With the official pushing of the SEC’s expected rulemaking timetable into the first half of this year from late ’11, many were resting easy that there would not be any new SEC executive pay positions to worry about this proxy season. Think again as this article from yesterday’s WSJ was an eye-opener, noting that Verizon has agreed to make additional pay disclosures in the Summary Compensation Table of its next proxy statement after a total of 11 Corp Fin comment letters and responses – dated between June and November – were recently posted on the SEC’s site (you can see these by looking at the “Upload” and “Corresp” documents in this Verizon filing stream, or look at these SEC comments and Verizon responses).
Here’s how Cleary Gottlieb characterized the news of this WSJ article:
An article on page B1 of today’s Wall Street Journal, entitled “Verizon Details $20 Million More in Pay,” discusses an interpretive position taken by the staff at the SEC, in correspondence with Verizon Communications Inc, regarding the reporting of performance-based equity awards under plans that reserve significant discretion for the compensation committee to adjust payouts based on non-objective criteria, in the Summary Compensation Table of a proxy statement. The position relates to a current issue that may affect the staff’s view of proper reporting of 2011 compensation in some of your 2012 proxies. The specific position taken by the staff does not appear to have been previously publicly reported. We are sending this quick note to alert you to the interpretive issue. Applying the staff’s position to a particular plan may require judgment of the specific plan terms, as well as accounting expertise.
Here is the WSJ article repeated below:
Verizon Communications Inc. has agreed to increase by $20 million the total disclosed pay for former Chief Executive Ivan Seidenberg, but the recently retired executive won’t be getting any more money. Verizon will recalculate Mr. Seidenberg’s compensation for 2009 and 2010 after the Securities and Exchange Commission said the company hadn’t properly disclosed discretionary grants of restricted stock given to Mr. Seidenberg in 2007 and 2008.
Verizon maintains its disclosures were proper, but agreed to make the changes in its forthcoming proxy statement to resolve the SEC’s concerns. “The SEC did not suggest that anything was improper in past disclosures, but they wanted a new method of disclosure going forward,” said Verizon spokesman Peter Thonis in a statement. “We have simply complied with a reasonable request, given that all of the information we provided was accurate and transparent.” The dispute relates only to Verizon’s disclosure of Mr. Seidenberg’s pay, and won’t change his actual compensation.
Mr. Seidenberg, who stepped down after 11 years as Verizon’s CEO on July 31 and as chairman on Dec. 31, was long one of the nation’s best-paid CEOs. He earned more than $130 million total from 2006 through 2010, according to Standard & Poor’s Capital IQ unit. The total includes salary, bonuses, and the value of restricted stock and stock options at the time they vested, including the $20 million at issue with the SEC. His pay was also a flashpoint for unions and Verizon critics. In 2006, the nation’s largest labor-union group, AFL-CIO, sought to oust directors on Verizon’s compensation committee, calling Verizon “the poster child for pay for pulse.” Last summer, amid a labor dispute, union representatives organized a candlelit “funeral for the middle class” outside Mr. Seidenberg’s home.
The clash highlights tougher SEC scrutiny of regulatory filings by big companies, as well as the challenge of valuing different flavors of executive pay. “It is becoming increasingly common” for the SEC to question details in quarterly and annual reports about executive compensation, corporate taxes and non-standard accounting measures, says John Olson, a partner at Gibson, Dunn & Crutcher in Washington, D.C. Still, pay consultants say it’s unusual for a company to change an already-reported compensation total.
The dispute between Verizon and the SEC has been brewing since June, though it only recently became public, when the 11 letters exchanged between the company and the agency were posted on the SEC’s website. SEC rules call for such letters to be posted 45 days after an issue is resolved, which occurred in early November in Verizon’s case.
At issue was how the company should disclose grants of restricted stock given to Mr. Seidenberg in 2007 and 2008. The grants were tied to the performance of Verizon’s stock over three-year periods, as well as the board’s assessment of Mr. Seidenberg’s performance on several strategic initiatives, such as revenue growth and subscriptions to Verizon’s fiber-optic video service.
Verizon reported the grants in its proxy statements for 2007 and 2008, as SEC rules require. At the time, it valued the grants based on the performance “target,” though it specified that Mr. Seidenberg could receive more shares if his, and Verizon’s performance, exceeded the targets. In 2008, the company said that the grant if Verizon were to meet its targets through the next three years would be 355,210 shares of Verizon stock, then valued at $13.1 million. After the three-year period ended in 2010, Verizon directors awarded Mr. Seidenberg 838,457 shares, then valued at $30 million.
Verizon’s stock performance accounted for some of the increase, but SEC staffers said Verizon should have included the discretionary portion of the award, roughly $13.8 million, in the “summary compensation table” of the proxy statement filed last March. That’s the convenient headline number often cited in media reports and by some investors. The summary compensation table reported Mr. Seidenberg’s 2010 compensation as $18.2 million. Including the discretionary grant would have increased the total 76%, to $32 million. For 2009, the SEC wanted Verizon to boost Mr. Seidenberg’s reported total compensation by $6.5 million, to $24 million. Verizon’s calculation method “has had and, may in the future, have the effect of under reporting compensation” in the summary table, the SEC said in an Aug. 5 letter. An SEC spokesman didn’t respond to requests for comment.
Mark Borges, a principal at Compensia, a management consulting firm, says there’s room for interpretation in the SEC’s rules for reporting performance-based awards, because company plans differ. But he says the SEC increasingly has been pushing companies for more disclosure. “The staff really wants companies, particularly when it comes to CEO compensation, to be as forthcoming as possible,” he says. Verizon’s Mr. Thonis says the company had disclosed the range of values for the grant in 2008, the amount ultimately awarded, and highlighted the figures in its proxy statement and in letters sent to some big shareholders.
One Cincinnati Bell Say-on-Pay Case Settled, Second in Limbo
Cincinnati Bell has agreed to settle one of the say-on-pay law suits which is pending against it in the Hamilton County Court of Common Pleas. The lawsuit arises out of the shareholder’s “say on pay” vote taken at Cincinnati Bell’s May 2011 annual meeting. The Dodd-Frank Wall Street Reform and Consumer Protection Act signed into law in July, 2010, requires that all public companies solicit an advisory shareholder vote on executive compensation. We previously reported on a related case here and here which survived a motion to dismiss.
According to Phillip R. Cox, Chairman of Cincinnati Bell’s Board of Directors, “The proposed settlement includes features which will clarify the Company’s executive compensation policies and which will more clearly communicate these policies to our shareholders. Importantly, the changes represented by this agreement should better assist our shareholders’ understanding of how these policies are applied to covered employees.”
One of Plaintiffs’ Counsel, Ed Korsinsky, adds that: “The longer-term and perhaps most important aspect of the settlement is that it provides a binding agreement that executive compensation decisions remain consistent with the Company’s pay for performance philosophy and that the Board of Directors will continue to clearly articulate the Company’s philosophy to its shareholders.” As part of this settlement, Cincinnati Bell will, among other things, reaffirm its pay for performance practice and provide for an annual discussion of its philosophy related to executive compensation.
Many may conclude the failed say-on-pay law suit which is settled for disclosure relief will become a shake down for an attorney fee award, much like numerous cases filed to block an acquisition. It will be interesting to see what kind of fee award the court grants for this type of “success.” That may drive how many of these litigations are filed in the future.
But the case settled is a different one than the case which survived a motion to dismiss. The effect of the settlement on that case, pending in the United States District Court for the Southern District of the Western Ohio Division, is unclear. However, that case has taken some unusual twists and turns.
After the court denied the defendants’ motion to dismiss, the defendants learned that diversity jurisdiction did not exist. Plaintiffs failed to identify itself as a citizen of Georgia and one of Cincinnati Bell’s defendant directors was a citizen of Georgia. Plaintiffs attempted to correct the subject matter jurisdiction by amending the complaint to drop the director which resides in Georgia and voluntary dismissal of the director. The court granted defendants motion to strike the amended complaint and voluntary dismissal as procedurally improper. Apparently the plaintiffs can still a motion to amend the complaint following the proper procedures.
But there is another twist to the case that can only make the defense bar smile. The court sua sponte issued an order to the plaintiffs attorney to show cause why the attorneys should not be sanctioned under Rule 11 for failure to conduct a reasonable inquiry into the factual contentions as to the alleged diversity. The court ultimately concluded it was an honest mistake but found the attorneys “incomplete answer to the Court’s direct question of him at oral hearing represented misbehavior of an officer of the Court in his official transactions.” As a result, the court revoked the attorneys pro hac vice admission in the case.
More on “The Mentor Blog”
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– Views of Former SEC Chairs on Auditor Rotation
– Survey: Boards Vulnerable to Hacking and Information Theft
– Bob Monks: What Occupy Wall Street Means for Corporate Governance
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– A Corporate Governance Framework for Emerging Markets
– Broc Romanek