Recently, ISS released its “Preliminary 2011 U.S. Postseason Report,” whose key findings include:
– During the first year of advisory votes on executive compensation under Dodd-Frank, investors overwhelmingly endorsed companies’ pay programs, providing 91.2% support on average.
– Shareholders voted down management “say on pay” proposals at 37 Russell 3000 companies, or just 1.6% of the total that reported vote results. Most of the failed votes apparently were driven by pay-for-performance concerns.
– “Say on pay” votes spurred greater engagement by companies and prompted some firms to make late changes to their pay practices to win support.
– Investors overwhelmingly supported an annual frequency for future pay votes, even though many companies recommended a triennial frequency.
– Among governance proposals, the biggest story this year was the greater support for board declassification. Shareholder resolutions on this topic averaged 73.5% support, up more than 12% from 2010, and won majority support at 22 large-cap firms.
– Shareholder resolutions on environmental and social issues reached a new high of 20.6% average support. Five proposals received a majority of votes cast, a new record.
– The arrival of “say on pay” contributed to a significant decline in opposition to directors. As of June 30, just 43 directors at Russell 3000 firms had failed to win majority support, down from 87 during the same period in 2010. Poor meeting attendance, the failure to put a poison pill to a shareholder vote, and the failure to implement majority-supported investor proposals were among the reasons that contributed to investor dissent.
Proxy Access: Will Shareholders Submit Shareholder Proposals in 2012?
In the wake of the proxy access court decision, Ted Allen of ISS blogs:
The July 22 federal appeals court ruling that struck down the SEC’s marketwide proxy access rule, Rule 14a-11, did not affect the SEC’s amendments to Rule 14a-8 that would permit shareholders to resume filing proxy access bylaw proposals. Those amendments were placed on hold by the SEC last October after two business groups brought a legal challenge to Rule 14a-11. At that time, the SEC said the 14a-8 changes were “intertwined” with the marketwide access rule.
If the SEC lifts its stay on its Rule 14a-8 amendments, shareholders will be able to submit access bylaw proposals in 2012. Investors would not face any additional ownership hurdles other than the requirements that already apply to proponents–i.e., owning at least $2,000 in company stock for more than a year.
Several investors said last week they are looking into submitting access proposals next season. Investors could file binding or non-binding resolutions, but some states require higher ownership thresholds for binding bylaw proposals. It appears likely that proponents would seek holding periods and ownership thresholds that are more permissive than Rule 14a-11’s requirements of a 3 percent stake for at least three years. Labor funds generally prefer a two-year period, and some activists have argued for a lower threshold (such as 1%) at large-cap firms.
So far, it appears that the activist investor community is undecided about whether to file access proposals in 2012 and how many companies to target. There is a concern that the filing of dozens of access resolutions next season might bolster corporate arguments that the SEC should refrain from adopting a new marketwide access rule and just allow private ordering to work. There also is a concern that low support levels for poorly targeted proposals would be cited by corporate critics as evidence that most shareholders don’t want access. Conversely, some activists argue that strong shareholder votes for access in 2012 could help prod the resource-stretched SEC to prepare a revised access rule. If activists do file access proposals next season, it appears that they may focus on a few high-profile companies with well-known governance issues.
Back in 2007, two well-targeted shareholder access proposals did attract broad investor support, winning at least 43 percent approval at UnitedHealth Group and Hewlett-Packard. There also was majority approval for access at Cryo-Cell International, a small-cap firm. However, the SEC, which then had a Republican majority, approved a rule in late 2007 to stop investors from filing access resolutions.
If shareholders bring access resolutions in 2012, no-action challenges by companies would be inevitable. Some companies may seek to exclude investor access proposals (as firms have done in response to special meeting requests) by offering their own management resolutions with greater hurdles to access – such as a 10% (or higher) ownership threshold.
Transcript: “Top IP Pitfalls in Deals: How to Avoid Them”
We have posted the transcript for our recent DealLawyers.com webcast: “Top IP Pitfalls in Deals: How to Avoid Them.”
– Broc Romanek
As it has done before, the SEC has adjusted its tentative rulemaking calendar to push back some of the expected proposal and adoption dates for the remaining executive compensation and corporate governance items on its agenda. Thanks to Mike Melbinger, who blogged this information yesterday on CompensationStandards.com (see Davis Polk’s blog for more analysis):
On Friday, the SEC modified its schedule for adopting rules relating to the Dodd-Frank Act, including the key provisions applicable to executive compensation, as follows:
August – December 2011 (planned)
– §951: Adopt rules regarding disclosure by institutional investment managers of votes on executive compensation
– §952: Adopt exchange listing standards regarding compensation committee independence and factors affecting compensation adviser independence; adopt disclosure rules regarding compensation consultant conflicts
January – June 2012 (planned)
– §953 and 955: Adopt rules regarding disclosure of pay-for-performance, pay ratios, and hedging by employees and directors
– §954: Adopt rules regarding recovery of executive compensation
– §956: Adopt rules (jointly with others) regarding disclosure of, and prohibitions of certain executive compensation structures and arrangements
July – December 2012 (planned)
– §952: Report to Congress on study and review of the use of compensation consultants and the effects of such use
Dates still to be determined
– §957: Issue rules defining “other significant matters” for purposes of exchange standards regarding broker voting of uninstructed shares
Thus, it seems unlikely that all five of the clawback, pay-for-performance, CEO pay ratio, incentive compensation rules for large financial institutions, and hedging by employees and directors provisions will be effective for next year’s proxy season. However, if they meet this schedule, one or two of the provisions will be effective for proxies filed after January (as with the say on pay rules, published in January 2011). Fortunately, the SEC will propose rules first (and already has for a couple of the provisions), so we should know well in advance which provisions will be final for the 2012 proxy season.
1st Annual Reports: CIGFO and FSOC
As noted by Vanessa Schoenthaler in her “100 F Street Blog,” Section 989E of Dodd-Frank created the Council of Inspectors General on Financial Oversight (CIGFO). Appropriately named, CIGFO is made up of the Inspector Generals of nine federal agencies-the Fed, CFTC, HUD, Treasury, FDIC, FHFA, NCUA, SEC and SIGTARP- involved in financial oversight. Last week, CIGFO released its 1st annual report.
In addition, as noted in the Dodd-Frank.com Blog, the Financial Stability Oversight Council, or FSOC, issued its 1st annual report last week too. The report fulfills the Congressional mandate to report on the activities of the Council, describe significant financial market and regulatory developments, analyze potential emerging threats, and make certain recommendations.
Lehman Case Hints at Need to Stiffen Audit Rules
Last week, Judge Kaplan of the Federal District Court for the Southern District Court of New York delivered his decision – In re Lehman Brothers Secs. and ERISA Litig. (SDNY; 7/27/11) – involving Lehman, its executives, its investment bankers and auditors. As noted in this NY Times article, Judge Kaplan’s conclusion was “the company misled investors and its officers and directors may be held liable. But the company’s auditor seems likely to escape any responsibility for an audit that wrongly concluded the company’s financial statements were completely proper.” As a result, some experts have opined that there could be shortcomings in a number of accounting standards including those on disclosures of risk, SOP 94-6, SFAS 107 and SFAS 140.
– Broc Romanek
Maybe the debt ceiling standoff is making everyone act a little strange in this town, as noted in this observation from Lynn Turner about the latest from Congress:
This newly proposed legislation – the “SEC Modernization Act of 2011” – raises serious questions in light of the fact members of Congress have proven themselves incapable of any resemblance of managing of the debt issues and their own spending bills. It also reflects badly on Congress which has seriously failed to carry out its own oversight functions and in light of those shortcomings, is “piling on” the SEC in a manner which is likely to increase its costs of operations significantly – and refocus significant attention away from its core mission of protecting over 100 million investors.
In this legislation, the sponsors – who apparently fail to have a basic understanding of the SEC – have nonetheless decided it is they who are best to:
1. Decide the structure for the SEC, rather than leaving it up to the CEO they nominate as Chair of the SEC.
2. Take away the revolving discretionary fund that the SEC has used to direct spending to top priorities and instead direct it should only be spent on information technology, notwithstanding the House is now proposing also to “starve” the SEC of sufficient funding for carrying out its duties.
Some of the sponsors are the same very people who have severely criticized the SEC for its failure to act on tips on the Madoff matter, yet they are also failing to give the SEC the money to do so, cutting off sufficient funding to staff the new office of whistleblowers. So they want to have their cake and eat it to, criticizing the SEC while at the same time, legislating that it cannot possible do what it is being criticized for not doing.
This legislation is duplicative of existing legislation that already requires the SEC to consider cost benefits. And as noted in the recent proxy access decisions of the DC district court, when the SEC has failed to do so to the satisfaction of the court, it is held accountable. Yet at the same time, the GAO has issued a number of reports (see this example) which highlight how the SEC is doing its job and doing it well. Given the vast magnitude of rule making that has been thrust upon the SEC, Chair Schapiro has done a tremendous job working through it, including seeking public comment from all the proposed rules.
When the Congress cannot even figure out how to deal with deficits and spending, one would think they would not have time for such unnecessary and duplicative legislation, that can only serve to impede the protections investors need, as highlighted by the lack of regulation directing contributing to the worst financial crisis in 75 years, which cost, and continues to cost, tens of millions of Americans their jobs. It is very clear the sponsors of this legislation want to return to unregulated markets which created this economic mess in the first place, putting their own jobs and campaign financing necessary to keep their jobs, well ahead of the interests of those on Main Street.
Piling On: Trio of House Reps Ask SEC for Report on Proxy Access Workload
In this letter to the SEC sent on Thursday, a trio of House Representatives seek information about how many Staff hours were spent on proxy access rulemaking over the past decade, including a dollar amount associated with that labor (and an estimate of these items for litigating over the rule) including any amounts spent on outside counsel. To me, it’s funny how the letter mentions that the origins of the rulemaking were politically motivated – when it sure seems that this request after the SEC lost the Business Roundtable/Chamber case is…
Sidenote: The FEI has made this silly music video entitled “Hey There Bob Pozen,” just in time for the 3rd anniversary of the ‘Pozen Committee” report.
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– Broc Romanek