Report: Say on Pay Picking up Steam at Financials

On the same day the SEC issued its long-awaited proposed rules on advisory votes for executive compensation and “golden parachutes,” The Conference Board Governance Center announced in its 2010 U.S. Directors’ Compensation and Board Practices Report that Say on Pay is gaining some traction among financial service companies but almost no companies surveyed have adopted such a policy for golden parachutes.

The Oct. 18 report, [Read it here.] which was conducted in collaboration with the Society of Corporate Secretaries and Governance Professionals and was sponsored by the Deloitte Center for Corporate Governance, found that 22 percent of financial services companies surveyed have adopted Say on Pay compared to just 3.8 percent in manufacturing and 2.8 percent in non-financial services. Among financial companies, the advisory vote has been introduced by 42.9 percent of those with assets valued at $100 billion or higher. The report states that is mostly due to the large banks that participated in the Troubled Asset Recovery Program (TARP). Overall, 93 percent of all respondents don’t have Say on Pay policy.

The report is based on a survey of 279 corporate secretaries that took place in May and June 2010. [Download report here. (Free to members.)] It was written by Matteo Tonello, director of corporate governance research for The Conference Board, and Judit Torok, senior research analyst in The Conference Board’s human capital department.

Other major findings from the report include:

• The largest companies (by revenue) predominantly elect directors via majority voting. More than three-quarters of companies in the largest revenue group utilize some form of majority voting, and 95.1 percent also include a mandatory resignation policy.
• Boards increasingly focus on risk oversight. Almost all financial companies with asset value equal to $10 billion or more have a designated chief risk officer. Nearly half of all non-financial companies and 46.2 percent of manufacturing companies have an enterprise risk management committee at the management level.
• Large companies, in particular, utilize clawback provisions. At least 40 percent of companies in the manufacturing and non-financial services industries have adopted clawback provisions to recoup executive compensation in the case of a restatement or fraud.

The proposed SEC rules, which are due to take effect for proxy season 2011 following the Nov. 18 public comment period deadline [See Say on Pay and golden parachute proposed rule and institutional investment manager proxy voting disclosure proposed rule.], would require public companies to do the following:

• Shareholder approval of executive compensation (Say on Pay): Section 14A (a) of the Exchange Act would require such votes to take place at least once every three years beginning with the first shareholders’ meetings taking place on or after Jan. 21, 2011. Such a vote would have to be disclosed in the annual proxy statement and the Compensation Discussion & Analysis would have to include whether a company considered the results of the non-binding vote.
• Shareholder approval of the frequency of shareholder votes on executive compensation: Starting with Jan. 21, 2011, at least once every six years companies would have to allow shareholders to vote on how often they would hold Say on Pay votes.
• Shareholder approval and disclosure of golden parachute arrangements: Companies would have to disclose compensation arrangements for executive officers in connection with mergers, going private transactions and third party tender offers. Also, companies would have to provide a shareholder advisory vote to approve such golden parachute arrangements in merger proxy statements.
• Institutional investment manager reporting of votes: Such managers would have to file annual statements with the SEC disclosing their votes on Say on Pay, frequency of Say on Pay, and golden parachute arrangements. The rule would apply to every institutional investment manager who manages certain equity securities with an aggregate fair market value of at least $100 million.

A separate survey of more than 700 private and public company directors released by the National Association of Corporate Directors (NACD) on Tuesday found there is urgency for risk and crisis oversight and a better feeling about the alignment of CEO pay to performance. Corporate board directors rank risk and crisis oversight among the top three priorities compared to 16^th in 2007.  A total of 78 percent of directors believe their CEO’s executive compensation program improved corporate performance and 75 percent believe their CEO’s pay matches their performance. This compares to a 2007 NACD survey that found 77 percent of directors thought CEO pay was excessive.