Governance Center Blog

Feb
01
2012

Boards Beware of Growing Executive Compensation Packages

By Anthony Galban

Some 25 years ago I attended a crowded and agitated shareholders meeting for a Fortune 500 company. During the meeting, a shareholder held up a large and colorful chart for the meeting attendees to see. The chart showed the change in the CEO’s compensation compared to shareholder return over the past several years. Impressively, the CEO pay had grown by roughly 300%. As I struggled to see the second line charting shareholder return, I noted the flat line running along the x axis indicating little to no growth for shareholders. When challenged by this graph, the CEO stated that his pay was “comparable” to what other Fortune 500 CEOs were paid. The shareholder proposal to freeze the CEO’s compensation got a surprising 30% of the vote and both the Board and management were visibly shaken.

This story captures many of the dynamics of the “say on pay” issue that remain important to this day. This topic can be an emotional one for shareholders and Boards, and emotions can be both volatile and unpredictable. Here are my observations on this issue:

1. The “status” argument doesn’t hold water anymore. Today’s shareholders want value, which is driven by corporate performance. Being told that large compensation packages are required for “captains of big ships” doesn’t resonate. Today’s CEOs and Boards should expect to answer the question regarding executive compensation in terms of performance and the shareholder experience.

2. CEOs may overrate their value. There are actually only a handful of companies where shareholders may feel a CEO is absolutely indispensable—and at those companies, the shareholders may be willing to give the CEO a “pass” on issues such as compensation because the CEO brings that much value to the table. These are usually situations where the shareholders have experienced significant appreciation.

3. Things can turn quickly. Shareholders can be surprisingly relaxed with executive compensation when things are going well, but they can agitate quickly finding big pay packages outrageous when the tides turn. This can create a material disconnect between shareholders and the Board when executive compensation has grown to very high levels and the company is no longer performing.

As a directors and officers underwriter, I am wary when I see a company with a very large executive compensation package. It could signal future trouble should the company’s financial situation falter. But in the marketplace the rule of thumb seems to be that the climate for bigger and bigger pay is quite good so long as the company and the stock are doing well. It’s when they disconnect that I sense trouble – and it’s headed towards the Board.

Anthony Galban, a senior vice president and directors and officers liability underwriting manager for the Chubb Group of Insurance Companies, can be reached at galbant@chubb.com.

Posted by Anthony Galban at 2:47 PM | No Comments »

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Dec
21
2011

ISS Publishes White Paper on Pay for Performance Evaluation

Yesterday ISS published a white paper detailing its new methodology for the pay-for-performance test described in ISS’ 2012 proxy voting policies. ISS’ new approach to evaluating pay for performance alignment consists of two steps:

Read the rest of this entry »

Posted by admin at 3:33 PM | No Comments »

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Dec
15
2011

For Companies in the Gray Zone, Preparing for the Next Say-on-Pay Vote is Black and White

As I noted in my post about the 2012 ISS Policy Updates, in the lead up to the 2012 voting season, there has been a great deal of discussion about what happens with companies that garnered a of majority shareholder support for the company’s say-on-pay proposal, but not overwhelming majority support. With ISS effectively drawing a bright line around those companies with “truly” passing say on pay votes (more than 70 percent), and those in the “gray” zone (those with more than 50 but less than 70 percent), we asked Yonat Assayag, a Partner with ClearBridge Compensation Group, for her firm’s view on how companies in this “gray zone” prepare for the 2012 say on pay vote. Here is Yonat’s response . . .

As 2011 comes to a close, most public companies have by now had their shareholder advisory vote on their executive pay programs, known as “say-on-pay.” Say-on-pay, an outcome of the Dodd-Frank Wall Street Reform and Consumer Protection Act, requires publicly-traded companies in the U.S. to hold shareholder advisory votes at least once every three years. Read the rest of this entry »

Posted by Barbara Blackford at 11:31 AM | No Comments »

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Dec
07
2011

Directors React to ISS Policy Updates for 2012 Proxy Season

On December 1-2, 2011, directors from across the country participated in the Executive Compensation Director’s Forum presented by The Weinberg Center for Corporate Governance of the University of Delaware and The Conference Board’s Governance Center. At the Forum, directors discussed a wide range of issues related to the challenges of designing and administering appropriate executive programs in a difficult and hard-to-predict economic environment, where compensation decisions are being placed under the microscope by investors, proxy-advisory firms, employees, media and the public. Read the rest of this entry »

Posted by Barbara Blackford at 1:32 PM | 1 Comment »

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Dec
02
2011

Shareholder Activism in Uncertain Times

The recent Governance Watch webcast, Shareholder Activism in Uncertain Times, raised important questions for both management and boards to consider in the midst of an economic climate that is making many companies particularly attractive to activist shareholders, and potentially vulnerable to aggressive moves that could force a board to take actions that may not be in the best long-term interest of the company or the majority of its investors.

The roundtable discussion was moderated by Ethan Klingsberg, a partner at Cleary Gottlieb Steen & Hamilton LLP, and featured three guests:

Kathy Bostjancic, director for Macroeconomic Analysis at The Conference Board;
Timothy Ingrassia, co-chairman of Global Mergers & Acquisitions at Goldman Sachs; and
Glenn Eisenberg, CFO at Timken Co. and a director at both Alpha Natural Resources and Family Dollar Stores.

Bostjancic started the discussion by summarizing the current economic situation and outlook, noting that although the U.S. economy may avoid falling into another official recession, growth is likely to remain very slow through early 2012. Read the rest of this entry »

Posted by Larry West at 8:14 AM | No Comments »

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Oct
18
2011

Reports: Say on Pay Votes Bridging Shareholder-Director Communication Gap

Even though shareholders approved most of the executive compensation plans put up for vote in the 2011 proxy season, the tiny minority of failed say on pay votes are getting an inordinate amount of attention for a myriad of reasons.

Those reasons, which reflect an overarching problem between shareholders and companies, range from a pay-for-performance disconnect to poor pay practices to poor disclosure and pay reasonableness, according to a new study by the Council of Institutional Investors (Say on Pay: Identifying Investor Concerns). Based on its interviews with institutional shareholders who voted against say on pay proposals, Farient Advisors LLC, which was commissioned by CII to write the report, found that 92 percent gave pay-for-performance disconnect as the biggest reason for their vote. The other top reasons were poor pay practices (57 percent) and poor disclosure (35 percent). Read the rest of this entry »

Posted by Gary Larkin at 4:27 PM | No Comments »

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Sep
06
2011

Is Executive Compensation Information Accuracy Vulnerable as Equilar ends ISS Deal?

There was a snippet of information that caught my eye last week as I was researching the hash tag #corpgov on Twitter: “Equilar terminates agreement with ISS.”

While that news isn’t earth-shattering, it’s what’s not in the press release that this tweet was linked to that could have deep implications for next year’s proxy season. What I’m talking about specifically is executive compensation data. For those not familiar with the Equilar name, it is a California-based provider of total executive compensation information for public companies. So why is a termination of an agreement between Equilar and the proxy advisory firm Institutional Shareholder Services mean anything to corporate secretaries of public companies or others in the corporate governance world? Read the rest of this entry »

Posted by Gary Larkin at 4:26 PM | 2 Comments »

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Jul
26
2011

Proxy Access Court Decision Fallout: Bank on More Proxy Contests

Two things are almost certain following Friday’s decision by the U.S. Court of Appeals for the D.C. Circuit in the case challenging the SEC’s new proxy access rules: there definitely will be no proxy access for proxy season 2012 and the number of proxy contests will increase next year.

While I know I’m not going out on a limb to make the first prediction since the court unanimously vacated Rule 14a-11 (which would allow shareholders direct access to the proxy), I believe shareholder groups will take advantage of Rule 14a-8 as a backdoor way toward proxy access. Additionally, there is bound to be some kind of blowback for those directors sitting on companies that had negative Say on Pay votes. Granted, that might take the form of withhold campaigns but many shareholder groups may just opt for the good old-fashioned proxy contest.

Here’s why I believe there will be an uptick in proxy contests and/or shareholder proposals calling for proxy access: Read the rest of this entry »

Posted by Gary Larkin at 12:55 PM | 1 Comment »

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Jul
18
2011

Derivative Lawsuits on Radar of Failed SOP Vote Companies

If you sit on the board of any of the 39 companies that had a failed Say on Pay vote the past proxy season, I don’t need to tell you that despite the fact the votes were only “advisory” there will be some shareholder repercussions. In the past year, seven companies have already faced one of those repercussions – the dreaded derivative shareholder lawsuit.

It’s possible the plaintiff’s bar may not limit their targets to companies with failed SOP votes; the word is that any vote below 70 percent is troubling. And in some cases compensation consultants have been named as defendants.

At last check, the companies facing derivative lawsuits from shareholders after negative SOP votes include:

Occidental Petroleum (2010)
Keycorp (2010)
Beazer Homes (2011)
Umpqua Holdings Corp. (2011)
Jacobs Engineering Group (2011)
Hercules Offshore Inc. (2011)
Bank of New York Mellon (2011)*

*=It should be noted that BNY Mellon is the only company to be sued following a successful SOP vote. Read the rest of this entry »

Posted by Gary Larkin at 5:03 PM | No Comments »

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Jul
14
2011

Say on Pay Review: More Shareholder Engagement, but Pay for Performance ‘Disconnect’

The early word on what U.S. public companies should do following the first mandatory year of Say on Pay is to review the level of engagement with shareholders vs. the level of support the company received on the advisory vote.

Depending on what you read or who you talk to, the word is that companies and their boards should ascertain the power of proxy advisory firms recommendations and whether or not there is a “disconnect” on pay for performance. Those are two issues that have come up in at least two post-proxy season reports and a Webcast. Read the rest of this entry »

Posted by Gary Larkin at 1:18 PM | No Comments »

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