Actionable Information

Performance Secrets of Effective Boards







Tuesday, October 19, 2010

Director Highlights of Yesterday's SEC Proposed Say on Pay Rule

Yesterday the SEC proposed rules to implement the say on pay provisions of Dodd-Frank. Here are the key points for directors.
  1. Director compensation is not subject to stockholder approval under Dodd-Frank.
  2. There must be a shareholder advisory say on pay vote at the 2011 annual meeting (or other meeting, whichever is first, held after January 21) and no less frequently than once every three years thereafter. The non-binding shareholder vote is required to cover the compensation of the named executive officers as disclosed under Item 402 of Reg SK, which means the tables, the narrative and the CD&A -- including the golden parachute compensation. And, of course, the CD&A must now discuss the impact of any shareholder votes on the comp committee's subsequent compensation determinations.
  3. At least once every 6 years, starting in 2011, stockholders must be given a separate non-binding (under the proposed rules) vote on how frequently to hold the say on pay votes. With limited exceptions, a non-binding frequency vote presented to the stockholders must be in a form that allows them to select from 4 choices: ONE, TWO or THREE years or ABSTAIN. This is NEW. Most proxy cards are structured FOR, AGAINST or ABSTAIN, and some service providers may not be able to reprogram their systems for a 4 choice vote (In that case, the SEC has provided a limited exception). Of course, management can make a recommendation regarding that frequency and is not bound by the vote, in any event. All other things being equal, we think an annual say on pay vote is preferable, even if the shareholders elect a different cycle. An annual vote makes it a routine matter and gives more immediate feedback to the Board and Management rather than delaying the conversation, building shareholder frustration and making the vote a major crisis when it finally arrives.
  4. The SEC has proposed a new table and disclosure regime for proxy statements on mergers, sales, asset sales, other changes in control etc. ( "CICc") and the related say on pay votes. The CICs format includes, among other things, a table breaking out in columnar form the golden parachute components for each NEO: cash, equity, pension/nqdc, perquisites/benefits, tax reimbursement, other and total. For their routine proxy statements companies can (but are not required to) choose to use the CICs format, in which event that disclosure and shareholder advisory vote will count when it comes time for a deal. If companies do not use the CICs format when seeking the regular say on pay vote, then another separate golden parachute vote is required in that Change in Control proxy statement. As expected, even if the CICs regime is used for routine meetings, additional disclosure and a separate vote would be required if the information in the table changes. The practice point, however, is that activist shareholders are expected to press companies (and send in comments to the SEC during the comment period) to utilize the more extensive tabular disclosure mandated by the CICs regime in its annual disclosure even where a merger or other change in control is not involved.
  5. Shareholder say on pay proposals may be excluded from the proxy statement to the extent they duplicate the votes presented to the meeting under Dodd-Frank.
  6. Broker discretionary voting of uninstructed shares, of course, is not permitted on these say on pay votes.
  7. These are just the highlights of most interest to directors. There are provisions for smaller companies and TARP companies and other changes and forms affected by the proposed rule. The rule can change. Comments are due by November 18, 2010, some time after which we should have a final rule.

Tuesday, October 5, 2010

Board Impact of the SEC's Proxy Access Delay

On October 4, the SEC suspended its rules permitting certain shareholders to nominate directors on issuer proxy statements (proxy access), pending the outcome of a lawsuit by The Business Roundtable and Chamber of Commerce. Most pundits do not expect these nomination rules to be effective for 2011. This suspension, however, is not a Mulligan, a "do over" or any cause for celebration or relief. The other provisions of Dodd-Frank are still in place, and the importance of doing the work to deal with them (outlined in my September 8 blog below -- "Director Elections in 2011: Yours to Lose" and on my website here) remains undiminished. For example, SAY ON PAY is still in place for 2011. The six principles (TSR, OR/IR, BICS, KISS, CAT and C2C) are just as important to follow for Say on Pay as they are for shareholder nominations of director candidates. [Note, I have updated the July 27 blog "Director's Checklist of Corporate Governance Changes in Dodd Frank" below.] The postponement of this SEC rule that seemed to bother directors the most should be seen as an opportunity to have one more year to improve or fine tune shareholder relations -- especially with the feedback of the extent of your 2011 shareholder say on pay support -- before the nomination rule becomes effective.