September 26, 2016

Life as a Corporate Lawyer: Brink Dickerson

I had a lot of fun taping this 36-minute podcast with Brink Dickerson of Troutman Sanders. I’m still chuckling over Brink’s response to my query about “least favorite tasks” (starting at the 23:45 mark). I highly encourage you to listen to these podcasts when you take a walk, commute to work, etc. Brink tackles:

1. Where did you grow up?
2. I understand that you may be the only securities lawyer without a customary qualification?
3. How did you end up going to law school?
4. Although you are in Atlanta now, you started practicing in Chicago. How did that come about?
5. What early experiences shaped how you practice law?
6. Were there any particular experiences that impacted how your practice evolved?
7. I understand that you considered joining the SEC at one point. Tell me about that.
8. How do you prepare for a speaking gig?
9. What types of work tasks are your favorite to work on?
10. Least favorite?

This podcast is also posted as part of my “Big Legal Minds” podcast series. Remember that these podcasts are also available on iTunes or Google Play (use the “My Podcasts” app on your iPhone and search for “Big Legal Minds”; you can subscribe to the feed so that any new podcast automatically downloads…

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Rebuttal: “How the SEC Enabled the Gross Under-Reporting of CEO Pay”

Here’s a rebuttal from a member to the blog that I excerpted from on Friday: About this new study about how to calculate “total compensation” for purposes of the Summary Compensation Table, not only are the authors misstating what goes into the SCT – but that even is of little consequence to their analysis. The grant date value of awards issued during the year (not vested) are reported in the Summary Compensation Table. What these these authors are saying is realized compensation (W-2 pay) is far more valuable than SCT pay:

– For example, they reference data from 2014, which indicated S&P 500 company CEOs’ SCT pay averaged $19.3 million, while average realized compensation was $34.3 million.

– The authors conclude that pay is seriously underreported – and the SEC is aiding and abetting this understatement.

The problem with the paper’s analysis is that realized equity gains are based on awards granted several years ago – and comparing gains realized in the current year to awards granted during the year is largely irrelevant & very misleading (to quote Mark Twain: “there are lies, damn lies and then there are statistics”):

– A careful statistician would have examined the grant date value of the specific awards from prior years and compared it to the actual value of the award; in that way, they would be truly matching grant date and realized values of the same award.

– A likely distortion in their analysis is gains realized in the current year might include several years of prior awards (for example 2-3 years of stock options exercised in a single year), thus one year’s pay reported in the SCT is being compared to multiple years’ awards reported in the gain realized table.

– Stock price performance could have soared since the awards were granted, thus realized values are far more valuable than anticipated ( as are shareholders’ gains); why do the authors believe this is a bad outcome?

– Executives who hold onto stock options until expiration (rather than exercise at vest) are likely to report the largest realized gains; arguably, the gains realized after vesting are investment rather than compensation decisions, and should not be included in the authors’ analysis of grant date versus realized pay.

The SEC’s proposing release on pay-for-performance includes a table that attempts to address the lack of disclosure of realized pay, as equity awards will be reported as they vest – but this wouldn’t completely address the authors’ concerns as they are using the value of options when exercised, not when vested.

UK: Theresa May’s Upcoming Corporate Governance Consultation

As I blogged a few months ago, in the wake of Brexit, the new UK Prime Minister Theresa May is seeking a number of governance reforms – she recently promised that a corporate governance consultation would take place within the next few months. The Prime Minister has promised bold action including “cracking down on excessive corporate pay” and giving employees and customers representation on boards.

Meanwhile, the UK Parliament Business, Innovation & Skills Committee launched its own governance consultation last week. This is what Marty Lipton wrote about that:

In announcing the inquiry, the chairman of the committee stated that principle purposes were to determine whether under existing law, corporate governance encourages companies to achieve long-term prosperity and assures fair treatment of employees. That the inquiry is focused on a stakeholder approach to corporate governance is made clear by the first three questions it poses:

– Is company law sufficiently clear on the roles of directors and non-executive directors, and are those duties the right ones? If not, how should it be amended?
– Is the duty to promote the long-term success of the company clear and enforceable?
– How are the interests of shareholders, current and former employees best balanced?

In addition to combatting short-termism, promoting long-term investment and protecting employees, the inquiry is focusing on executive compensation and its relation to companies long-term performance. Lastly, the inquiry poses the following questions about the composition of boards:

– How should greater diversity of board membership be achieved? What should diversity include, e.g. gender, ethnicity, age sexuality, disability, experience, socio-economic background?
– Should there be worker representation on boards and/or remuneration committees? If so, what form should this take?

While the outcome of the inquiry is not certain, it is clear that corporate governance in the U.K., in the U.S., and in the EU has again become a serious political issue. If companies and investors do not find a mutual path to governance that promotes long-term investment and accommodates employee, customer, supplier and community interests, legislation will result. That legislation may not be to the liking of either companies or investors.

“Consultations” are the UK’s rulemaking process – and they typically involve multiple bodies to accomplish the feat. It’s confusing. For an example, look at this blog leading up to the UK adopting binding say-on-pay where I note dual consultation processes in the House of Commons/House of Lords and the Financial Reporting Council (which looks after the “UK Corporate Governance Code”)…

Broc Romanek