Week in Review: Oct 18, 2013
SEC Chair Speech to the NACD
At a recent speech given to the NACD 2013 Leadership Conference, SEC Chair White took the opportunity to speak broadly about SEC corporate disclosure requirements, and the SEC’s examination of these issues pursuant to Section 108 of the 2012 JOBS Act. Her speech addresses the historical underpinnings of the current system, some known or perceived shortcomings, and provides very broad guidance for how the SEC might begin to think about improving these disclosure requirements to make them appropriate for today’s environment. While the entire speech is worth a read, those interested in compensation and corporate governance issues should take note of her comments specifically addressing compensation-related disclosure. In particular, her comments about the volume of compensation related disclosure, and whether or not it is “too much of a good thing” are particularly good reminders as we begin to prepare CD&As for the upcoming proxy season. For many companies, these documents have not been significantly revised since the SEC adopted Proxy Disclosure Enhancements in 2009. Given this, we believe many companies would be well served by beginning this year’s drafting process with a theoretical blank page, and giving serious consideration to their disclosure, with an eye towards ensuring that it is clear, succinct, and comprehensive.
Excerpt of Chair White’s comments on executive compensation related disclosure:
“We see a similar phenomenon in the area of executive compensation disclosure – where the disclosures in some cases can amount to more than 40 detailed pages. The rules for such disclosure have been revised, perhaps, more times than any other set of disclosure rules as we have tried to keep pace with changing trends in compensation.
Part of this increase is not from new disclosure mandates, but from companies trying to do a better job of explaining the rationale for the compensation packages they pay executives because they now must provide investors with an advisory vote on executive compensation – a “say-on-pay” vote. The Dodd-Frank Act mandated such a vote, which most companies are providing annually. And, as a result, companies have decided to more fully explain to their shareholders the rationale and considerations for these compensation decisions. And we think these additional disclosures are a good thing, but we should be careful not to have too much of a good thing.
We also should ask: Is there information that appears more than once in a filing, and if so, is that so bad? Or is there a way to avoid repetition in a document?”
NY Times: When the Stock Price Hides Trouble
Gretchen Morgenson questions the use of stock price performance to justify executive pay in her Fair Game column of the New York Times.
Should a rising stock price inoculate top executives from criticism over their pay? To more and more experts in corporate finance and pay issues, the answer is no…
The trouble with relying on total shareholder returns is that these figures can rise even after a company has shown an economic loss — a negative return on capital — over an extended period. A focus on stock price, therefore, can mask a longer-term decline in a company’s financial footing…
Still, Ms. Minow says these and other investors have a great lever on pay that they are not using. “Investors are just now beginning to vote against companies’ pay plans,” she said. But voting against pay was not enough.
“You have got to tie together a vote against a pay plan with a vote against the compensation committee of the board,” she said. “Unless we focus on the comp committees, nothing is going to change.”
61 Companies have Failed Say on Pay in 2013
Andrea Electronics Corp. failed its Say on Pay vote, becoming the 61st fail in 2013. With 61 fails in 2013, we have passed the number of companies that failed in 2012.
SEC Comment Letter of the Week
Comment letters continue to pour in to the SEC. Although the vast majority to date appear to be heartfelt requests from members of the public to enforce the rules, there have been a number of thoughtful standouts. One that struck was us written by Karl T. Muth, a Lecturer in Economics and Public Policy at Northwestern University. Although the letter does a good job of making a number of valid points about the usefulness of the ratio to investors, and the lack of correlation between CEO pay and managerial effectiveness or how well CEOs treat their lower level employees, Mr. Muth saves the best for last. In his final paragraph, he pointedly asks Chair White to consider her own pay ratio. We’ve provided the relevant expert below, and the full letter can be found here.
“Finally, to illustrate this point, allow me to make an observation about your office. Let’s take your annual salary of $165,300 as Chair of the SEC. If the median worker at the SEC makes $50,000 or $75,000, does this change the reasonableness of your compensation? Does it change the reasonableness of that person’s compensation (as measured relative to your own)? Or, if one were to view the entirety of the federal government, is it reasonable to compare the $400,000 salary of President Obama to the median federal worker’s salary or to your own salary? Is that ratio important in evaluating the performance of any worker? I think not.”
Client Alert: Results of ISS’ 2013-2014 Policy Survey
ISS recently released the results of their annual survey of institutional investors and companies on emerging corporate governance issues. ISS considers the survey a critical component of its annual policy review and formulation process.
In contrast with last year’s survey which focused on numerous executive compensation topics (e.g. peer group selection, measuring pay including granted vs. realizable pay, pay for failure, and executives’ and/or board members’ pledging of company stock), this year’s survey concentrated on broader high-level corporate governance themes including board responsiveness, director tenure/rotation and director assessment, with the primary executive compensation survey questions relating to equity plan evaluations. One theme that continued from last year’s survey results: the sometimes dramatic differences in opinions held by those in the investment community vs. companies.