Category: Executive Compensation
Corp Fin does a one-eighty on shareholder proposals under Rule 14a-8
In June 2023, then-Commissioner Mark Uyeda (currently, Acting Chair) spoke to the Society for Corporate Governance 2023 National Conference on the topic of shareholder proposals under Rule 14a-8. Alluding to the frequent reversals in interpretations of Rule 14a-8, he said that “[r]elying on the Commission’s rules, or its staff’s positions in this area is akin to building a sand castle on the beach. Any rule or interpretation, no matter how recently adopted, is at risk of being erased by the next wave.” No matter that Uyeda is now at the helm, that “next wave” tradition is continuing with the issuance by Corp Fin last week of new Staff Legal Bulletin 14M, which rescinds the prior Administration’s interpretation in SLB 14L and does an about-face on interpretations of two Rule 14a-8 shareholder proposal exclusions. Turnabout is fair play? (See this Pubco post.) The new SLB revises Corp Fin’s views on the scope and application of Rule 14a-8(i)(5), the economic relevance exception, and Rule 14a-8(i)(7), the ordinary business exception. The effect of new SLB 14M is to reverse some of the interpretations of “economic relevance,” “micromanagement” and “significant social policy” imposed under now rescinded SLB 14L, which had reversed interpretations of those same issues by rescinding Clayton-era SLBs 14I, 14J and 14K. Got it? Grounding its revised approach in the historical antecedents of 1998 and earlier SEC releases—as did now rescinded SLB 14L—Corp Fin takes the position that, under new SLB 14M, “where relevant to the arguments raised to the staff by companies and proponents, the staff will consider whether a proposal is otherwise significantly related to a particular company’s business, in the case of Rule 14a-8(i)(5), or focuses on a significant policy issue that has a sufficient nexus to a particular company, in the case of Rule 14a-8(i)(7).” Moreover, the new approach will involve, as a “key factor in the analysis of shareholder proposals that raise significant policy issues,” a “‘case-by-case’ consideration of a particular company’s facts and circumstances.” Where SLB 14L made exclusion of shareholder proposals—particularly proposals related to environmental and social issues—more of a challenge for companies, new SLB 14M is expected to provide a framework for exclusion of proposals that will likely be more accommodating for companies. Companies will certainly welcome the revamp.
SEC charges Celsius Holdings with improper accounting for stock awards and disclosure control failures
In this settled action—part of a slew of SEC Enforcement cases reported out in the last days before the change in Administration—the SEC alleged that Celsius Holdings, Inc. engaged in improper accounting for stock-based compensation expenses when the company modified the terms of stock awards for six departing employees and retiring board members, but failed to re-value them as required under GAAP. As a result, the SEC alleged, in periodic and current reports, Celsius’ financial statements were materially inaccurate and misleading. The SEC charged that Celsius violated the reporting, books and records, internal accounting controls and disclosure controls and procedures provisions. Celsius has agreed to pay $3 million to settle the charges.
Cooley Alert: Should the SEC Revisit Executive Security Perquisite Disclosure?
You might want to look at this recent Cooley Alert, Should SEC Revisit Executive Security Perquisite Disclosure?, from our Public Companies and Compensation and Benefits Groups. Following the alarming murder of an insurance company CEO recently, the need for protection and security for CEOs and other executives is now high on the agenda, as are questions about how these items should be reported. Under the guidance set forth in the SEC’s 2006 release, an “item is not a perquisite or personal benefit if it is integrally and directly related to the performance of the executive’s duties. Otherwise, an item is a perquisite or personal benefit if it confers a direct or indirect benefit that has a personal aspect, without regard to whether it may be provided for some business reason or for the convenience of the company, unless it is generally available on a non-discriminatory basis to all employees.” According to the release, the “concept of a benefit that is ‘integrally and directly related’ to job performance is a narrow one.” But, the Alert contends, maybe that approach should be revisited.
SEC Enforcement charges Express for failure to disclose CEO perks
The SEC has announced settled charges against Express, Inc., a multi-brand American fashion retailer formerly listed on the NYSE, for failing to disclose over a three-year period almost $1 million in perks provided to its now former CEO. What were those perks? About a half of that amount was attributable to the perk that seems to trip up so many companies (and flashing favorite target of SEC Enforcement): use of company-owned or -leased aircraft and other travel expenses for personal purposes. The SEC also charged that the company “did not have adequate controls, policies, or procedures in place to effectively identify and analyze potential compensation for disclosure.” However, the SEC did not impose civil penalties on the company, which filed for bankruptcy, in light of its cooperation. According to Sanjay Wadhwa, the Acting Director of Enforcement, “[p]ublic companies have a duty to comply with their disclosure obligations regarding executive compensation, including perks and personal benefits, so that investors can make educated investment decisions….Here, although Express fell short in carrying out its obligation, the Commission declined to impose a civil penalty based, in part, on the company’s self-report, cooperation with the staff’s investigation, and remedial efforts.”
Are ESG performance metrics in comp plans just a layup with little impact?
There’s been a lot of attention lately to the use of ESG metrics as incentives in executive compensation, perhaps because the concept of ESG has become something of a lightning rod in the political landscape—particularly given the fallout from recent court decisions on diversity as well as escalating activity by anti-ESG groups. As discussed below, consultants have found that the use of ESG metrics seems to have levelled out, as some institutional investors have begun to view them cautiously and some academics studies have questioned their rigor and even their benefit. Companies employing ESG metrics as part of their comp plans may want to consider some of the issues raised by these studies, such as level of challenge and transparency, in designing their ESG metrics.
Are responses to failed say-on-pay votes consequential?
Are you ever surprised that more companies don’t fail their say-on-pay votes? Say on pay was adopted by the SEC under a Dodd-Frank mandate signed into law against the backdrop of the 2008 financial crisis. The mandate was enacted largely in reaction to the public’s railing against the runaway levels of compensation paid to some corporate executives despite poor performance by their companies, especially when those firms were viewed as contributors to the crisis itself. Say on pay was expected to help rein in excessive levels of compensation and, even though the vote was advisory only, ascribe some level of accountability to boards and compensation committees that set executive compensation levels. But, while say on pay may have driven more investor engagement—certainly a good thing—the anticipated say-on-pay challenge by shareholders to out-of-line pay packages did not really materialize. From the get-go, the average failure rate has only been about 2%. Instead, say-on-pay votes have served largely as confirmations of board decisions regarding executive compensation and not, in most cases, as the kind of rock-throwing exercises that many companies had feared and some governance activists had hoped. According to a 2011 Business Week article, Robert A.G. Monks, who founded ISS in 1985, concluded that say on pay was “‘at best a diversion and at worst a deception….You only have the appearance of reform, and it’s a cruel hoax.’” This paper, Failed Say on Pay: How Do Companies Course Correct after to a ‘No’ Vote?, from the Rock Center for Corporate Governance at Stanford University, with authors from Stanford and Equilar, looked at the 2% that fail the vote and what they did in response to pass muster with investors. But the underlying message is reflected in the authors’ questions: “Does this process reflect a healthy dynamic of the market correcting egregious practices, or does it simply reflect a standardization process whereby observed outlier practices are brought in line with industry norms? Do the changes companies make in response to a failed vote lead to substantive improvement in the managerial incentives of their pay programs?”
Is there a place for more inside directors on corporate boards?
In this article in the Harvard Business Review, a law professor from the University of Calgary makes “The Case for More Company Insiders on Boards.” From the end of World War II to the 1970s, he observes, the composition of most boards of U.S. companies was predominantly insider—75% of board directors were insiders in the decade after World War II. But, he maintains, that changed “in the wake of the rising distrust of all American institutions” after Viet Nam and Watergate in the 1970s, as new concepts of corporate governance emerged and the NYSE began to adopt listing rule changes, such as a requirement for independent audit committees. And after the Enron and WorldCom financial scandals of the 2000s, further changes in corporate governance requirements and expectations for board independence ultimately made the overwhelming prevalence of independent directors on corporate boards and committees de rigueur. By 2005, the author reports, 75% of directors of large U.S. public companies were independent and, as of 2023, that percentage had risen to 85%. But is that necessarily a good thing? Maybe not so much, the author contends. Rather, he maintains, the “empirical research on director independence suggests…that business leaders should re-consider the merits of inside directors.”
SEC approves Nasdaq corporate governance rule changes
In May, Nasdaq proposed to revise some of its corporate governance rules—specifically Rules 5605, 5615 and 5810—to modify the phase-in schedules for the independent director and committee requirements in connection with a slew of different circumstances: IPOs, spin-offs and carve-outs, companies emerging from bankruptcy, companies ceasing to qualify as Foreign Private Issuers, companies ceasing to be controlled companies, companies transferring from other national securities exchanges, and companies listing securities that were, immediately prior to listing, registered pursuant to Section 12(g) of the Act. In addition, Nasdaq proposed to codify or amend its practices regarding the applicability of certain cure periods. Many of the changes proposed by Nasdaq were similar to rules that had previously been approved for the NYSE. There were apparently no comments received on the proposal, even after the SEC designated a longer time period for approval. On Monday, the SEC approved Nasdaq’s proposal.
Are companies getting the clawback checkboxes right?
As you know, in 2022, the SEC adopted a new clawback rule, Exchange Act Rule 10D-1, which directed the national securities exchanges to establish listing standards requiring listed issuers to adopt and comply with a clawback policy and to provide disclosure about the policy and its implementation. Under the rules, the clawback policy had to provide that, in the event the listed issuer was required to prepare an accounting restatement—including not just “reissuance,” or “Big R,” restatements, but also “revision” or “little r” restatements—the issuer must recover the incentive-based compensation that was erroneously paid to its current or former executive officers based on the misstated financial reporting measure. The recovery policy had to apply to incentive compensation received during the three completed fiscal years immediately preceding the date that the company was required to prepare a restatement. (See this PubCo post.) The clawback rules added a requirement to include new checkboxes on the cover pages of Form 10-K, Form 20-F and Form 40-F to indicate separately (a) whether the financial statements of the issuer included in the filing reflect correction of errors to previously issued financial statements, and (b) whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the issuer’s executive officers during the relevant recovery period. (See this PubCo post.) It’s worth noting here that the first box, which applies to correction of any errors in the financial statements filed, is broader in scope than the second, which applies if the restatements needed a potential clawback analysis, even if no actual recovery was required. Apparently, there hasn’t been much action for the second box. In this article, Bloomberg reports on a study by research firm Nonlinear Analytics LLC, which showed that of “the 205 companies that reported accounting corrections in their annual financial statements so far this year, just 29—less than 15%—said they reviewed the error to see if they needed to force a compensation clawback,” i.e., reported that they performed a potential recovery analysis. And, only two of the companies that performed an analysis ended up clawing back any executive bonuses.
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