April 9, 2019

CalPERS’ Say-on-Pay Policy: No More Second Chances?

Beginning next year, CalPERS will likely vote “against” compensation committee members in the same year that the compensation plan fails its pay-for-performance quantitative model. That’s according to recommendations in a recent staff report to the pension fund’s Investment Committee. Here’s more detail on the executive compensation initiative that’s underway:

– Move from a 3-year to a 5-year quantitative model (developed in collaboration with Equilar) to assess pay-for-performance, and vote “against” bottom quartile of universe

– Vote “against” Compensation Committee members in the same year the compensation plan fails the pay-for-performance quantitative model (effective 2020 proxy season)

– Additional qualitative components will continue to be used to assess compensation plans – e.g. insufficient disclosure of goals, lack of clawback policy

– For this year, CalPERS expects its say-on-pay voting outcomes to be similar to 2018, where CalPERS voted against 43% of pay programs

The report also summarizes the status of CalPERS’ voting & engagement efforts with Climate Action 100+, and its push for board quality, board diversity and majority voting in director elections. Here’s the staff’s recommended enhancements for overboarding and refreshment:

– Vote “against” non-executive directors who sit on more than 4 boards. The current practice is to vote “against” non-executive directors who sit on more than 5 boards

– Vote “against” Nominating/Governance Committee members if the Board has more than 1/3 of directors with greater than 12-year tenure AND less than 1/3 of directors were appointed in the last 6 years

More on “SEC Chair Talks About ‘Human Capital’ Disclosure”

In February, I summed up then-recent remarks from SEC Chair Jay Clayton on the topic of human capital disclosure by saying:

Companies should focus on providing material information that a reasonable investor needs to make informed investment & voting decisions – Jay is wary of mandating rigid disclosure standards or metrics.

In remarks a couple of weeks ago to the SEC Investor Advisory Committee, it was pretty clear that Chair Clayton’s views still stand. Here’s an excerpt:

Disclosure should focus on the material information that a reasonable investor needs to make informed investment and voting decisions; yet, applying this and the other principles I mentioned to human capital in the way businesses assess and disclose, and investors evaluate, for example, revenue or costs of goods sold, is not a simple task. That said, the historical approach of disclosing only the costs of compensation and benefits often is not enough to fully understand the value and impact of human capital on the performance and future prospects of an organization.

With that as context, my view is that to move our framework forward we should not attempt to impose rigid standards or metrics for human capital on all public companies. Rather, I think investors would be better served by understanding the lens through which each company looks at its human capital. In this regard, I ask: what questions do boards ask their management teams about human capital and what questions do investors—those who are making investment decisions—ask about human capital?

These remarks came in response to an IAC subcommittee recommending that the SEC adopt additional disclosure requirements on the topic of human capital management. Here’s an excerpt (also see this Cooley blog, which summarizes several HCM rulemaking petitions & initiatives, and this Willis Towers Watson memo about the IAC recommendations):

There are a wide range of potentially material HCM disclosures and ways to integrate that information into current reporting. At the most basic, issuers could be required to comply with a principles-based disclosure requirement asking them to detail their HCM policies and strategies for competitive advantage and comment on their progress in meeting their corporate objectives. This would essentially augment existing principles-based requirements with explicit discussions of HCM.

The fact that board and managers routinely rely on a number of similar metrics suggests that they can add value for investors, at least within a given sector, similar to the “view from management” approach to MD&A disclosure. We offer a few examples here of disclosure that – based on research findings in the studies cited above — could be considered. They could be considered in rule-making or as part of routine disclosure reviews by Commission staff. At a minimum, application of existing SEC guidance on non-GAAP accounting, including efforts to prevent issuers from providing inconsistent or otherwise misleading HCM disclosures over time, could be specifically applied to HCM metrics.

SEC Chair Gives Commission’s “MD&A” (And They’re Hiring)

In the category of “leading by example,” SEC Chair Jay Clayton structured his remarks at yesterday’s “SEC Speaks” Conference in the form of an MD&A. Here’s an excerpt that shows the importance of “human capital” at the SEC:

Employee pay and benefits was our largest expenditure in fiscal years 2018 and 2013. This is not surprising given that our human capital is by far our most important asset. Technology expenditures have increased in total dollars and as a percentage of the total budget over the last five years. This is a direct result of our commitment to maintaining and upgrading our information technology systems and enhancing the agency’s cybersecurity and risk management.

For fiscal year 2019, our current fiscal year, employee pay and benefits is expected to continue to account for a significant portion of our appropriation. As a result of a hiring freeze, Commission staffing is down more than 400 authorized positions compared to fiscal year 2016. To ensure we can continue to meet our mission objectives, the resources Congress provided the agency for fiscal year 2019 will allow us to lift the hiring freeze and add 100 much-needed positions. This would put our staffing level on par with where we were five years ago.

Liz Dunshee