NYSE and Nasdaq listing standards governing the independence of compensation committee members, as required under Dodd-Frank, do not go into effect until companies’ first annual meeting after January 15, 2014 or at the latest by October 31, 2014. Currently, the two exchanges diverge in how they treat directors who receive any compensatory fees, including consulting and advisory fees. For Nasdaq-listed companies, a director who receives such payments is prohibited from being considered independent for purposes of the compensation committee. 

Nasdaq has filed a proposed rule change with the SEC to replace this strict prohibition with a requirement that a board of directors instead consider the receipt of such fees when determining eligibility for compensation committee membership, similar to the NYSE standard.
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Glass Lewis recently released its 2013 Proxy Season Guidelines for the 2013 proxy season, which will go into effect for shareholder meetings taking place after January 1, 2013, an abridged version of which is publicly available. These updates should be viewed in conjunction with Glass Lewis’s policies on its say-on-pay analysis, which it updated in July, as discussed here. 

One of the more notable changes is regarding board responsiveness to a “significant” shareholder vote. Glass Lewis’s new policy provides that it will scrutinize board responses to any vote by 25% or more of shareholders (excluding abstentions and broker non-votes) against management’s recommendation on any proposal, including  “against” or “withhold” from a director nominee, “against” a management-sponsored proposal or “for” a shareholder proposal.
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In the midst of the focus on executive compensation litigation, a recent Delaware opinion serves as a reminder that stockholder approval of at least some portion of director compensation may be beneficial in subsequent litigation, particularly if the approval results in the application of the “business judgment rule.” However, as described below, uncertainty remains about the level of detail concerning director compensation that is necessary in a stockholder-approved plan to warrant the application of that rule. Companies and their boards will want to balance the desire to increase the likelihood that compensation decisions will be protected by the business judgment rule with the understandable preference to preserve flexibility in establishing director compensation.
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Yesterday marked an active day on the corporate governance front. First, the U.K. Government announced “a far reaching package of reform to strengthen the hand of shareholders to challenge excessive pay.” The hallmark of this package is a binding shareholder vote on prospective compensation and exit payments. Other elements include a continued shareholder advisory say-on-pay vote, as well as enhanced disclosure regarding actual amounts of remuneration paid during the prior year.

Second, the SEC finalized its rule requiring listing standards for compensation committees and their advisers, as required by the Dodd-Frank Act. The final rules largely adopt the SEC’s proposed approach, which in turn closely follows the original statutory language.
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At the Walt Disney Company’s annual meeting of shareholders today, shareholders approved Disney’s controversial executive compensation plan and voted to reelect Disney’s slate of directors, despite negative recommendations by the ISS.  ISS had recommended against voting for the members of Disney’s Governance and Nominating Committee because of the decision to appoint its Chief Executive Officer, Bob Iger, as Chairman of the Board at the annual meeting, thereby reversing “a commitment to independent board leadership without conducting outreach to shareholders beforehand.” Disney had not combined the roles of CEO and Chairman since 2004.   ISS also recommended against Disney’s say-on-pay vote.

Disney had vigorously opposed the negative ISS recommendations.
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Some shareholders are using lawsuits as a new tactic to fight what they perceive as an escalation in executive compensation.  Shareholders are likely to find these suits difficult to push through the courts on their merits, but the suits can cost subject companies time and money, not to mention reputational harm brought on by negative media attention.

Last year, we saw shareholder derivative suits filed on behalf of KeyCorp (in Ohio state court) and Occidental Petroleum (in California state court) in connection with failed say-on-pay votes during the 2010 proxy season.  KeyCorp agreed, according to Reuters, to pay $1.75 million in attorneys’ fees and expenses to settle related suits and Occidental Petroleum, faced with three suits, settled one for an undisclosed amount and had two dismissed. 
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The deadline for comments about the SEC proposed rules regarding compensation committees has passed, with 54 submissions sent.  While many commenters support the approach of directing the listing exchanges to adopt independence standards for compensation committees, taking into account issuer affiliation and source of compensation, several activists advocated for additional standards.  The Council of Institutional Investors (CII), AFSCME, AFL-CIO, among others, argued that independence is also impaired through other relationships, including:  (a) family linkages (employment of a director’s family member by the company); (b) business, financial and personal relationships between directors and executive officers (a director is employed by a firm that advises management or affiliated with a non-profit that receives grants from executive officers); (c) any related person transactions involving directors and (d) relationships amongst directors (one director is instrumental to the nomination of another director).
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Today is the deadline for comments in response to the SEC’s proposed rules directing the national securities exchanges to adopt listing standards relating to the independence of compensation committees and compensation consultants, as required by Dodd-Frank. We’ve submitted our comments, which generally applaud the SEC for giving the exchanges the flexibility to develop applicable independence considerations. We’ve also made suggestions for technical changes and clarifications, such as that the independence rules for compensation committee members should not apply to committees that are responsible for broad-based plans (e.g., 401(k) plans), that the independence rules for consultants and advisers should not apply to in-house or outside counsel retained by management and that IPOing companies should be permitted a transition period, as they do under existing listing standards.
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