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Results of SEC Open Meeting on Say on Pay Rules

As I mentioned a few days ago, the SEC had an open meeting this morning at 10am with an agenda covering several things including shareholder approval of executive compensation and golden parachute compensation.

The meeting should be archived soon,but the highlights are that:

• Filers with less than $75 million in public float will be exempted from say on pay votes and votes on frequency until January 21, 2013.
• Other filers will be required to hold say on pay advisory votes at least once every three years starting with the first annual meeting after January 21, 2011. 
• Large and mid cap filers will be required to hold their say on pay frequency vote starting with the first annual meeting after January 21, 2011 and at least once every six years after the first vote.
• Filers will not be required to entertain shareholder motions to change say on pay vote frequency between votes if they adopt the option supported by majority shareholder vote.
• Filers will be required to provide more detailed disclosure of golden parachute arrangements and to have separate votes on agreements when seeking approval for M&A and other transaction which would facilitate payouts unless these were included in the company's say on pay vote and were unchanged since the vote.
• No action was taken on rules which would require institutional investors to disclose their voting records on say on pay and golden parachutes.  This will be addressed at a future meeting, likely within a month.

SEC Responds to Proxy Access Litigation

The SEC posted an 83 page brief on January 19th in response to litigation initiated by the Business Roundtable in August of 2010 regarding proxy access and the adoption of Rule 14a-11. Oral arguments are scheduled for April 7, 2011.

The brief summarizes the rule, outlines modifications designed to minimize costs and enumerates why these are justified.  It also explains why it rejected the policy argument that shareholders access to the company proxy should be determined by private ordering.

The commission has also stated that they have decided not to exclude investment companies from the rule noting that protections afforded by the Investment Company Act do not do away with the need for the rule.

SEC Say on Pay Open Meeting Today

Further consideration will be devoted to the implementation of Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act  which are scheduled to apply to proxy materials prepared in connection with annual shareholder meetings taking place after January 20th 2011.say on pay rules at an open meeting of the SEC on January 25. There aren't too many hot button issues here but clarity may be provided on the exemption of smaller or new filers and some other nuances of how to deal with furture shareholder proposals.

If you get a chance there are also some interesting comments posted on sections 953 and 954 most recenting presenting positions on aspects of director independence rules (from the David Gordon of Frederic W. Cook) and the materiality of the CEO to average employee ratio  which is not scheduled for implementation for this proxy season (from Richard Trumka, President of the AFL-CIO and Kenexa Compensation client).

If you are active in M&A you may also want to keep an eye specifically on commentary regarding Proposed Rule: Shareholder Approval of Executive Compensation and Golden Parachute Compensation; File No. S7-31-10.

Mixed Results and Predictions on Say on Pay

I happened to see the Towers Watson poll conducted on 135 public companies regarding the frequency with which they anticipated holding their say on pay votes. The study notes that 51% predicted annual, 39% every three years and 10% biennial. If you have been watching my stats on what I have been seeing in early filings, this is not in line with what I have been seeing in actual early filings. The demographics of the universe that is being looked at could be different and what the board recommends and what shareholders vote could diverge even more. In the now 104 companies who have filed a DEF 14A since the beginning of December I have seen 52 (or a solid 50%) recommend a triennial vote, 34 (33%) recommend an annual vote, the fence sitters recommending bienniel are trailing at 9 almost equal with the 8 who have opted to make no recommendation.

I will try to do a tally of the reasons they quote for their recommendations but they do not vary much from what I have reported earlier. 

Some other noteworthy and interesting results of the Towers survey though are regarding the number of companies who have not decided what percentage of votes will be considered a favorable vote on say on pay (almost half), the not so surprising percentage of companies who are making changes to pay setting processes (48%), dusting off their CD&As (65%), doing more analysis on the linkage between pay and performance (41%) and making changes to post employment and perks (30%). 

Caught between ISS and a Hard Place

All we seem to hear about approaching this proxy season not surprisingly is say on pay. All of the blogs, articles and webinars are focused on what to expect. Clients are buzzing about whether to recommend annual, biennial or triennial votes and hoping to be able to see what their peers will recommend before they have to make their own recommendations.

One of the more interesting questions I got recently was what you should do if your shareholders vote for triennial voting frequency when ISS has come out in favor of annual and whether this could lead to negative recommendations even when the company was following shareholder preferences. I have to wonder, since the question was anonymous via a user group, whether this was just a hypothetical or whether this happens much.

I thought I would share with you my response none the less and you can weigh against ISS US corporate governance policy updates for 2011 and perhaps share your perspective for others facing similar issues.

Early Results on Say-on-Pay Frequency

I know many public filers have been waiting to see what others are going to be recommending for say-on-pay frequency in this proxy season. I took a look at some early PRE DEF 14A documents and DEF 14As and found the following excerpts which may be helpful in drafting your own proxies and determining the optimal frequency. I will keep providing excerpts and updated stats as we get closer to the proxy season, but as of this writing, I had found 17 examples. Five recommend annual votes, one recommends biennial, one makes no recommendation and the overwhelming majority recommends a triennial vote.

I will start with the one biennial vote since it is unusual and takes some language and theory from both the triennial and annual advocates, and perhaps from Goldilocks, who also was seeking the elusive "just right."

Hormel Foods
The Board of Directors believes a biennial frequency (i.e., every two years) is the optimal frequency for the say-on-pay vote. A say-on-pay vote every two years strikes the right balance between having the vote too frequently with an annual vote and being less responsive to stockholders with a vote every third year. A vote every two years provides stockholders and advisory firms the opportunity to evaluate the Company’s compensation program on a more thorough, longer-term basis than an annual vote.

The Board believes an annual say-on-pay vote would not allow for changes to the Company’s compensation program to be in place long enough to evaluate whether the changes were effective. For example, if the say-on-pay vote in January 2011 led to changes to the compensation program being made in November 2011, at the beginning of the next fiscal year, those changes would be in place only a few months before the next annual say-on-pay vote would take place in January 2012. For a related example, even if changes were made to the compensation program shortly after a say-on-pay vote in January 2011, those changes would be in place only for the last half of fiscal 2011 and the first few months of fiscal 2012 before the next annual say-on-pay vote would take place in January 2012.

Conversely, waiting for a say-on-pay vote once every three years may allow an unpopular pay practice to continue too long without timely feedback. A say-on-pay vote every two years is also sensitive to stockholders who have interests in many companies and may not be able to devote sufficient time to an annual review of pay practices for all of their holdings.

Air Product & Chemicals: new pay for performance disclosure

I took a look today for more examples of say-on-pay frequency voting recommendations and only found a couple.

Lightpath and Plexus recommended a triennial vote. Lannett highlighted the pros and cons of both annual and triennial say on pay votes but came down in favor of annual. Also noteworthy in their proxy was their report of risk assessment in comp programs which includes a handy check list of company practices in place that prevent it. Similarly there is a clear and detailed list of qualifications (also included in the Plexus proxy with a check list by director of which had what experience) required when recruiting to create a diverse and well rounded board.

Air Product & Chemicals not surprisingly has opted to recommend a say on pay vote every third year for the reasons that are now falling into the regular categories of long term focus of compensation, overburdening and confusion of shareholders and allowing the board time to evaluate feedback and develop a response. This makes 13 to six so far in favor of triennial.

The Board recommends a vote every three years. As described in the Compensation Discussion and Analysis, the Company’s Executive Officer compensation is designed with a long-term focus. Key elements of the program include performance measures that require creation of shareholder value across economic cycles, long-term orientation of the pay mix to reward the disciplined long-term investments that are fundamental to our business model, and substantial linkage to long-term stock performance. The Board intends that the program be responsive to shareholder concerns, but is concerned that annual votes on the program could foster a short-term focus and undermine some of its most thoughtful features.

Countrywide Executives Hit With Record-breaking Penalties

Charges filed against former Countrywide Financial CEO Angelo Mozilo (pictured right) and two other former executives in June 2009 alleging a failure to disclose to investors the credit risks taken by Countrywide have resulted in the largest financial penalty on the books for a public company executive. Mozilo will pay $22.5 million in civil penalties and $45 million in "disgorgement" to settle charges for a total of $67.5 million, and he will be permanently barred from serving as a director of officer of a publicly traded company.

Former Countrywide COO David Sambol also agreed a settlement of $5 million in disgorgement, a $520,000 penalty and a three-year bar. Former Countrywide CFO Eric Sieracki agreed to a $130,000 penalty and a one-year officer-and-director bar. None of the three admitted guilt in reaching their individual settlements. The funds will be paid to investors of Countrywide. Much of the settlement for all three will be paid by Bank of America under indemnification provisions, though Mozillo's settlement agreement prevents him from seeking reimbursement for the $22.5 million civil penalty. 

Enforcement actions have also been filed against other financial entities including Goldman Sachs, Evergreen, Reserve Fund, American Home Mortgage, New Century, Morgan Keenan, CitiGroup, ICP, State Street, Brookstreet, and Farkas/Taylor, Bean & Whitaker.

Tackling New Clawback Rules

Among the many topics discussed at this year's NASPP Conference, I wanted to blog on one in particular - namely Say on Pay, and specifically the new provision under Dodd-Frank for listed companies to develop and implement a policy regarding clawbacks. Fortunately, due to the scheduling of rules, filers will not HAVE to deal with these changes - or those relating to reporting of the CEO to average employee salary ratio - in the 2011 proxy season.

There seems to be a lot of confusion on this topic, since many filers assume that since they already have a clawback provision in place that they are all set. In fact, a large proportion of filers are going to have to rewrite these provisions, which were likely written in response to Sarbane's Oxley or possibly TARP. The differences in the rules for SOX and Dodd-Frank are important to understand. 

Leadership Strategies from the Chilean Desert

As the world watched while each of 33 Chilean miners were freed from the caved-in mines, it occurred to me that their hope, courage, resiliency and perseverance offered relevant lessons that any manager could embrace.

In a crisis, a leader should take charge quickly, pull in diverse resources and pick the very best to resolve the problem. The Chilean government didn’t waste time negotiating with the mining company. Rather, the government stepped in and asked the world to bring their experts, then built an experienced and skilled team that included scientists from NASA, South African construction professionals, cabling experts from Germany, and Canadian oil drillers among others.

Leaders should never lose hope, and they shouldn’t let their team lose hope either. Both President Piñera above ground and foreman Urzua below ground kept spirits up despite overwhelmingly dire circumstances.

Lead by keeping the team focused on solving the problem. Case scenarios were devised with team members helping at every step. Each person had a task to accomplish and was held accountable for their part in their survival, in avoiding possible health risks in the mine, and more. The groups above and below ground were focused on solutions for every scenario. Finger pointing was not permitted, as it would be a distraction to accomplishing the mission. The country, the media and family members kept criticism to a minimum until after the rescue, because they were all united on reaching the goal.

Leaders need to communicate goals and responsibilities to each team member, particularly during times of crisis. Trapped miners and rescue personnel were well informed of issues that might come up during drilling, rescue efforts and post rescue issues. Leaders should balance their communication by encouraging the group to express ideas and experience without letting them undermine their authority.