May 26, 2010

Say-On-Pay So Far: Wow! A Third Company Fails to Gain Majority Support

As noted in the ISS Blog, KeyCorp became the third company to fail to obtain majority support for its executive pay package at its annual meeting last Friday. The pay package received only 45% support - it received 87% support last year. Here's the company's Form 8-K with the voting results.

So KeyCorp joins Motorola and Occidental Petroleum as the first three US companies whose management say-on-pay ballot items didn't pass. Wow.

Consider the magnitude of this development:

- These three companies are not Wall Street banks where the general public is angry over banker bonuses.

- There were no organized campaigns against the pay packages at these three companies. This was a pure grass roots movement. With organized campaigns, imagine the level of votes.

- Only a few hundred companies have say-on-pay on their ballot this year; a small fraction of the 10,000 that will have it on their ballot next year when Congress makes it mandatory.

- If the Senate provision remains in the final bill changing NYSE Rule 452, say-on-pay will become a "nonroutine" agenda item - and broker nonvotes won't be available to be cast in favor of pay packages. This means it will become harder to obtain majority support for executive pay packages.

How to Prepare for Mandatory Say-on-Pay

We have just posted the agendas for the "7th Annual Executive Compensation Conference" and the "18th Annual NASPP Conference" to be held in Chicago on September 20-23 (the "7th Annual" is also available via video webcast).

Among the 40-plus panels, we have tailored a special track to help you prepare for mandatory say-on-pay including these panels:

- "Say-on-Pay: The Proxy Solicitors Speak"
- "Say-on-Pay: Successfully Communicating Externally and Internally"
- "The Proxy Advisors & Investors Speak: Their Hot Button Issues and Say-on-Pay"
- "The New Compensation Legislation: What to Do About Say-on-Pay and More"
- "Five Hot Button Compensation Fixes: In Light of Say-on-Pay and More"
- "This Coming Year's Grants: How to Deal with Last Year's Inadvertent Gains"
- "The Big Roundtable: Consultants, Directors and Top HR Heads"
- "Directors Speak Their Minds on Executive Compensation"

With Conference registrations going strong - on track to reach nearly 2000 attendees - you don't want to be caught unprepared as we head into next year. Last year's Conference sold out a month in advance - and that was without the reality of mandatory say-on-pay hanging over our heads.

Act Now: You have two choices - either attend the "18th Annual NASPP Conference" in Chicago (which includes the ability to attend the "7th Annual Executive Compensation Conference" - or attend the "7th Annual Executive Compensation Conference" by video webcast (which includes the "5th Annual Proxy Disclosure Conference").

Handicapping the House-Senate Conference Committee Reconciliation

Although we will not officially know the entire composition of the House-Senate Conference Committee that will reconcile the Senate and House versions of a financial reform bill for a few more weeks, we do know that Rep. Barney Frank will head the Committee (as noted in the NY Times' DealBook) and we do know the twelve Senators that will be included in that Committee (as noted in this Reuters article; this Reuters article identifies likely House members of the Committee even though they won't be officially named til week of June 7th). Congress - and President Obama - have a goal to wrap up a final bill by the 4th of July recess.

Even though the House's bill was weaker in the governance area, it is likely that Rep. Frank will push to keep the stronger Senate provisions in the final bill - with some tweaks as noted below - given that very few of the 400-plus proposed amendments to the Dodd bill dealt with governance issues. The real reconciliation debate will center on how financial institutions are regulated (ie. derivatives, "too big to fail", etc. - see Frank's comments in these areas yesterday).

Note that Barney Frank wants the Conference Committee negotiations televised.

Barney Frank Speaks: His View of Which Governance Provisions Will Survive Reconciliation

According to this article, Rep. Frank yesterday said that the specific language regarding the proxy access provision was up in the air. He also said that the Senate provision for a self-funded SEC may be tweaked to keep Congress involved somewhat - and he indicated that the House provision to exempt smaller companies from SOX's internal controls requirement may survive. According to the ISS Blog, Frank said that the Senate's majority vote requirement could well be stripped out in the final bill.

Below is a piece written by CongressDaily's Bill Swindell entitled "Frank Sees SEC Self-Funding Language As Ripe for Revision" that covers a number of topics:

A drive to allow the SEC to self-fund its budget by retaining fees it collects will likely have to be modified to allow for greater oversight by appropriators, House Financial Services Chairman Barney Frank said Tuesday. Frank said conference negotiators on legislation to revamp the nation's financial regulatory system will have to take into account the resistance of appropriators to SEC self-funding because they would lose their power to dictate its budget.

"The Appropriations Committee gets very upset about this. What I am hoping that gets worked out, and it will be with their participation, is a way to do some self-funding, which leaves the Appropriations Committee with a role," Frank said during a talk at the Compliance Week annual conference. The Senate bill contains the provision, allowing the agency's chairman to submit a budget to the SEC, but it would automatically get the amount requested. The language was sponsored by Sen. Charles Schumer, D-N.Y., who has argued the agency needs more resources to monitor wrongdoing in the aftermath of the Bernard Madoff and Allen Stanford fraud cases. The House bill set an increase in authorization levels.

The FY10 funding for the SEC was $1.1 billion, a $151 million increase over FY09. It has requested $1.26 billion for FY11. The agency collected $1.5 billion in fees in 2008. "The appropriators are going to push hard to maintain some role, and I think they will be successful," Frank said. Both bills give the SEC authority to issue rules that would allow shareholders to nominate board of director candidates through increased proxy access. "I think we are at least going to empower the SEC to do it. Beyond that, I'm not sure," Frank said.

The SEC last year proposed a rule to require companies in some cases to include in their proxy materials the nominations for directors by shareholders, but held off on finalizing the proposal. The U.S. Chamber of Commerce and other business groups question whether the agency has the right to issue rules over corporate governance standards that are enacted at the state level.

The Senate bill, however, includes additional Schumer provisions, such as requiring that directors in uncontested elections receive a majority of the votes cast, or they must tender their resignation. It also would require the SEC to issue rules to require public companies in their proxy statements to disclose why the same or different people serve as chairman and CEO. Frank said he did not know if the additional Schumer provisions could withstand negotiations, though they are a priority for the New Yorker.

Frank expressed some skepticism for a drive to separate the CEO and chairman duties. "In my experience, it hasn't made a lot of difference if you have looked at the performance, of separating the CEO from the chairman of the board. People say it's very important. But my guess is that if you threw up the list of major companies, and didn't tell people which was which, there wouldn't be [a] way to differentiate by any kind of results and analysis," he said.

The Senate appointed its conferees Tuesday, with a 7-5 ratio of Democrats to Republicans. Frank said the House will appoint its conferees the week of June 7, and he recommended a party-line ratio of eight to five. "We have an administration that feels strongly about this, and I expect House leadership will be engaged more than they were last year when health care took up much of their time and when they paid us the compliment of trusting us," Frank wrote to Democratic members of his panel.

"Their greater involvement will not imply a lack of trust, but simply the fact we are down to a very few important issues where the administration will be strongly expressing its view," he continued. "There is also the fact that the need to keep 60 votes in the Senate will be something of a constraint."

- Broc Romanek