Compensation Committee Corner : Executive Compensation Lawyer & Attorney : Winstead Law Firm : Director Liability, Employee Benefit Arrangements

We now have our first failed say-on-pay proposal for this proxy season.  Discussed below, this failure raises the issue of whether companies should affirmatively disclose controversial pay practices or compensation issues within their proxy statements.  Minimally, the issue should be considered. 

Background

Generally, institutional shareholder advisory services such as ISS will only look to the "four corners" of the proxy statement in making its recommendation (i.e., it will not look at other filings of the issuer).  This means that if a company has a controversial pay practice or compensation issue, it should consider affirmatively explaining such issue in its proxy statement in the hopes of avoiding a possible negative recommendation from ISS (and applicable others). 

First Failed Say-on-Pay Proposal of this Proxy Season 

On January 28, 2011, Jacobs Engineering Group Inc. filed a Form 8-K (Found Here) showing that their advisory say-on-pay vote resulted in a majority voting "against" the proposal.  This is the first failed proposal for this proxy season.

It seems a cause for the failure related to a one-time grant of restricted stock to its executive officers.  The proxy statement contained little discussion about the grants.  Though I did not check, it can be inferred that ISS (or other service) recommended a "no" vote because the company later made an effort to explain the grants by filing additional materials to its proxy statement.  (Found Here)

Some Examples of Companies Providing Affirmative Disclosure

A few examples of companies providing affirmative disclosure of controversial pay practices or issues within their proxy statements are as follows:

• FedEx Corporation explained in their proxy statement filed on August 16, 2010, why tax reimbursements associated with their executive officers' receipt of restricted stock was appropriate even though the company generally discontinued tax gross-ups.  (Found Here)
• Level 3 Communications, Inc. discussed its rationale for single trigger vesting and 280G gross-up provisions in its proxy statement filed on April 2, 2010.  (Found Here) 
• Saks Incorporated addressed its rationale for severance arrangements with its executive officers in its proxy statement filed on May 7, 2010.  (Found Here)
• Intel Corporation addressed overhang and burn rate issues in its proxy statement filed on April 3, 2009.  (Found Here)

To close, companies should at least consider providing affirmative disclosure.

• Email This
• Print
• Comments
• Trackbacks

Issuers who hold their annual shareholders meeting after January 21, 2011, will have to implement say-on-pay as part of their proxy process.  At this first annual meeting, shareholders must also decide on the frequency of the say-on-pay vote, such frequency also becoming known as "say-when-on-pay."  The purpose of this Post is to discuss issues that should be considered when implementing say-when-on-pay. 

Background

Addressing the frequency of say-on-pay, issuers must offer shareholders the following four choices: annual, biennial, triennial and abstention.  Thereafter, the vote on frequency must be held by a separate resolution no less than once every six years.

Worth noting is that a majority of the issuers who have filed proxy statements this season have recommended triennial say-when-on-pay.

Some Reasons to Adopt an Annual Vote

• There is a belief that annual votes will become routine, similar to annual ratification of an issuer's outside auditors.  Those following this thought believe that the scrutiny associated with an annual vote will eventually be less than the scrutiny associated with a biennial or triennial vote.
• Another thought is that shareholder dissatisfaction is likely to be expressed in the say-on-pay process as opposed to utilizing withhold/no votes on compensation committee members.  Thus, as the thought goes, compensation committee members are more protected with annual say-on-pay.
• ISS recommends annual voting.
• There is real time disclosure and shareholder feedback associated with annual voting.
• For those issuers with poor pay practices, annual voting may be preferred so that the taint associated with a no vote does not last for two or three years (as it would if biennial or triennial voting were implemented).

Some Reasons to Adopt a Biennial or Triennial Vote

•  A biennial or triennial vote helps shareholders evaluate the long-term effects of an issuer's multi-year compensation structures.  In contrast, an annual vote encourages short-term thinking and focuses on interim results, such as a decrease in stock price.
• Preparing for and implementing say-on-pay on an annual basis may be costly and mis-directs the attention of management.
• Assuming shareholders express negative thoughts during the say-on-pay process, the compensation committee may need to time implement changes to various compensation policies and procedures. 
• Some investors prefer a voting frequency that is longer than annual voting  (e.g., the United Brotherhood of Carpenters prefers triennial voting).
• Certain registered institutional investment managers may find that annual reporting to the SEC on how they voted is too burdensome for every portfolio company.

Recommendation from the Issuer

Issuers have the opportunity in their proxy statement to recommend a voting frequency.  The following are some examples of recent examples (and links to their proxy statements) where issuers have recommended a frequency vote or have affirmatively abstained from such recommendation (or you can go here where I have cut and paste the applicable language into this PDF):

• Annual vote recommendation filed by Navistar International Corporation in its proxy statement on January 14, 2011.
• Biennial vote recommendation filed by Fair Isaac Corporation in its proxy statement on December 27, 2010.
• Triennial vote recommendation filed by Tyco International Ltd. in its proxy statement on January 14, 2011.
• Affirmative abstention from any recommendation filed by Jack In The Box, Inc. in its proxy statement on January 13, 2011.

Any Worries with Recommending other than an Annual Vote?

For issuers who prefer other than an annual vote but are worried that such a recommendation may not succeed, consider offering an olive branch such as:

• A written commitment in the recommendation that the issuer will resubmit its say-when-on pay the following year if the biennial or triennial recommendation does not receive the affirmative vote of a majority of the shareholders.
• A written commitment in the recommendation that the issuer will resubmit the say-when-on-pay proposal at such biennial or triennial vote.

As a concluding thought, for those of you who are responsible for implementing say-on-pay and say-when-on-pay internally at the issuer, do not forget to set internal expectations as to what is an acceptable percentage of "no" votes.  It may be that your team thinks 10% or 20% "no" votes is acceptable, whereas your compensation committee may find such percentage appalling (or vice versa).

• Email This
• Print
• Comments
• Trackbacks

 It looks like Senator Dodd's bill entitled "Restoring American Financial Stability Act of 2010" (PDF, pages 1056-1090) finally got its legs in that it was approved by the Senate on May 20, 2010 (though a copy of the bill did not become available to us until last week).  The purpose of this Post is to highlight some of the compensation and corporate governance changes within the Senate bill that would affect public companies. 

Reconciliation

In July 2009 the House of Representatives passed the Corporate and Financial Institution Compensation Fairness Act of 2009, which was introduced by Representative Frank (the "Frank Bill").  In December 2009 the House passed the Wall Street Reform and Consumer Protection Act of 2009, which incorporated a variety of bills, including the Frank Bill.  The Senate bill will have to be reconciled with the House bill.  It may be a few months before legislation is enacted. 

Overview of the Senate Bill

As discussed in a prior post (Prior Post), the compensation and corporate governance provisions of the Senate bill and House bill are similar in many respects.  Thus, the following is intended to highlight the more significant provisions under the Senate bill: 

• Say-on-Pay.  Say-on-pay provides shareholders of public companies with a non-binding vote on the compensation of named executive officers.  This is not a new development in terms of proposed legislation and is similar to the House bill. 
• Discretionary Voting by Brokers.  Discretionary voting by brokers in connection with executive compensation matters (including say-on-pay) and other "significant matters" would be eliminated absent specific instructions from the beneficial owner.  This provision is not present in the House bill.  If this provision survives reconciliation, it is likely to result in fewer shares of retail shareholders being voted absent a specific effort by issuers to educate their shareholders that voting is necessary.
• Majority Voting.  This provision would generally require a board member to tender his resignation if his election was uncontested and he failed to receive a majority of the votes cast. 
• Pay v. Performance.  The annual proxy statement would have to describe the relationship between compensation actually paid and the financial performance of the company.  This could be disclosed in a graph or pictorial.
• Clawbacks.  Continued listing on a national securities exchange would require the issuer to develop a clawback policy more robust than currently required under Section 304 of Sarbanes-Oxley.  The more robust clawback policy would (i) include all executive officers (not just the CEO and CFO), (ii) eliminate the requirement that a clawback be triggered due to "misconduct," and (iii) expand the period covered from 12 months to 3 years. 

More posts will follow as this legislation develops.  Till then, if you would like to learn more about the differences between the House and Senate bills, you can sign up for our free webinar entitled "Hot Topics in Executive Pay," to be held at 10:00 am (CST) on June 9, 2010.  Sign up can be found at http://www.winstead.com/AboutWinstead/ContinuingEducationWebinarSeries/CompensationBenefits.

• Email This
• Print
• Comments
• Trackbacks

New SEC rules require narrative disclosure of compensation policies and practices that are "reasonably likely" to have a "material adverse effect" on the company. The purpose of this Post is to highlight that implementation (or increased use) of mitigating factors could negate risk assessment disclosure while simultaneously bolstering a company's compensation governance practices.

Background

On December 16, 2009, the SEC adopted final rules (Prior Post) that broaden executive compensation disclosure within proxy statements and annual reports. The new disclosure rules are generally effective February 28, 2010 (Prior Post).

One requirement of the new rules is that a company must provide narrative disclosure of compensation policies and practices that are "reasonably likely" to have a "material adverse effect" on the company. An important point is that no disclosure is required unless the materiality threshold is satisfied (though financial institutions participating in TARP are subject to different requirements).

Mitigating Factors

A risk assessment should be conducted to determine whether the materiality threshold is satisfied. This assessment should (i) focus on individuals (and groups of employees) who could cause risk to the company, and (ii) identify features of compensation programs that could entice executives (or groups of employees) to take risks that might threaten the company's value.

However, these risks (and the subsequent "materiality" analysis) should be balanced against mitigating factors such as:

• stock ownership guidelines that require an employee or director to own a meaningful amount of equity in the company until some future date (e.g., retirement, termination of employment);
• clawback provisions or policies that are more stringent than currently required under Section 304 of the Sarbanes-Oxley Act of 2002; and/or
• compensation limits or caps to ensure an employee's total pay does not exceed acceptable levels.

In addition to helping negate risk assessment disclosure, the above mitigating factors (and others not addressed above) are a form of good compensation governance (and positive CD&A disclosure) that every compensation committee should consider implementing or enhancing this proxy season.

• Email This
• Print
• Comments
• Trackbacks

Recently the SEC issued interpretative guidance (PDF) on how the effective date of the new proxy disclosure rules (Previous Post) would apply in various factual scenarios.  Though the new proxy disclosure rules are effective February 28, 2010, the interpretative guidance provides the following transition rules:

• An issuer must comply with the new rules if its fiscal year ends on or after December 20, 2009, and its definitive proxy statement is filed on or after February 28, 2010. Under such facts any preliminary proxy statement required to be filed would have to comply with the new rules even if it is filed prior to February 28, 2010.
  
• Under the above facts an issuer's proxy statement must comply with the new rules even if its 2009 Form 10-K is filed prior to February 28, 2010.
  
• An issuer is NOT required to comply with the new rules if its fiscal year ends prior to December 20, 2009. This rule applies even if the proxy is filed on or after February 28, 2010.
  

Addressing voluntary compliance, the interpretative guidance provides that an issuer may voluntarily comply with some or all of the new rules; however, if an issuer desires to comply with amendments to the Summary Compensation Table and Director Compensation Table, then it must comply with all of the new rules relating to the form filed.

Addressing Form 8-Ks, the interpretative guidance provides that new item 5.07 to Form 8-K (generally requiring issuers to disclose the results of a shareholder vote and to have that information filed within four business days after the end of the meeting at which the vote was held) will apply if the annual meeting of shareholders takes place on or after February 28, 2010, even if the proxy was mailed prior to that date.  Annual meetings taking place prior to February 28, 2010 would not have to comply with new item 5.07.

The interpretative guidance may be good news for those issuers with a fiscal year ending prior to December 20, 2009, but who file their proxy (or have their annual meeting) on or after February 28, 2010.

• Email This
• Print
• Comments
• Trackbacks