November 20, 2008

Your Upcoming Proxy Disclosures – The EESA Effect

We have just posted the first issue of our quarterly “Proxy Disclosure Updates” Newsletter, which is free for all those that try a no-risk trial to Lynn, Romanek and Borges’ “The Executive Compensation Disclosure Treatise & Reporting Guide.” We are pleased to announce that Mark Borges has agreed to keep us all updated on the newest best practices and guidance through our new Disclosure Updates newsletter.

Subscribers to the Treatise will receive this quarterly Updates newsletter (as part of the Annual Service that accompanies the Treatise at no charge), in which Mark and I will keep you abreast of all the latest guidance that you need to know.

This first issue focuses on key new disclosures all companies will need to address in the wake of EESA and other regulatory responses to the crisis. Subscribers will receive the second issue of Updates in early January, with plenty of last-minute critical pointers for your proxy disclosures.

Act Now: To receive a non-blurred copy today, try a No-Risk Trial to the Annual Service today. Subscribers can access the full issue here.

Here Come the EESA-related Shareholder Proposals

Ted Allen of RiskMetrics Group recently noted on the RiskMetrics Risk & Governance Blog that shareholder proposals seeking compensation reforms are being submitted to financial institutions participating in the Treasury’s bailout program. The proponents are the Laborer’s International Union and the International Brotherhood of Teamsters. Ted’s blog indicates that the proponents expect that some institutions will seek to exclude the proposal on a “substantially implemented” argument, but the unions will fight any such efforts at the SEC.

Ted notes: “The proposal calls for directors to adopt the following reforms:

– Limit annual incentive compensation to an amount not exceeding one times the senior executive’s annual salary;

– Require that a majority of long-term compensation be awarded in the form of performance-vested equity instruments;

– Freeze new stock option awards to senior executives, unless the options are indexed to peer group performance so that relative, not absolute, future stock price improvements are rewarded;

– Require senior executives to hold for the full term of their employment at least 75 percent of the shares of stock obtained through equity awards;

– Prohibit accelerated vesting for all unvested equity awards held by senior executives;

– Limit all senior executive severance payments to an amount no greater than one times the executive’s annual salary; and

– Freeze the accrual of retirement benefits under any supplemental executive retirement plan (SERP) for senior executives.

The labor unions urge directors to adopt all of these reforms unless barred by existing executive employment agreements. ‘At this critically important time for the Company and our nation’s economy, the benefits afforded the Company from participation in the TARP justify these more demanding executive compensation reforms,’ the funds argue in their supporting statement.”

It’s Not Too Late

There is still time for all companies – and not just financial institutions – to take another look at their compensation programs in light of recent events. With a great deal of attention focused on the CD&A in next year’s proxy statement, now is the time to consider comparing existing compensation policies and practices with the emerging standards coming out of the EESA and the fallout from the financial crisis. While it is likely that many companies will already have appropriate policies and practices in place, it may be necessary now to revisit things like the company’s clawback policy or whether a hold-through-retirement policy should be adopted or amended.

Further, in light of the most recent economic events, including significant layoffs, cost-cutting and an increasing trend toward CEOs foregoing bonuses, it may be necessary to pay close attention to bonus decisions that have already been made – as well as upcoming bonus decisions – for senior executive officers. Justification for why bonuses are warranted (and the level of bonuses) in light of a company’s financial situation will likely be a principal focus of investors in upcoming CD&As.

All of these actions should be considered in the coming weeks, so that any changes can be implemented in time to be disclosed in the upcoming CD&A. You can find out more about these critical considerations in the inaugural issue of “Proxy Disclosure Updates” Newsletter Fall 2008.

– Dave Lynn