (or SEC rulemaking) will be required as proposed new Section 14A(c) provides that the "shareholder vote referred to in subsections (a) and (b) shall not be binding on the issuer or the board of directors of an issuer . . . ." As presently drafted, this language encompasses both of the votes described in proposed new Section 14A(a), not just the general "Say on Pay" vote contained in Section 14A(a)(1).

There you have it. Borges’ posts contained ten times as much useful information as LeBron James’ television program on Thursday evening announcing his new team. And you didn’t have to spend an hour watching it.

Tags: Dodd-Frank Act, Executive Compensation, say-on-pay

Congressman Frank Gives Update on Say-on-Pay

Posted on May 13, 2010 by Martin Rosenbaum

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.

Tags: Executive Compensation, financial institution reform, majority voting, say-on-pay

SEC Staff Starts to Comment on Absence of Compensation Risk Disclosure; Say-On-Pay Update

Posted on May 6, 2010 by Martin Rosenbaum

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.

Tags: Compensation Disclosure, compensation risk, say-on-pay

Financial Reform Legislation is Coming, and Public Companies Should Start Planning Now for Say-on-Pay

Posted on April 29, 2010 by Martin Rosenbaum

Thumbs Up Thumbs Down The Restoring American Financial Stability Act of 2010 (1,410 page PDF) (the “Dodd Bill”), which would reform regulation of financial institutions and the securities markets, has been introduced, and debate on the Senate floor has finally begun. It appears that the bill will probably be approved in the next few weeks in some form, followed by conference committee action to resolve differences with the Frank Bill that was approved by the House in December. The two bills include overlapping but differing governance and compensation reform provisions that apply to all public companies (or, in some cases, to all companies listed on a securities exchange). The ON Securities Cheat Sheet (PDF) has been updated, making it easier to compare these provisions in the two bills.

Both the Senate and House bills would require Say-on-Pay – an annual shareholder advisory "up or down" vote on compensation. Therefore, it is very likely that Say-on-Pay will be a reality by next year’s proxy season. Public companies should start planning for Say-on-Pay now, including considering what compensation practices might trigger a negative vote.

The Council of Institutional Investors (CII) just published “Top 10 Red Flags to Watch for When Casting an Advisory Vote on Executive Pay” (PDF), which provides rules of thumb to help institutional investors identify pay programs that might be objectionable. Whether you agree or disagree, the CII document makes interesting reading. Most of the red flags are pretty obvious, including option repricing. Others are more thought-provoking. For example, CII considers it a “problematic pay practice” to grant conventional (time-vested) stock options to the CEO. The CII document recommends:

To isolate management’s contribution to stock price performance, stock options should be indexed to a peer group or should have an exercise price higher than the market price of common stock on the grant date and/or vest on achievement of specific performance targets that are based on challenging quantitative goals.

"I’m Just a Bill"

Thinking about the committee process in Congress brought to mind the great "Schoolhouse Rock" series of animated shorts from the 1970s, and the episode called “I’m Just a Bill.” The song was written by the equally great Dave Frishberg (a songwriter who also wrote “My Attorney Bernie”), and it actually does a pretty good job of explaining the process by which Senate and House bills become laws.

Video: YouTube

Tags: Executive Compensation, Restoring American Financial Stability Act, compensation practices, say-on-pay

Compensation Turkeys of the Year, and a RiskMetrics Update For Dessert

Posted on November 24, 2009 by Martin Rosenbaum

turkeys3 Just In Time For Thanksgiving - The Compensation Turkeys of the Year!

At Thanksgiving, our thoughts naturally turn to gluttony of all sorts. So it seems like a fitting time to recognize a few companies for granting awards to their executives that look so ridiculous they practically beg Congress to speed up compensation reform. A great place to look for these examples is the footnoted.org blog, which prides itself on posting the interesting stories "found in the footnotes" of SEC filings.

So pass the cranberry sauce and gravy, here are my nominees for the "Compensation Turkeys of the Year", all reported by footnoted.org in the past few weeks:

These aren't the only examples of compensation that grab your attention, but they are just the most recent obvious ones. As Mark Borges pointed out at the NASPP Annual Conference and other presentations, when companies eventually are required to have advisory votes on executive pay (Say-on-Pay), most companies' compensation will be approved. However, to prevent a "no" vote, they will need to think about the compensation practices that appear the most excessive - personal use of corporate jets, tax gross-ups, etc. It will be interesting to see whether, in a couple of years, after compensation reform, the Compensation Turkeys of the Year will be extinct birds. Don't count on it.

If you have any other Compensation Turkeys of the Year you would like to report, send me an e-mail. (As with any other good whistleblower policy, I won't use your name unless you give permission.)

By the way, the picture above shows the family of wild turkeys that hung out in our back yard for the past few months. Leading up to Thanksgiving, though, I haven't seen them lately. Times are tough.

Anyway, have a fantastic Thanksgiving!

RiskMetrics Update

Last week I reported that RiskMetrics Group came out with its 2010 updates to its proxy voting guidelines, summarized here. The compensation policy has changed more in form than in substance from last year, integrating separate policies into a single policy. RiskMetrics also clarified its methodology when it has compensation-related recommendations for a company based on its analysis. If that company has a Say-on-Pay proposal on the ballot, RiskMetrics will generally apply its recommendations to that resolution. However, if egregious practices are identified, or if a company previously received a negative recommendation on a Say-on-Pay resolution and the issue is not resolved, RiskMetrics may recommend a withhold vote with respect to compensation committee members.

The new governance policy also changes RiskMetrics' standards when making recommendations with respect to shareholder rights plans and revises its director independence standards.

Tags: Corporate Governance, Executive Compensation, Investor Relations, say-on-pay

"What's Goin' On"?

Posted on November 19, 2009 by Martin Rosenbaum

Several new reports have been published that provide valuable information about what's going on in the public company world. Here are two that just came out:

survey report

report

One more update - hot off the presses: I noticed that RiskMetrics today published some of its 2010 policy information, which applies to all shareholder meetings occurring on or after February 1, 2010. The more comprehensive proxy voting guidelines will be published in December. However, the just-released documents shed some light on RiskMetrics' evaluation of compensation and governance practices for the 2010 season. It appears that RiskMetrics will make some changes to its approach in making recommendations on Say-on-Pay votes and other compensation-related votes. I will report further on this next week.

Tags: Corporate Governance, Executive Compensation, Investor Relations, NYSE and Nasdaq, say-on-pay

What's Up?

Posted on November 5, 2009 by Martin Rosenbaum

question3 Early November finds us in a kind of limbo - those of us who advise public companies on governance and compensation matters are waiting for something big to happen. But there's plenty of smaller stuff to report on - although most of these items present more questions than answers:

Proxy Disclosure Rules.

Proxy Access.

Say-On-Pay and Shareholder Surveys.

reported

New York Power of Attorney Law.

article

analysis

I should get updates on some of these items next week - I'll be attending the NASPP Annual Conference in San Francisco. Of course, I can't wait to share the information with the ON Securities readers. There may even be a tweet or two, if you can't wait for the Blog.

Tags: Compensation Disclosure, Disclosure, Executive Compensation, Investor Relations, Public Company Reporting, SEC actions, disclosure issues, say-on-pay, shareholder access

Getting Ready for Reform

Posted on October 22, 2009 by Martin Rosenbaum

Mark Borges, the well known compensation consultant with Compensia, gave a very interesting talk this week at a joint meeting of the Society of Corporate Secretaries and Governance Professionals and the Twin Cities Compensation Network. Mark was gracious enough to give me permission to post his presentation, which is full of useful updates on governance and compensation reform and tips on how to get ready. One of the interesting features is a time line showing the dates of adoption and introduction of various legislative and regulatory initiatives, as well as a preview of what's to come. As I've said before, watching the progress of these initiatives through Congress and the SEC reminds me of the arcade game where you can watch the little mechanical horses race around and around the track, with the lead constantly changing - as in this great video.

Mark made these points, among many others:

Given the amount of attention Congress is giving to health care reform, it is very possible that governance and compensation reform will be pushed to 2010 - unless there is some unforeseen crisis before then, which is always possible.

Mark, like me, had thought the Shareholder Bill of Rights Act (the Schumer Bill) introduced in the Senate had probably been swept aside or at least delayed by the passage by the House of the Corporate and Financial Institution Compensation Fairness Act (the Frank Bill). Now, he believes that the Schumer Bill may be getting new traction. The Schumer Bill is heavier on governance reform than the Frank Bill, and some of these provisions may be grafted onto a financial institutions reform bill.

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I will mention some of Mark's other observations in a future post.

Tags: Corporate Governance, Executive Compensation, say-on-pay

Good Times on Wall Street; The Cheat Sheet Changeth!

Posted on October 15, 2009 by Martin Rosenbaum

Wall Street Wealth

Just as lawmakers and regulators are preparing to consider compensation reform once again, a new report has surfaced that's likely to turn up the heat on the debate. The Wall Street Journal reported that the major financial institutions are on pace to pay their employees around $140 billion this year - a record level. The Journal's study is based on compensation amounts these firms have accrued to date this year. Therefore, the amounts might be inflated. However, it's clear that the amounts will be back to pre-crash levels.

For example, the Journal projects that Goldman Sachs will pay $20 billion in compensation and benefits ($743,000 per employee) this year. Of course, Goldman is having a great year so far. But, as reported in the New York Times DealBlog, there is still a lot of debate over how much Goldman's results were helped by the government's bailout of AIG, which resulted in significant payouts to Goldman on AIG-insured contracts.

As reported by the Journal, its findings come at a time when the Obama administration's pay czar is preparing to issue his findings on pay packages at many of the financial firms that received TARP money. More generally, Congress will be considering reforms such as Say-on-Pay for all publicly held companies. One way or another, numbers like we're seeing from Wall Street are sure to affect the debate.

Are the banks paying the best and the brightest what they deserve, or do you think Wall Street greed is being rewarded by paying out bonuses fueled by taxpayer bailouts? Comment below or send me an e-mail.

Change (to the Cheat Sheet) You Can Believe In

It's been easy to keep the ON Securities Cheat Sheet up-to-date since early August - nothing really changed. All of the various legislative and regulatory reforms were dormant for a couple of months. (Probably waiting for the Olympic Committee to select a host city for 2016 and the Nobel Committee to select a Peace Prize winner.)

At long last, this month there has been a new development worthy of changing the Cheat Sheet. As reported in Bloomberg and elsewhere, the SEC has decided not to take any action on the proposed shareholder access rules this year, as it evaluates the many public comments on the proposal. The Cheat Sheet has been updated to reflect this decision, and as always, the updated version is available on the Resources section of this Blog.

The changes should start coming more quickly in the next few weeks. Stay tuned.

Tags: Executive Compensation, TARP, say-on-pay, shareholder access

Preview of Coming Attractions, and a Movie Review

Posted on September 10, 2009 by Martin Rosenbaum

Preview of Coming (Regulatory) Attractions

The past few weeks have been fairly slow in terms of new developments in securities law, corporate governance and executive compensation. However, summer's over, and I'm expecting a flurry in the next few weeks. Take a look back at the ON Securities Cheat Sheet - a lot of these developments are likely to change as we head into the fall:

Congress is back in session, and we are likely to see action on the Corporate and Financial Institution Compensation Fairness Act of 2009, passed by the House in July. Congress will likely try to reconcile that bill with the other legislation described in the Cheat Sheet, and I would expect that something will be enacted by the end of the year. Virtually every bill would require Say-on-Pay for public companies, but we don't know when the requirement will go into effect.

Comment periods are ending for the SEC's proposed proxy disclosure and solicitation rules and the proposed shareholder access rules. The SEC will almost certainly adopt the disclosure and solicitation rules this fall. As described in this post, action on the shareholder access rules is more uncertain.

The SEC and Treasury Department may further clarify compensation standards for financial institutions that received TARP funds - including the SEC's proposed rules to clarify Say-on-Pay standards for TARP recipients (maybe a preview of what Say-on-Pay will look like for other public companies).

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We'll be watching carefully - as Siskel and Ebert used to say, "The Balcony Is Open".

Mastering the Art of American Blogging - and Begging

Last weekend I saw my all-time favorite film about blogging - okay, maybe the only film I have seen about blogging. "Julie & Julia" follows two parallel true stories - Julia Child's authorship of "Mastering the Art of French Cooking", and Julie Powell's creation of a blog that chronicles her quest to prepare all 524 recipes in the Julia Child book in one year.

I agree with the critics who said that the Julia Child story is much more compelling, and Meryl Streep is wonderful as Julia. But I watched Julie's story with my "blogger hat" on, and I tried to figure out what made her blog successful. Aside from a good concept and great writing, she found a way to create a community among readers with a common interest, and she fed off their support and feedback.

Which leads me to the begging - I am gratified by the number of subscribers to the ON Securities blog, but I'd like to hear from you a little more often. I know it's not always easy - as expressed in an e-mail I received from one subscriber who provided a great comment but then said:

I need a trip to the Wizard of Oz before summoning up enough courage to post a response.

I've paraphrased his/her comment anonymously in the "Comments" section of my last post.

So my request is that you not hesitate to give me feedback - let me know when I'm right or wrong or off base, or if there's any information you would like me to provide in this space. My promise: reading my blog won't leave you as hungry as watching "Julie & Julia" or reading Julie's blog.

Tags: Corporate Governance, Disclosure, Executive Compensation, discretionary voting, movie review, proxy disclosures, say-on-pay

Say-on-Pay Play-by-Play

Posted on August 18, 2009 by Martin Rosenbaum

As I've said before, some version of a requirement for shareholder advisory votes on compensation (Say-on-Pay) is likely to be adopted in the next few months. The Say-on-Pay requirement will probably be similar to the Corporate and Financial Institution Fairness Act of 2009, recently adopted by the House and described in the ON Securities Cheat Sheet. In other words, Say-on-Pay has become a political football lately.

[Editor's Note: You may have noticed veiled references to "football" in the title and the first paragraph of this post. The Editor of the ON Securities Blog categorically denies ANY relationship between these references and Brett Favre's announcement Tuesday that he signed a contract with the Minnesota Vikings.]

It looks like shareholder advisory votes will not be required until the 2011 proxy season. Still, it makes sense to keep track of the results of recent advisory votes to see how various companies have fared. Several hundred financial institutions that received TARP funds were required to hold advisory votes last spring, and their recently filed Form 10-Q reports disclose many of the results.

So, what does the scoreboard look like in Say-on-Pay season? Generally, the non-binding proposals to approve executive compensation did very well. Here is a sampling of the results from financial institutions with strong ties to the Twin Cities:

US Bancorp: 92.0% in favor
Wells Fargo Company: 92.8% in favor
TCF Financial Corporation: 69.5% in favor

If the SEC adopts its recent rule proposals, we will no longer have to wait several months to see the results of shareholder votes. Companies will generally have to report them on Form 8-K within four business days. It will practically be possible to follow the results on your BlackBerry, along with football scores.

[Editor's Further Note: Did I mention that Brett Favre is joining the Vikings? All right, maybe I did have football on my mind.]

Tags: Disclosure, Executive Compensation, Minnesota Public Companies, Public Company Reporting, say-on-pay

Say-on-Pay Bill Passes the House; Cheat Sheet Updated!

Posted on August 4, 2009 by Martin Rosenbaum

On Friday, the House of Representatives passed the Corporate and Financial Institution Fairness Act of 2009. The Senate still needs to consider similar legislation, and any differences will need to be resolved.

For most public companies, the bill will (1) require an annual advisory vote on executive compensation ("Say-on-Pay") and (2) for exchange-traded companies, increase the independence requirements for compensation committee members. The bill also would, if enacted, regulate pay at the largest financial institutions. TheCorporateCounsel.net Blog in its August 3, 2009 post contains an excellent summary of the bill. As that blog points out, Say-on-Pay almost certainly will not be a reality during the 2010 proxy season.

The bill allows the SEC to exempt certain companies from both the Say-on-Pay requirement and the compensation committee requirements. Therefore, the SEC might exempt smaller companies from either or both provisions.

We have updated the ON Securities Cheat Sheet to include the revised status and content of this bill. As you can see, there are still several other bills making their way through the Senate and the House, as well as several proposed regulations that would impact governance and compensation. These bills and rules continue to jockey for position, like the toy arcade horses in the video that amuses me so much.

Tags: Corporate Governance, Executive Compensation, Smaller Reporting Companies, say-on-pay, small public companies

Say-on-Pay - Oy Vey!; More Cheat Sheeting

Posted on July 28, 2009 by Martin Rosenbaum

How to Play Say-on-Pay

It's a pretty good bet that non-binding shareholder advisory votes on executive compensation ("Say-on-Pay") will be adopted this year and will become mandatory for public companies, probably starting with the 2010 proxy season. There are several different pieces of proposed governance reform legislation in Congress, and virtually every one of them would, if adopted, require Say-on-Pay. See the ON Securities Cheat Sheet for details. If Say-on-Pay becomes a reality, this would be in line with the prediction I made in my StarTribune Business Forum commentary last April.

So, what does Say-on-Pay look like in practice, and what is the likely outcome of the shareholder vote? A recent alert by Compensia, a compensation consulting firm, gives a good summary of the proxy statement language used by various companies and the reported results to date. So far, very few companies have reported the results of advisory votes, but in most cases the resolutions approving compensation have passed by wide margins. We should see the reported results of many more votes soon - hundreds of financial institutions that received TARP funds were required to conduct advisory votes in the past few months. The results of most of these votes will be reported in 10-Qs over the next few weeks, and we should get a clearer picture of the atmosphere for these proposals, especially within the financial services industry.

Assuming Say-on-Pay is required to be on the ballot in 2010, what should companies do now? At the very least, companies should start planning early to review their proxy statement disclosures, including CD&A, to address concerns that institutional investors are likely to raise. I recommend reading the RiskMetrics 2009 report, "Evaluating U.S. Management Say On Pay Proposals" (note: you will need to create a free RiskMetrics account if you don't already have one). This report outlines a set of factors that RiskMetrics advises investors to consider in evaluating an advisory vote. Expect RiskMetrics to come out with a more specific set of guidelines in preparation for the 2010 proxy season. Compensia, in its alert, also recommends planning a program of shareholder communications regarding compensation matters.

Another resource is the Say-on-Pay web forum, sponsored by Corporate Secretary magazine, which looks like it will be providing ongoing analysis of Say-on-Pay votes.

What is your company doing to get ready for Say-on-Pay? How much of a pain will it be? Post a comment below or send me a confidential e-mail.

Updated Cheat Sheet Posted

We have just posted an updated version of the ON Securities Cheat Sheet under the Resources listing on the home page of this Blog. The updated document describes the Corporate Governance Reform Act of 2009 introduced by Minnesota's own Rep. Keith Ellison. The Cheat Sheet also reflects the actual introduction of the bill previously proposed by Treasury Secretary Geithner and now introduced by Rep. Barney Frank.

Tags: Compensation Disclosure, Corporate Governance, Executive Compensation, Investor Relations, proxy disclosures, say-on-pay

Announcing the ON Securities Cheat Sheet on New Developments - A Prescription for What Hurts

Posted on July 21, 2009 by Martin Rosenbaum

prescription

Is your head spinning from the number of new developments in corporate governance and compensation reform? Are you dizzy from trying to remember whether "say-on-severance" is part of the Schumer Bill or the Treasury Department's white paper? Is your heart racing from trying to keep track of the progress of shareholder access proposals?

We have just the answer - the ON Securities Cheat Sheet will cure what ails you. The Cheat Sheet is a one stop shop for "capsule summaries" of each bill and regulatory proposal being considered. These capsules are sure to make you feel better - and in the spirit of health care reform, this remedy is ABSOLUTELY FREE!

We can't promise that the Cheat Sheet contains the most in-depth analysis available of each bill and regulatory proposal. But it's helpful just to be able to scan the different proposals. For example, it's helpful to see that Say-on-Pay for all public companies is proposed as part of the Schumer bill, the Peters bill, and the Treasury Department's legislative proposal. At the same time, the SEC's proposals issued on July 1 included proposed Say-on-Pay standards for TARP recipients, which have previously been subject to Say-on-Pay requirements under the recovery bill.

We will continue to include the Cheat Sheet in the "Resources" section featured on the home page of this blog, and we will do our best to keep the document up to date. Since you'll be able to put the developments in context, your head should stop spinning. However, I can't make any promises about dizziness. Watching progress of the various proposals making their way through Congress and the regulatory agencies reminds me of the arcade game where you can watch the little mechanical horses race around and around the track, with the lead constantly changing. Here's a great video that shows you what I mean.

Tags: Compensation Disclosure, Corporate Governance, Disclosure, Executive Compensation, Public Company Reporting, SEC actions, proxy disclosures, say-on-pay

The SEC's July 1 actions in context; Singing Fish is a hit

Posted on July 7, 2009 by Martin Rosenbaum

The SEC takes action on July 1, but that's not the whole story.

On July 1, 2009, the SEC voted to take several actions:

The Commission proposed rules that would clarify the statutory requirement that TARP recipients hold annual stockholder votes on compensation ("Say-on-Pay").

The Commission proposed revisions to the compensation disclosure rules that, among other things, would (1) disclose the relationship to risk of a company's overall compensation policies (not just policies covering top executives) and (2) disclose potential conflicts of interest of compensation consultants.

analysis

However, to understand the impact of the July 1 actions, it is necessary to understand other current developments, some of which would have an even greater impact on a broader segment of companies:

The Commission's Say-on-Pay proposals covered only TARP recipient companies. However, the Shareholder Bill of Rights Act introduced in the Senate by Senator Schumer, if adopted, would mandate Say-on-Pay for all public companies, as would two other bills currently being considered by Congress.

The Commission did not require that public companies adopt a specific structure to assess risk and ensure that compensation practices are consistent with the company's risk profile. However, the ARRA and the Treasury's interim final rules currently require the compensation committees of TARP recipients to perform specific risk management functions. Also, the Schumer bill would require that the board of directors of all public companies form a risk committee of independent directors to report to the board about the company's risk profile and the appropriateness of its compensation practices.

The elimination of discretionary voting by brokers takes on added importance because it could alter the balance of power between management and activist stockholders, especially for companies that have adopted majority vote standards in director elections. This shift would compound the potential increase in power by institutional investors that would result from the Commission's controversial proxy access proposal, reported here, which would allow large stockholders to nominate director candidates who would be included in management's proxy statements.
The bottom line: you need a scorecard to keep everything in context. The ON Securities Blog is working on a scorecard that will cover the SEC proposals, the Schumer bill, other pending bills and the Treasury regulations under TARP and the stimulus bill. What would you like to see covered? Send me an e-mail and let me know.

Maslon Small Public Company Forum's Inaugural Event is a success (singing fish and all).

On June 24, 2009, I participated in the inaugural event of the Maslon Small Public Company Forum, which included presenters from Maslon, Baker Tilly Virchow Krause, Carver Moquist & O'Connor, Feltl and Company and Internal Control & Anti-Fraud Experts, LLC. Course materials and podcasts of the presentations are available at the Small Public Company Forum website, which we hope will be a great resource for small public companies across the region.

For my presentation on underwater options entitled "Underwaterworld", I presented the "world's leading expert on underwater options": Big Mouth Billy Bass, the famous singing fish. You can watch Billy's full performance here. In his immortal words, once you solve your company's underwater options problem, you can take his advice: "Don't Worry, Be Happy!"

Tags: Corporate Governance, Disclosure, Executive Compensation, NYSE and Nasdaq, SEC actions, Smaller Reporting Companies, TARP, discretionary voting, risk management, say-on-pay, small public companies