In the aftermath of the first proxy season of shareholder “say-on-pay” votes under the Dodd-Frank Act, shareholders have filed derivative suits against the boards of several of the companies failing to win majority approval. Many observers have been quick to dismiss the plaintiffs’ likelihood of success in these cases, given the well-established principle that decisions on compensation lie within the board’s business judgment. However, while a Georgia court, in the Beazer Homes USA litigation, relied on the business judgment rule to dismiss a say-on-pay shareholder derivative case, at roughly the same time a federal judge in Ohio reached the opposite conclusion, refusing to dismiss a say-on-pay suit involving Cincinnati Bell. [1] In light of these unfolding and conflicting developments, how should directors and compensation committees assess and respond to the risk of suit?

In our view, boards would be ill advised to take too much comfort in the belief that the business judgment rule will always be held to immunize compensation decisions from shareholder attack in the face of a substantial negative say-on-pay vote. The time might be coming for courts to start applying a stricter standard of review in these cases. Analysis of the rationale underlying the courts’ traditional deference to boards on compensation matters reveals that the unique circumstances presented by say-on-pay may lead to a different outcome.

…continue reading: Say-on-Pay Lawsuits – Is This Time Different?

Hewlett-Packard’s announcement that it will no longer accelerate the vesting of equity grants for departing executives is the latest victory in a new push by active investors to limit such generous exit packages (a Wall Street Journal story about the announcement is available here).

The drive began in 2010 when Amalgamated Bank’s LongView Funds filed shareholder proposals at several companies urging them to back away from the long-standing practice of accelerating awards of restricted stock or stock options when an executive departs after a change in control or even without such a change. (Pro rata vesting would be allowed under these proposals.)

The LongView Funds argued that these equity awards were intended to be performance-based, and multi-million dollar awards that disregard vesting requirements have nothing to do with performance. The value of accelerated awards can often dwarf the amount paid in terms of the “base pay plus bonus” components of a severance agreement. Eight-figure payouts are not uncommon.

…continue reading: Accelerated Equity Awards for Departing Executives Lose Favor

On December 20, 2011, Vice Chancellor Parsons of the Delaware Court of Chancery issued an opinion and entered a temporary restraining order enjoining ChinaCast Education Corporation from holding its annual meeting, scheduled for later that day, until January 10, 2012. See Sherwood, et al. v. Chan Tze Ngon, et al., No. 7106-VCP (Delaware Court of Chancery). The Court found that ChinaCast’s actions, having removed incumbent director Ned Sherwood from its slate of nominees less than two weeks before the scheduled annual meeting, did not “comport with the ‘scrupulous fairness’ required of corporate elections.” The opinion serves as an important reminder for companies that while Delaware law provides significant latitude to create processes intended to facilitate the orderly conduct of annual stockholder meetings and election contests, actions that improperly infringe upon the shareholder franchise will be viewed skeptically by Delaware courts.

…continue reading: Delaware Court Intervenes to Protect Shareholder Voting Rights

Concerns about the responsible use of corporate power remain high in the wake of the financial crisis. Although these concerns have been focused primarily on the financial sector, there is spillover to corporations in every industry. Tough economic conditions, slow job growth, political dysfunction and general uncertainties about the future continue to undermine investor confidence and fuel public distrust (with Occupy Wall Street an example). This in turn intensifies the scrutiny of corporate actions and board decisions, and may skew the regulatory environment in which companies compete.

All corporate governance participants – boards, executive officers, shareholders, proxy advisors, regulators and politicians – have both an interest and a role to play in rebuilding trust in the corporations that are the engine of our economy. In our annual reflection, we offer thoughts on how, without the need for regulatory intervention, boards and shareholders can seize the opportunity to rebuild trust and, by doing so, help resolve some of the tensions that are stalling our economic recovery.

…continue reading: Rebuilding Trust: The Corporate Governance Opportunity for 2012

Companies looking ahead to the 2012 proxy season should be aware of the recently updated corporate governance policies of Institutional Shareholder Services (ISS). [1] While maintaining its formal policy of issuing “case-by-case” evaluations in many areas, ISS has issued numerous revisions of prior policies as well as new policies on certain types of shareholder proposals that had not been previously addressed. The key areas of interest for companies preparing for 2012 are likely to be proxy access, say-on-pay, pay-for-performance, and risk oversight.

Proxy Access

Shareholder proposals on proxy access are likely to be a topic of importance next year due to the Securities and Exchange Commission’s (SEC) amendment to Rule 14a-8, effective September 20, 2011. The rule now provides that companies may not exclude proposals for proxy access procedures from their proxy statements on the basis that they relate to the nomination or election of directors. Proponents must meet the current eligibility requirements of Rule 14a-8, which require that the shareholder have owned at least the lesser of $2,000 in market value, or 1 percent, of company shares for at least one year. (Companies may, of course, ask for noaction relief from the SEC to exclude such proposals on other grounds. [2])

…continue reading: The ISS 2012 Policy Updates: Another View of the Cathedral

As we prepare to bring down the curtain on 2011 and look ahead to a new year and proxy voting season, the fallout from the governance scandals, risk control and business failures continue to rain down upon executives, boards and shareholders providing lessons for each.

Although the final word on the individual problems spotlighted at the above mentioned companies has yet to be stated, the lessons and the actions they will result in are fairly clear. Without casting judgments on the companies and individuals involved we’ll comment, in this week’s and our final Byrd Watch for 2011, on what we believe the key lessons are and how market participants (investors, senior executives and corporate directors among them) may react going forward.

…continue reading: Proxy Access Heats Up for 2012

Staggered boards, a structure under which the board is divided into classes, with one class of directors standing for re-election annually, are perhaps the most consequential takeover defense. They also are a favorite target of activist shareholders and governance experts. The effect of collective pressure to move to annual elections for all directors has been dramatic: the proportion of public companies with staggered boards has fallen from 60 percent in 2002 to less than half in 2011 (and less than one-third among S&P 500 companies). Non-binding shareholder proposals have been an important catalyst in the move away from staggered boards. [1] More recently, activist hedge funds have emerged as an alternate and better-financed vehicle to channel shareholder displeasure. This report documents the extent to which activism of any type continues to push corporations to implement annual director elections and compares the influence different forms of activism have had on this governance practice.

…continue reading: Activism and the Move toward Annual Director Elections

Escalating CEO pay packages in the last few decades have stirred much debate, culminating in mandated advisory shareholder votes on executive compensation under the Dodd-Frank Act of 2010. The first year of widespread “say-on-pay” votes in the U.S. suggests that investors are taking a conservative approach – about 40 proposals at Russell 3000 index companies received less than majority support from votes cast for and against, and fewer than 200 received support from less than 70 percent. The advent of say on pay in the U.S. has highlighted pay-for-performance as the most significant factor driving investors’ voting decisions on the issue, however.

Doubts about the strength of pay and performance alignment arise from perceptions of “agency problem” conflicts of interest, weak board oversight and aggressive pay benchmarking; from demonstrated abuses such as options backdating; and most recently, from concern that pay practices at some firms likely contributed to the financial meltdown that triggered the latest economic and market malaise.  Further, while executive pay has increased at a fairly rapid pace since the 1980s, investor portfolios have experienced multiple market swings – booms and busts that often appear disconnected from individual executives’ impact — adding to skepticism about long-term pay and performance alignment.

…continue reading: ISS’ New Pay-for-Performance Evaluation Methodology

The past decade has been a whirlwind for corporate governance in America. Since 2001, we have witnessed a myriad of scandals, epic corporate failures and legislative and regulatory attempts to prevent more of the same. Early on it was the failure of firms such as Enron, WorldCom and Global Crossing. More recently, the failure of financial stalwarts like Lehman Brothers, Bear Stearns and AIG nearly pushed our markets to the brink of collapse. These failures have ushered in a new era of shareholder activism and corporate governance initiatives, including extensive legislative reform efforts and new rules by the Securities and Exchange Commission (SEC), the New York Stock Exchange (NYSE) and the Financial Industry Regulatory Authority (FINRA).

While many of the proxy-related reforms have focused on enhanced disclosure requirements (the SEC has approved expansive new rules around director experience and qualifications, board leadership structure, board risk oversight responsibilities and Compensation Disclosure and Analysis (CD&A) disclosure), new regulations have been put in place that fundamentally shift what issues are considered by shareholder at annual meetings in the United States.

…continue reading: 2011 Annual Corporate Governance Review

For most companies 2011 was the first year for say-on-pay. The good news is that most emerged from the process unscathed. Only a relative handful (38 of the Russell 3000, including eight in the S&P 500) failed to receive majority support as of October, and those companies are part of a small number (157 and 42, respectively) that received less than 70% of the votes cast.

Shareholders also displayed a strong preference for annual votes, which means that year two is almost upon us. Companies with failed or close votes in 2011 know that they will face heightened scrutiny, particularly as to whether changes were made in response to the vote. But all public companies should consider the lessons learned from year one and make say-on-pay assessment part of their regular annual planning process.

Here are some suggestions to keep in mind.

…continue reading: Say-on-Pay Year Two: a Planning Primer