Posts Tagged ‘Director compensation’

Compensating for Long-Term Value Creation in U.S. Public Corporations

Editor’s Note: Joseph Bachelder is special counsel in the Tax, Employee Benefits & Private Clients practice group at McCarter & English, LLP. The following post is based on an article by Mr. Bachelder, with assistance from Andy Tsang, which first appeared in the New York Law Journal.

Three categories of performers are rewarded for value creation in U.S. public corporations. They are: (1) the executives who manage the corporations; (2) the directors who oversee the performance of these corporations; and (3) the individual asset managers and others who provide investment services to investors who own, directly or indirectly, these corporations.

The following post takes a look at the correlation between the long-term incentive compensation of these three categories of performers and long-term value creation in U.S. public corporations that is attributable to them. In fact, such correlation appears to be limited. In addition, the article will consider a definition of “long-term” value creation, the roles of these three categories of performers in creating “long-term” value and the methods of compensating these different categories of performers in their respective roles in “long-term” value creation.

…continue reading: Compensating for Long-Term Value Creation in U.S. Public Corporations

CII Urges SEC to Require Disclosure of Third-Party Director Compensation

Editor’s Note: Sabastian V. Niles is counsel in the Corporate Department at Wachtell, Lipton, Rosen & Katz, where he focuses on rapid response shareholder activism, takeover defense and corporate governance. This post is based on a Wachtell Lipton firm memorandum by Mr. Niles, Trevor Norwitz, Andrew R. Brownstein, and David C. Karp.

As we have previously written, special compensation arrangements between public company directors and third parties, such as activist hedge funds or other nominating shareholders, pose serious threats to the integrity of boardroom decision-making and have been sharply criticized by commentators and many institutional shareholders. The Council of Institutional Investors (CII), which has previously declared that third-party director incentive schemes “blatantly contradict” CII policies on director compensation, has now taken the additional step of encouraging the SEC to act to ensure investors are fully informed about such arrangements between nominating shareholders and their director candidates.

…continue reading: CII Urges SEC to Require Disclosure of Third-Party Director Compensation

Compensation Committee Guide 2014

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday March 24, 2014 at 9:25 am
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Editor’s Note: The following post comes to us from Michael J. Segal, partner in the Executive Compensation and Benefits Department of Wachtell, Lipton, Rosen & Katz, and is based on the introduction to a Wachtell Lipton memorandum by Mr. Segal, David C. Karp, Jeannemarie O’Brien, Adam J. Shapiro, Jeremy L. Goldstein, and David E. Kahan; the complete memorandum is available here.

The past year in executive compensation has been marked by two continuing trends: (1) a continuing refinement of conceptions of so-called “best practices” advocated by certain shareholders and responses to those refinements by compensation committees, most notably in the context of the nonbinding, advisory “say-on-pay” vote required by the Dodd-Frank Act (“Dodd-Frank”) and (2) an increased desire by corporations to engage with shareholders to convince them of the appropriateness of their responses and the corporation’s compensation arrangements generally. Against this backdrop, the key challenge for compensation committee members has been to continue to approve compensation programs that directors believe are right for their corporations while maintaining a sufficient understanding of these emerging shareholder views and communicating the appropriateness of their arrangements to avoid attacks that could undermine directors’ abilities to act in their company’s best interest.

…continue reading: Compensation Committee Guide 2014

Disqualifying Dissident Nominees: A New Trend in Incumbent Director Entrenchment

Editor’s Note: Carl Icahn is the majority shareholder of Icahn Enterprises. The following post is based on a commentary featured today at the Shareholders’ Square Table.

There are many good, independent boards of directors at public companies in the United States. Unfortunately, there are also many ineffectual boards composed of cronies of CEOs and management teams, and such boards routinely use corporate capital to hire high-priced “advisors” to design defense mechanisms, such as the staggered board and poison pill, that serve to insulate them from criticism. Recently, these advisors have created a particularly pernicious new mechanism to protect their deep-pocketed clients—a bylaw amendment (which we call the “Director Disqualification Bylaw”) that disqualifies certain people from seeking to replace incumbent members of a board of directors. Under a Director Disqualification Bylaw, a person is not eligible for election to the board of directors if he is nominated by a shareholder and the shareholder has agreed to pay the nominee a fee, such as a cash payment to compensate the nominee for taking the time and effort to seek election in a proxy fight, or compensation that is tied to performance of the company. [1]

…continue reading: Disqualifying Dissident Nominees: A New Trend in Incumbent Director Entrenchment

ISS Releases FAQs: Defensive Bylaw May Lead to Negative Vote Recommendations

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Sunday January 26, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Rebecca Grapsas, senior associate in the Corporate Department of Weil, Gotshal & Manges LLP, and is based on a Weil alert.

Public companies that have recently adopted or are considering adopting bylaws that disqualify director nominees who receive compensation from anyone other than the company should be aware of new FAQs released yesterday by Institutional Shareholder Services (ISS) and the potential impact the FAQs may have on forthcoming director elections. Such bylaws typically operate in conjunction with advance notice bylaws that require proponents to disclose compensation arrangements with their nominees. Compensation payable by a third party for director candidacy and/or board service—for example, by an insurgent in a contested director election—may call into question a director’s undivided loyalty to the company and all of its shareholders.

…continue reading: ISS Releases FAQs: Defensive Bylaw May Lead to Negative Vote Recommendations

ISS Publishes Guidance on Director Compensation (and Other Qualification) Bylaws

Editor’s Note: Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton, Andrew R. Brownstein, Steven A. Rosenblum, Trevor S. Norwitz, David C. Karp, and Sabastian V. Niles.

In the latest instance of proxy advisors establishing a governance standard without offering evidence that it will improve corporate governance or corporate performance, ISS has adopted a new policy position that appears designed to chill board efforts to protect against “golden leash” incentive bonus schemes. These bonus schemes have been used by some activist hedge funds to recruit director candidates to stand for election in support of whatever business strategy the fund seeks to impose on a company.

…continue reading: ISS Publishes Guidance on Director Compensation (and Other Qualification) Bylaws

Nasdaq Proposes Tweaks to Compensation Committee Independence Requirements

Editor’s Note: Arthur H. Kohn is a partner at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum by Michael Albano, Mary Alcock, and Jonathan Reinstein.

On November 26, 2013, the Nasdaq Stock Market filed a proposal to amend its listing rules implementing Rule 10C-1 of the Securities Exchange Act of 1934, governing the independence of compensation committee members. [1] Currently, Nasdaq Listing Rule 5605(d)(2)(A) and IM-5605-6 employ a bright line test for independence that prohibits compensation committee members from accepting directly or indirectly any consulting, advisory or other compensatory fees from the company or any subsidiary. The requirement is subject to exceptions for fees received for serving on the board of directors (or any of its committees) or fixed amounts of compensation under a retirement plan for prior service with the company provided that such compensation is not contingent on continued service.

…continue reading: Nasdaq Proposes Tweaks to Compensation Committee Independence Requirements

ISS Addresses Dissident Director Compensation Bylaw

Editor’s Note: Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. The following post is based on a Wachtell Lipton memorandum by Mr. Lipton, Andrew R. Brownstein, Steven A. Rosenblum, Trevor S. Norwitz, and Sabastian V. Niles.

ISS Proxy Advisory Services recently recommended that shareholders of a small cap bank holding company, Provident Financial Holdings, Inc., withhold their votes from the three director candidates standing for reelection to the company’s staggered board (all of whom serve on its nominating and governance committee) because the board adopted a bylaw designed to discourage special dissident compensation schemes. These special compensation arrangements featured prominently in a number of recent high profile proxy contests and have been roundly criticized by leading commentators. Columbia Law Professor John C. Coffee, Jr. succinctly noted “third-party bonuses create the wrong incentives, fragment the board and imply a shift toward both the short-term and higher risk.” In our memorandum on the topic, we catalogued the dangers posed by such schemes to the integrity of the boardroom and board decision-making processes. We also noted that companies could proactively address these risks by adopting a bylaw that would disqualify director candidates who are party to any such extraordinary arrangements.

…continue reading: ISS Addresses Dissident Director Compensation Bylaw

Determinants and Performance of Equity Deferral Choices by Outside Directors

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday November 18, 2013 at 9:35 am
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Editor’s Note: The following post comes to us from Christopher Ittner, Professor of Accounting at the University of Pennsylvania; and Francesca Franco and Oktay Urcan, both of the Accounting Area at the London Business School.

In our paper, Determinants and Trading Performance of Equity Deferral Choices by Corporate Outside Directors, which was recently made publicly available on SSRN, we investigate the determinants and trading performance of outside directors’ “equity deferrals,” which represent the choice to convert part or all of the current cash compensation into deferred company stock. Director equity deferrals are interesting for two reasons. First, by deferring, the directors give up a sure amount of cash today for firm stock with an uncertain future value, while at the same time substantially increasing the proportion of their compensation that is tied to future firm performance. Second, the equity deferrals can become a form of insider trading, because directors can use these options as a tax-advantaged alternative to open-market purchases of the firm’s stock.

We examine director equity deferrals using a hand-collected sample of U.S. firms that allowed outside board members to defer their cash compensation into equity between 1999 and 2003. We first focus on the factors affecting director equity deferral choices. Consistent with a certainty equivalent story, we find that directors are more likely to defer cash into equity when they receive higher cash compensation levels and when the plans offer premiums for deferrals made into equity. Deferral likelihood also increases with the size of the taxes that are deferred.

…continue reading: Determinants and Performance of Equity Deferral Choices by Outside Directors

Incentive Schemes for Nominees of Activist Investors

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday June 5, 2013 at 9:34 am
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Editor’s Note: The following post comes to us from Neil Whoriskey, partner focusing on mergers and acquisitions at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum by Mr. Whoriskey, titled “Golden Leashes, Honest Brokers, Risk Tolerances and Market Imperfections: Incentive Schemes for Nominees of Activist Investors.”

Golden leashes – compensation arrangements between activists and their nominees to target boards – have emerged as the latest advance (or atrocity, depending on your point of view) in the long running battle between activists and defenders of the long-term investor faith. Just exactly what are we worried about?

With average holding periods for U.S. equity investors having shriveled from five years in the 1980s to nine months or less today, the defenders of “long-termism” would seem to have lost the war, though perhaps not the argument. After all, if the average shareholder is only sticking around for nine months, and if directors owe their duties to their shareholders (average or otherwise), then at best a director on average will have nine months to maximize the value of those shares. Starting now. Or maybe starting nine months ago.

But this assumes that the directors of any particular company have a real idea of just how long their particular set of “average” shareholders will stick around, and it also assumes that the directors owe duties primarily to their average shareholders, and not to their Warren Buffett investors (on one hand) or their high speed traders (on the other). So, in the absence of any real information about how long any then-current set of shareholders will invest for on average, and in the absence of any rational analytical framework to decide which subset(s) of shareholders they should be acting for, what is a director to do?

Here is what I think directors do, in one form or fashion or another:

…continue reading: Incentive Schemes for Nominees of Activist Investors

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