The 2013 proxy season marks the third year of Advisory Vote on Executive Compensation proposals (Management Say on Pay (MSOP)) as required under the Dodd-Frank Wall Street Reform and Consumer Protection Act. In 2011, 36 U.S. corporations failed to receive majority shareholder support for their MSOP proposal and in 2012 that number increased to 59. Based on the YTD results for 2013, it seems that there could be fewer MSOP failures this year compared to 2012. In this report, we present some interesting facts relating to the 20 failed MSOP votes for annual meetings through May 17. 
Posts Tagged ‘Say on pay’
In our paper, Say Pays! Shareholder Voice and Firm Performance, which was recently made publicly available on SSRN, we estimate the effect of increasing shareholder “voice” in corporations through a new governance rule that provides shareholders with a regular vote on pay: Say on Pay. Say on Pay policy is an important governance change mandated by the Dodd-Frank Act that provides shareholders with a vote on executive pay. It is part of a general trend toward more CEO accountability and increased shareholder rights. Shareholders may use this new channel to voice their discontent regarding the link between pay and performance. This new policy is at the forefront of the debate on executive pay and its efficacy to deliver firm performance.
Early Lessons from the 2013 Proxy Season
As Skadden monitors the initial weeks of the 2013 proxy season, we are seeing the following preliminary trends:
Of the first 279 companies of the Russell 3000 to report the results of say-on-pay proposals, approximately:
- 72 percent have passed with over 90 percent support;
- 22 percent have passed with between 70.1 percent and 90 percent support;
- 4 percent have passed with between 50 percent and 70 percent support; and
- 2 percent (six companies) obtained less than 50 percent support.
Almost half a decade after the onset of the financial crisis, populist sentiment and the resulting political environment continue to fuel stricter regulation of executive and director compensation, with the latest wave in Europe including substantive restrictions on compensation in the financial services industry and “say-on-pay” initiatives (i.e., initiatives providing for shareholder approval of compensation). This post describes these recent European compensation developments, namely:
- The so-called “banker bonus cap” – substantive limits on the amount of variable compensation that can be paid to certain employees at financial institutions; and
- Say-on-pay developments in the E.U. and Switzerland.
Say on Pay Continues to Shape the Executive Pay Landscape
An overwhelming 97% of Russell 3000 companies that conducted a Say on Pay (SOP) vote in 2012 received majority shareholder support.  While support levels rival those for management proposals to ratify auditors, companies do not take SOP vote outcomes for granted. Rather, the prospects for low shareholder support for SOP proposals have caused most companies to devote a tremendous amount of time, resources, and consideration to the administration and disclosure of executive compensation programs. This paper serves to highlight the key issues compensation committees faced in 2012 and the implications for action in 2013 and beyond.
With the proxy season just getting underway, we thought it might be useful to summarize some initial observations to aid those in the midst of the season’s challenges.
Results. According to Institutional Shareholder Services’ (ISS) 2013 Say on Pay Snapshot released April 8, 2013, ISS has recommended against 10 percent of issuers so far this proxy season. While ISS’s study represents a relatively small sample size (473 companies), a “no” recommendation from ISS against 10 percent of companies represents a decrease in “no” recommendations of over 20 percent from last year (12.2 percent).
Reasons for Failure. The single largest reason that companies have received “no” recommendations from ISS continues to be a so-called pay-for-performance disconnect. In addition, ISS has recommended against an increased number of companies on the basis of a so-called lack of compensation committee communications and effectiveness. A lack of effectiveness often arises where ISS has determined that the company has not provided disclosure about actions it has taken in light of a low say on pay vote for the previous year.
We have previously discussed a wave of “say-on-pay” lawsuits focused on allegedly inadequate proxy disclosures (in a memo, article, and memo). At least six courts (four state and two federal) have denied requests for injunctive relief against say-on-pay votes. Now, a federal court that had already denied preliminary injunctive relief has dismissed the complaint with prejudice. Noble v. AAR Corp., No. 12 C 7973 (N.D. Ill. Apr. 3, 2013).
Applying Delaware and federal law, the Northern District of Illinois held that Delaware law did not require a company soliciting proxies in advisory say-on-pay vote to disclose information beyond that specified in Regulation S-K:
In our paper, Should Shareholders Have a Say on Executive Compensation? Evidence from Say-on-Pay in the United States, which was recently made publicly available on SSRN, we examine the SEC 2011 regulation requiring an advisory (non-binding) shareholder vote on the compensation of the top five highest paid executives – “say-on-pay” (SOP). In July of 2010, Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) was signed into law requiring all public companies to give their shareholders the opportunity to cast a “non-binding” advisory vote to approve or disapprove the compensation of the 5 highest paid executives at least once every 3-years. The Securities and Exchange Commission (SEC) implemented “say-on-pay” (SOP) in January of 2011, and since then, shareholders in the US have “had their say” on executive compensation packages for two years: 2011 and 2012. To date, the SOP shareholders’ votes overwhelmingly approved the executive compensation proposals by a majority of votes (>than 50 percent) giving broad support to management pay packages (Cotter et al., 2012). Only 1.2 percent of the Russell 3000 failed the SOP proposal in 2011 and 2.5 percent failed in 2012 obtaining less than 50 percent approval. However, around 10 percent of firms received more than 30 percent opposition or “rejection” votes.
Reaffirming that the advisory “say-on-pay” vote required by the Dodd-Frank Act cannot be used to attack directors’ executive compensation decisions, the United States District Court for the District of Delaware recently dismissed a derivative complaint brought after a negative say-on-pay vote. The court, applying Delaware law, found that the plaintiff had not pleaded facts sufficient to show that demand would have been futile, or to state a claim upon which relief could be granted. Raul v. Rynd, C.A. No. 11-560-LPS (D. Del. March 14, 2013).
The complaint was filed in 2011, and was one of a number of similar lawsuits filed after Dodd-Frank’s requirement for advisory votes on compensation came into effect. The plaintiff challenged the board’s compensation decisions, alleging that increased compensation in a year when the company posted a net operating loss and negative shareholder return violated the company’s pay-for-performance philosophy and rendered the company’s compensation disclosures in its proxy statement misleading. The plaintiff asserted that the negative shareholder advisory vote rebutted the presumption of business judgment surrounding the board’s compensation decisions.
This post addresses an emerging litigation trend that entails a higher degree of litigation risk than in past years. Companies familiar with shareholder litigation in the context of mergers and acquisitions transactions know that virtually all material corporate transactions attract plaintiffs’ lawyers who, suing on behalf of shareholders, allege that proxy materials published ahead of a shareholder vote are, for one reason or another, false or misleading. These plaintiffs’ lawyers typically seek a quick settlement in which the issuer avoids a possible injunction delaying the shareholder vote on the proposed transaction by publishing “corrected” disclosure. In return, the plaintiffs’ lawyers demand a fee for the purported “benefit” to the shareholder class.
This proxy season, there has been an uptick in the number of cases in which plaintiffs’ lawyers assert similar claims in connection with “say-on-pay” proxy disclosures and approval of equity incentive plans. Although many of these cases have been dismissed, or motions for preliminary injunctive relief have been denied by the courts, some issuers are electing to settle such claims to avoid even a remote possibility of a delayed annual shareholder meeting and the burden and expense associated with litigation. Recent press reports highlight this growing trend.  We outline below the current trend and several suggested strategies for addressing this new proxy litigation.