Say-on-Pay

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A Say-on-Pay Update — Plus Strategies for Responding to a Negative Recommendation by a Proxy Advisory Firm

The proxy season is just around the corner for calendar year public companies. Ahead of the season, two major proxy advisory firms, Institutional Shareholder Services (ISS) and Glass Lewis, recently released their 2019 policy updates to provide guidance on how they will make recommendations on companies’ “say-on-pay” vote. Although a non-binding vote, performing poorly on a say-on-pay vote is not only disheartening, but can impact shareholder votes on election of directors (particularly compensation committee members), result in greater scrutiny of CEO performance, and require management and compensation committee members to expend significant time and resources to address concerns reflected by the vote.
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Recent European Compensation Developments

The Eurozone crisis and ensuing populist resentment over perceived compensation excesses have given rise to a recent wave of compensation measures and restrictions in Europe. As we explain in our memo, the measures range from a cap on financial institution bonuses (the so-called “banker bonus cap”) in the EU, binding say-on-pay votes in several European jurisdictions and even criminal sanctions for violating compensation restrictions and corporate governance requirements in Switzerland. Simon Witty, a partner in our London office, explains the key aspects of these developments.

What is the banker bonus cap?
Under CRD IV, which is slated to go into effect for credit institutions (including banks) and investment firms (such as broker-dealer or wealth management firms) in January 2014, the basic rule is that bonus payments will be capped at 100% of total fixed pay or, with shareholder approval, 200% of total fixed pay.
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Say-on-Pay Results Reflect Need to Understand Proxy Advisory Firm Methods

According to the latest Semler Brossy report, only three Russell 3000 companies (Nuance Communications, Digital Generation and Navistar) have failed their say-on-pay vote, with Navistar receiving only a startling 18% in favor. ISS has been recommending against companies about 9% of the time, and companies facing ISS opposition received 24% less support on average. Interestingly, ISS continues to reverse unfavorable recommendations. It did so for 17% of companies in 2012 and most recently for both Hewlett-Packard and Kaman Corp., after the company removed excise tax gross-ups from an executive’s renewed change-in-control agreement. 
 
In a recent analysis, the consulting firm discussed why a company may encounter a significant reduction in votes from one year to next.
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Early Examples of Companies Disputing ISS Say-on-Pay Recommendations

So far, as we launch into the proxy season, only a handful of companies have filed additional soliciting materials to dispute proxy advisory firm recommendations. These materials were almost ubiquitous last season, and it is unclear whether the recent changes in the formulation of comparative peer groups by the advisory firms will curtail their numbers.

Piedmont Natural Gas Company provided in detail several points of contention with the ISS negative recommendation. In particular, the company argued that of the 12 peers that ISS used to compare their CEO compensation, 8 had not yet filed their most recent proxy statements. In addition, ISS’ constraints around the revenue size and market capitalization in selecting the peer group, the company complains, resulted in ignoring several peers that the company believes to be more relevant to their business.    
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Two Company Wins for Say-on-Pay Proxy Disclosure Lawsuits (Symantec and Apple)

In our recent client alert, “Recent Developments in Executive Compensation,” an open question was the fate of Gordon v. Symantec Corp. (and similar cases) after the court denied a preliminary injunction to enjoin the company’s say-on-pay vote.  At the time of our client alert, a demurrer to the plaintiff’s class action complaint was pending.

On February 22, 2013, the judge in Symantec (the same judge who granted a preliminary injunction in Knee v. Brocade Communications Systems Inc. to enjoin a vote on an equity plan proposal) issued an order sustaining the defendants’ demurrer to the plaintiff’s complaint.  The Symantec court noted that once the shareholder vote on Symantec’s say-on-pay proposal was held at its annual meeting in October 2012, the direct disclosure claim was no longer available to the plaintiff and the plaintiff’s claim then became a derivative claim subject to a pre-suit demand requirement.
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ISS Provides Guidance on Compensation-Related Voting Policies

On December 20th, ISS issued two extensive FAQs on their voting policies. This post covers the compensation items (a previous post covered the non-compensation items).

Although the compensation FAQs contain a number of items previously posted by ISS, there are a few new items worth noting, including:

  • For the CEO Tally Sheet table, how the present value of all accumulated pension benefits (qualified and non-qualified) is calculated (page 7).
  • The FAQs explain the methodology used in evaluating a company’s pay for performance, including how an initial quantitative analysis affects the ultimate vote recommendation for say-on-pay proposals and the factors that ISS considers when it conducts a qualitative review (such as the ratio of performance- to time-based equity awards, benchmarking processes and realizable pay vs.

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Investors and a Study on the Use of Peer Group Benchmarking

Given say-on-pay votes, companies are interested in understanding how their shareholders view executive compensation. At the always informative NASPP conference, Michelle Edkins from BlackRock and Ann Chapman from Capital Research both mentioned a recent paper from Charles Elson of the Weinberg Center for Corporate Governance, titled “Executive Superstars, Peer Groups and Over-Compensation – Cause, Effect and Solution.”

The paper argues that tying CEO compensation to external peer group benchmarking is unnecessary at best because the practice is based on a faulty premise of easily transferable executive talent. Citing various other studies, they question the frequency of CEO turnover, in particular, movements by public company CEOs to another public company. 
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Say-on-Pay Litigation Update

Since our last blog post on say-on-pay litigation in January 2012, there have been several dismissals of say-on-pay lawsuits on procedural grounds – principally the failure of plaintiffs to satisfy the demand standard, which requires a plaintiff seeking to bring a derivative action to first make a demand on the corporation’s board so that it can determine whether to pursue the action. Under Delaware law, failure to make a demand may be excused if the plaintiff can raise a reasonable doubt that (1) a majority of the board is disinterested or independent or (2) the challenged act was a product of the board’s valid exercise of business judgment.
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Glass Lewis Changes Its Say-on-Pay Analysis

For the past two proxy seasons, companies have criticized how proxy advisory services have selected company peer groups in order to evaluate “pay for performance” for purposes of making say-on-pay voting recommendations. Recently, Glass Lewis announced changes in their peer group selection methodology that will affect annual meetings held after July 1, 2012.

On July 12, 2012, Glass Lewis hosted a “proxy talk” during which they outlined enhancements to their proprietary pay-for-performance model. The most significant development is the change to peer groups. Since 2003, Glass Lewis has been using a process that is based on GICS codes, industry group and geographical region, but they will now use a “market-based” peer group approach developed with Equilar.
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Anticipating the Future of Corporate Governance at the Society’s National Conference

Cognitive bias leads to faulty decisionmaking, warned Vice Chancellor J. Travis Laster at the National Conference of the Society of Corporate Secretaries and Governance Professionals. In his address, he used an example of a Delaware case to demonstrate the collective desire to develop information to support a preconceived goal rather than reach independent conclusions, the fallacy of groupthink that avoids hard questions, the tendency to prefer data that confirms a prior belief and the likelihood of taking immense risks to avoid losses, noting that the Court looks for the presence of those biases in examining cases. We also heard from the leaders of two influential proxy advisers, ISS and Glass Lewis, that each firm will change to new methodologies in the coming proxy season for constructing the all-important peer group against which they assess CEO compensation and form say-on-pay recommendations, making predictability an ever elusive goal for now.
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U.K. Government Publishes Consultation Paper Regarding Draft Regulations Governing Remuneration Reports

Following closely on the heels of its announcement of a package of proposals  intended to curb executive remuneration, the U.K. Government recently published a consultation paper focusing on the content of remuneration reports of UK-incorporated quoted companies that would disclose the compensation of directors, including executive directors.  While much of the consultation paper simply echoes the announcement, which we summarized in our memo, it is fairly detailed and merits a close read.  Here are selected highlights:

  • Remuneration reports would have two parts:
    • A policy report setting out all elements of a company’s remuneration policy and key factors that were taken into account in setting the policy.

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Summer Watch-List of Governance Developments

While proxy season has ended for most companies, there are a number of governance matters worth keeping an eye on during the summer months:

SEC Rulemaking.  The SEC website noting upcoming Dodd-Frank activity still indicates a number of actions slated before the end of June, including proposing rules regarding disclosure of pay-for-performance, pay ratios, hedging by employees and directors and recovery of executive compensation. It was recently updated to reflect the adoption of final rules on compensation committees and advisers, which we discussed here. As we are in the last week of June, it is likely that the Commission will again delay the actions into the next time period – July to December 2012.
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Say-on-Pay Scorecard: 2012 vs. 2011 (So Far)

With proxy season in full swing, we wanted to provide an update on this year’s say-on-pay findings to date and compare them to results from last year at this time, almost to the day.  As of the end of last week (May 18, 2012), 639 large accelerated filers reported the voting results from their shareholder meetings. Note that these results do not account for any companies that adopted a triennial or biennial say-on-pay vote, nor do they include smaller companies.

Percentage Approval Large Accelerated Filers by
Say-on-pay Vote
(as of May 18, 2012)
Large Accelerated Filers by
Say-on-pay Vote
(as of May 20, 2011)
90-100% 454 540
80-89% 85 126
70-79% 40 65
60-69% 22 40
50-59% 23 14
40-49% 8 9
30-39% 4 7
20-29% 3 1
0-19% 0 0
Total 639 802

Approval for say-on-pay votes has remained high so far this season, as the average say-on-pay results for all large accelerated filers is 89%. 
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U.K. Proposes Binding “Say on Pay” and a Limitation on Executive Severance Arrangements

The U.K.’s implementation of “say on pay” in 2002 is widely considered the harbinger of mandatory “say on pay” in the United States. So far, in both countries, the shareholder advisory vote on executive compensation has been non-binding on companies and their boards. Now, the U.K. appears to be moving toward a binding regime. Earlier this spring, the U.K. government’s Department of Business Innovation & Skills (BIS) published a consultation paper setting out a range of measures, including:

  • An annual binding vote on future remuneration policy;
  • An increase in the level of support required on votes on future remuneration policy (up to 75% of votes cast);
  • An annual advisory vote on how the company’s pay policy was implemented in the previous year (same as the status quo); and
  • A binding vote on “exit payments” of more than one year’s salary – with “exit payments” including not only cash severance payments, but also the vesting of equity compensation, continuation of benefits, etc.

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NYSE Webcast Panel Reflects on the 2012 Proxy Season

On Tuesday, I was fortunate to co-moderate a NYSE-sponsored webcast with Judy McLevey at the NYSE, as we discussed the leading proxy and governance issues for 2012 with a group of recognized experts that included Doug Chia from Johnson & Johnson, Michelle Edkins and Robert Zivnuska from BlackRock, Gordon McCoun from FTI Consulting and Pat McGurn from ISS.  An archive of the webcast is available here. Judy first informed us that while 285 companies have held annual meetings, 430 more are slated for April with another 970 currently scheduled for May.  The panelists then provided interesting perspectives and useful advice on several issues relevant to public companies today, including the following:

Proxy Statements
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Lessons Companies Can Learn from CalSTRS “Lessons Learned”

CalSTRS recently released a paper, “Lessons Learned: The Inaugural Year of Say-on-Pay,” in which they detailed their reasons for voting against companies’ 2011 Say-on-Pay proposals.

Surprisingly, CalSTRS voted against 23% of the say-on-pay proposals on which they voted during the 2011 proxy season, citing a pay for performance disconnect as the primary reason. In looking at the pay for performance disconnect, CalSTRS found that most of the companies they voted against had negative 5-year performance numbers. Other pay for performance issues noted by CalSTRS were companies’ failure to prioritize or fully explain the “laundry list” of performance metrics listed in the proxy statement and problems in peer group selection, including: a failure to adequately disclose the rationale of the peer group selection, too large a peer group, mismatch of size of peers and inclusion of companies in an unrelated industry.
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Implementation of New Disclosure on Say on Pay Results

Among the new proxy disclosure requirements under the Dodd-Frank Act is the mandate that issuers disclose in their CD&A “[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, if so, how that consideration has affected the registrant’s executive compensation decisions and policies.”  Thus far, the vast majority of the 110 large accelerated filers who filed proxy statements in the 2012 season through February 29, 2012 have addressed this new requirement in their CD&As.  Generally, the disclosure has been fairly predictable: those that received lower shareholder approval ratings on say on pay in 2011 have provided lengthier disclosure, often addressing changes made to their compensation programs, while those that received stronger shareholder support have simply stated that they have considered the results and decided to continue their previous compensation practices in light of the support.
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Mixed Signals on the Future of Say on Pay Litigation

The Oregon district court provided a ray of hope for companies fearing the possibility of shareholder say on pay litigation when it handed down its January 11, 2012 decision granting Umpqua’s motion to dismiss a shareholder derivative suit alleging directors’ breach of duty and officers’ unjust enrichment after an increase in executive compensation.  In the decision, Magistrate Judge Acosta rejected the shareholders’ arguments that demand was futile because the directors were not independent or disinterested.

In Umpqua, plaintiff-shareholders argued that, where directors were likely to be subject to liability for the challenged actions, they could not be disinterested.  The court rejected that reasoning in this context, saying that an adverse say on pay vote coupled with the award of increased compensation did not reach the necessary threshold of substantial likelihood of liability necessary to show that demand would be futile under Delaware law. 
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ISS’s New Pay-For-Performance Review Framework is Now in Place

In December, ISS issued a whitepaper providing further guidance on its new pay-for-performance review framework first introduced in its 2012 proxy voting guidelines update (effective for meetings on or after February 1, 2012).  As described in our memo New ISS Policies Overhaul Say-on-Pay Analysis (November 29, 2011), the revised pay-for-performance methodology includes both a three-part quantitative analysis and a qualitative analysis.  The quantitative analysis is made up of two relative measures (“Relative Degree of Alignment,” comparing CEO pay and TSR performance against a comparison group over 1- and 3-year periods, and “Multiple of Median,” comparing the prior year’s CEO pay to the median pay of a comparison group for the same period) and one absolute measure (“Pay-TSR Alignment,” comparing trends in CEO annual pay and the value of an investment in the company over the prior 5-year period).
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2012 Proxy Season: Early Filers Disclose the Impact of 2011 Say On Pay Voting Results

Proxy season 2012 has begun and we’re beginning to see disclosure on the impact of last year’s say on pay voting results.  As of December 16, 2011, 14 large accelerated filer companies have filed proxy statements for the 2012 season.  These proxy statements disclose whether, and to what extent, the companies considered the results of their 2011 management say on pay proposal and how that affected their compensation decisions and practices.  Unsurprisingly, the ten companies with high shareholder approval ratings (83% and higher) have provided simple and unremarkable disclosure.  These companies generally acknowledge their high ratings and cite them as support for continuing their compensation practices.
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Issuer Engagement with Institutional Investors – Advice from Donna Anderson at T. Rowe Price

Engagement with shareholders plays an increasingly important role in strengthening issuers’ corporate governance practices.  With proxy season around the corner, we turn to Donna Anderson, a vice president of T. Rowe Price Associates, Inc., and global corporate governance analyst in the U.S. Equity Division of T. Rowe Price., for her perspective on company efforts.  In her current role, Donna leads the policy-formation process for proxy voting, shepherds the firm’s engagement efforts with portfolio companies, and is co-chair of the Proxy Committee.  She joined the firm in 2007, has 15 years of investment experience, and was recently named one of the “People to Watch” in the NACD Directorship 100.
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Early Golden Parachute Shareholder Vote Results

Section 951(b)(2) of Dodd-Frank requires companies to hold a non-binding shareholder vote on executive severance packages (golden parachutes) in connection with M&A transactions that are presented for shareholder approval.  Shareholder votes on golden parachutes have been required since April 25, 2011.  Pearl Meyer & Partners recently completed a study on the outcomes of such shareholder votes held between April 25, 2011 and September 26, 2011.

According to the Pearl Meyer study, during this period, 37 companies included golden parachute disclosure and votes in their merger proxies, 24 of which to date have publicly disclosed the results of the golden parachute vote. 
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Companies Get Hit With New Say-on-Pay Shareholder Derivative Suits

As previously posted on June 24, several derivative lawsuits have been filed against companies that have failed their “say-on-pay” votes. The lawsuits seek a recovery for alleged excessive executive compensation. Earlier this month, Dex One Corporation became the eighth company sued. The Dex One lawsuit, filed in the Eastern District of North Carolina, claims that officers and directors breached their fiduciary duty to the company by awarding large increases in compensation to the management team while the company was in bankruptcy, followed by a share price decline of more than 95 percent.

Since our last post on this topic, several companies with say-on-pay lawsuits have updated their disclosure.
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Large Accelerated Filer Announces Triennial Frequency in Face of Majority Support for Annual

The Dodd-Frank frequency vote is of course “nonbinding”, but companies that have “lost” the vote for triennial frequency have almost without exception decided that the better part of valor is to follow the shareholders’ expressed will for an annual vote. With more than 60% of large accelerated filers having announced their decisions, only two companies have bucked the trend. Annaly Capital Management just filed an amended Form 8-K declaring that its board has determined that future say-on-pay votes will be submitted to shareholders every three years, even though annual say-on-pay received majority approval. Annaly Capital Management is the first large accelerated filer to follow the example previously set by American Reprogaphics Company, a small company, to conduct triennial votes.
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