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This proxy season there has been a lot of focus on companies filing additional soliciting materials to supplement proxy disclosure, with a particular focus on executive compensation in light of the say-on-pay vote. Exxon Mobil has taken a particularly interesting approach turning a two-dimensional paper communication into something more dynamic by inviting interested persons to a company-sponsored webcast on executive compensation.

The webcast represents an additional proactive step Exxon has taken. On the same day it filed its proxy statement, Exxon took the unusual step of also filing a colorful presentation filled with data, graphs and photos to explain how its pay-for-performance approach focuses on the long-term nature of its capital-intensive business. In supplemental information filed more recently, Exxon took issue with specific aspects of the ISS analysis, including the peer group selected, which Exxon asserted failed to adjust for its size and complexity, since the company's revenue is more than 4X larger by revenue and 3.5X larger by market capitalization than the median of the peer group. 

On the webcast, which included a presentation, Exxon representatives discussed the company's business environment, the scale and scope of the company and its focus on the long-term nature of its business strategy. The company explained that together, these form the basis for customized compensation decisions, including a lengthy "hold-to-retirement" policy and a unique approach on the deferral of 50% of annual bonuses, a measure rarely seen outside of financial institutions. The company's focus on executive training, retention and succession was emphasized, including the fact that the company achieves its retention goals without change in control or severance agreements with senior executives. The company also discussed the shareholder engagement it undertook as a result of last year's say-on-pay vote. In response to questions during the webcast, the company noted how its programs focus on performance assessments that take a more holistic approach rather than concentrating on formulas that inspire executives to reach for only certain specific goals. The company received several questions about specific aspects of its pay decisions, the reasons for the webcast and the proxy advisory firms' recommendations.

The NYSE announced today that the Proxy Fee Advisory Committee (PFAC), formed in September 2010 and comprised of representative investors, brokers and companies, has published its recommendations to change the proxy fees. Brokers and banks are required under SEC rules to distribute company proxy materials to beneficial owners of securities, or shareholders holding in "street name." In turn, companies must reimburse them for their expenses. The NYSE regulates the amount of fees, subject to SEC review and approval.

The full Report by PFAC explains in summary form the complexities of the proxy distribution process, by reference to the SEC "proxy plumbing" concept release. Over 80% of public securities are estimated to be held in street name. Broadridge, the primary intermediary for proxy distribution, reported that in 2011 it handled distributions to 90 million beneficial owners with accounts at over 900 banks and brokers, covering over 628 billion shares, at a cost of about $200 million to companies in the aggregate.

The Report painstakingly describes the careful work by PFAC in considering each of the four different type of proxy fee designed to compensate brokers for different services, an examination of the existing rationale based on the work involved and an evaluation of whether a change in fee is warranted based on recent developments, such as a move toward less paper distributions. According to the Report, it is expected that overall fees paid by companies will decrease by about 4% under the revised structure.

PFAC's recommendations include several changes to the existing fees and also streamlining the proxy fee categories to increase transparency. In addition, PFAC supported allowing companies to ask brokers for a list of the identity of non-objecting beneficial owners (NOBO) based on number of shares held or of those that have not yet voted proxies, without needing to pay for an entire list of all NOBOs. In order to encourage further retail investor voting, PFAC also recommended that the NYSE broach with the SEC the idea of a fee to pay for an "investor mailbox," through which investors can access proxy materials and voting forms through their brokers' website. 

For those interested in learning more, an archive version of a webcast sponsored by the NYSE is here.

PFAC's work is only the beginning.  The NYSE indicated that it will initiate discussions regarding the PFAC’s recommendations with the SEC, after which the NYSE would expect to submit a rule change proposal to the SEC reflecting the outcome of these discussions. Any rule filing proposal would be published for public comment prior to SEC approval.

The U.K.’s implementation of “say on pay” in 2002 is widely considered the harbinger of mandatory “say on pay” in the United States. So far, in both countries, the shareholder advisory vote on executive compensation has been non-binding on companies and their boards. Now, the U.K. appears to be moving toward a binding regime. Earlier this spring, the U.K. government’s Department of Business Innovation & Skills (BIS) published a consultation paper setting out a range of measures, including:

• An annual binding vote on future remuneration policy;
  
  
• An increase in the level of support required on votes on future remuneration policy (up to 75% of votes cast);
  
  
• An annual advisory vote on how the company’s pay policy was implemented in the previous year (same as the status quo); and
  
  
• A binding vote on “exit payments” of more than one year’s salary – with “exit payments” including not only cash severance payments, but also the vesting of equity compensation, continuation of benefits, etc.

How This Differs from Current Practice

Currently, the U.K.’s “say on pay” vote is limited to a shareholder advisory vote on the compensation of the executive directors (by approving the directors’ remuneration report). The vote is retrospective in that it relates to the prior year’s compensation.  Under the proposal, the retrospective vote would remain advisory; however, there would also be a binding vote on future pay, where an affirmative vote would require a supermajority. Companies would be required to propose, at the start of the year, a pay policy for the upcoming year, including potential payouts and the performance measures that would be used. This proposal would then be put before shareholders. If, for some reason, the binding vote were lost, the company would be required to fall back to the last policy to be approved or hold another shareholders meeting so that shareholders could vote on a revised proposal.

To facilitate this binding vote on future remuneration, the U.K. government intends to publish draft regulations later this year, which will prescribe the content of remuneration reports. The regulations are likely to state that the section of the report that discloses the company’s future remuneration should include the following elements:

• The composition and potential level of pay for each individual executive director;
  
  
• How proposed pay structures reflect and support company strategy and key performance indicators;
  
  
• What the performance criteria are, how performance will be assessed and how this will translate into total level of reward for each individual under different scenarios (e.g., on-target and stretch performance);
  
  
• How and why the company has used benchmarks and other comparison data to inform pay levels and structures;
  
  
• How employee pay and views have been taken into account; and
  
  
• How shareholders’ views have been sought and taken into account, including the results of the previous year’s votes on remuneration.

In addition, there would also be a binding vote related to any severance arrangements for an executive director exceeding the equivalent of one year’s base salary. A company proposing to pay a higher amount would be required to provide detailed information explaining the proposed amount, how it was calculated and why it is deserved. This proposal would then be put to shareholders. If the vote were lost, the company would not be able to pay the exiting executive more than the basic limit. Existing arrangements would be required to be amended prior to legislative effectiveness (as noted below, currently slated for October 1, 2013).

What to Expect Next

Already, this spring has been a tumultuous one for U.K. public companies. Three major companies – including, most recently, Aviva, Britain’s largest insurer – have witnessed the departures or imminent departures of their CEOs, in connection with compensation arrangements that drew shareholder ire. And, just before their annual shareholders meeting, Barclays announced that a portion of the bonuses for the CEO and Finance Director would be subject to performance criteria. An unanswered question is whether these developments will serve to embolden shareholder activists, or whether they are Exhibit A that shareholders already have the ability to exert their will in compensatory matters.

As a formal matter, the consultation period closed on April 27, 2012, and our understanding is that a number of market players, including trade and business organizations, have commented on the proposals. The consultation paper notes that the government will consider the comments received and confirm the exact measures it proposes to take forward in primary legislation later this year, subject to parliamentary time being available. 

Subject to the parliamentary process, the government expects legislation on new shareholder voting rights and revised reporting requirements to come into force in spring 2013. These provisions would take effect for companies whose reporting years end after October 1, 2013, and for executive directors whose contracts are terminated after that date; thus, this would impact shareholders meetings held after October 1, 2013.

It is contemplated that, in the first instance, these changes will be adopted via amendments to the U.K. Companies Act (analogous to the general corporation law of many U.S. states). Thus, they would apply to all U.K. public companies (the consultation paper notes that there are over 1,000 U.K.-incorporated companies listed on the London Stock Exchange’s Main Market as of January 31, 2012, plus another 100 or so U.K.-incorporated companies listed on the NYSE, Nasdaq or in a European Economic Area state).

However, given the perceived anti-competitive effect that this could have on U.K.-incorporated companies (who might even seek to redomicile elsewhere), it remains to be seen if any changes along these lines will be implemented more broadly through other means, such as through the requirements of the UK Listing Authority or the index inclusion rules.

An increasing number of shareholders are filing solicitation materials advocating for a particular position on a voting matter at annual meetings, the flip-side to our recent discussion of companies filing additional soliciting materials to support management proposals. Some companies that are not accustomed to the practice may be surprised that the shareholder materials are filed under the company's EDGAR record, as a Notice of Exempt Solicitation. As permissible under Rule 14a-6(g)(1) and Rule 14a-2(b)(1), the solicitation is exempt from requiring the proponents to file accompanying proxy statements.

Since March 1st, shareholders have made over 30 such filings. More than half were filed by the proponents that submitted shareholder proposals being voted on at the meeting. The others generally focus on voting against director nominees. Recently, a coalition of state pension funds, including CalPERS and CALSTRS, urged shareholders to vote against the two directors up for re-election at Hospitality Properties Trust. Their letter states that they are taking this "extraordinary action" for several reasons, including the adoption of a poison pill by the company without shareholder approval and the absence of efforts to declassify its board after receiving more than majority support for shareholder proposals seeking annual elections for three consecutive years. Yesterday, the company announced that one of the directors received only 42% in support and resigned as a result. However, as the board determined that the low vote was not due to the director's "personal failings" but rather the board's disagreement with CalPERS, the board re-appointed the same director to the vacancy that his resignation created, and the director accepted. The composition of the board remained the same.

At Wellpoint, CtW Investment Group filed three separate letters to shareholders asking them to withhold support for two director nominees because of perceived lack of oversight for political spending. The most recent criticizes not only the company but also takes issue with ISS' support for the election of those directors and the advisory firm's recommendation to vote against a shareholder proposal on political contributions disclosure. CtW also asked Sotheby's shareholders to vote against its nominating and governance committee for their "failure to take decisive action and break with James Murdoch," a former board member. In another action directed at board members, the Comptroller of the City of New York encourages shareholders to vote against several director nominees at Wal-Mart for independence and compliance issues related to recent allegations of bribery at the company. 

Proponents who submitted shareholder proposals are using these materials as another way to hype their proposals, without being restricted by the 500-word limit imposed on supporting statements. They also use them to rebut the company's opposition statement in the proxy statement. The most prolific shareholders include Trillium Asset Management, urging support for their proposals asking that boards of directors adopt policies prohibiting the use of corporate funds for political purposes at 3M and Bank of America as well as proposals at Verizon and AT&T to commit to operate its network consistent with principles of network neutrality, which at 10 pages (with footnotes) was one of the longest. Most soliciting materials are from advocates of environmental and social issues, with a few covering executive compensation proposals. In addition, Amalgamated Bank filed a letter urging shareholders of Chevron to vote for its proposal to repeal an exclusive forum bylaw.

In early April, Norges Bank Investment Management filed a presentation on the proxy access proposals that it had submitted to six companies, including Wells Fargo. Norges had taken part in a Glass Lewis-sponsored proxy talk. Besides explaining the terms of the proposal, the presentation provides the reasons why it focused on these particular companies, citing issues ranging from stock price performance to governance matters such as combined CEO and chair positions, the absence of the right to call special meetings or the adoption of the right to call special meetings at higher thresholds than the 10% supported by a majority of shareholders, the existence of classified boards or the boards' rights to amend bylaws without shareholder approval. The claims are sufficiently wide-ranging as to make it difficult to predict what companies would not be targets.

The results at Hospitality Properties Trust is likely due to its fairly unusual fact pattern, and the ability of these shareholder soliciting materials to affect vote results is probably not meaningful for the most part. However, as a relatively simple and inexpensive means of shareholder communication, the use of these exempt filings could continue to appeal to these types of shareholder activists.

In 2011, companies included in their proxy ballots a choice for shareholders to advise on whether they preferred to cast advisory votes on executive compensation every 1, 2 or 3 years, the so-called "say-when-on-pay" or frequency vote. Item 5.07(d) of Form 8-K required issuers that did not otherwise announce their decisions earlier to file a second, amended Form 8-K. That deadline was months later, either 150 calendar days after the meeting or 60 days before the shareholder proposal deadline, whichever came first. The SEC Staff realized this year in reported news accounts that possibly hundreds of companies did not file the amended Form 8-K. 

Failure to file this Form 8-K can lead to the loss of Form S-3 eligibility, but the SEC Staff appears willing to consider granting a waiver to those companies that have implemented the frequency that the majority of shareholders supported, which was the case for all but a handful of companies. To obtain a waiver (which the Staff prefers to characterize as a "non-objection"), a company with an existing shelf registration or one that is about to file a shelf registration must file the amended Form 8-K and make a request by writing a letter and uploading it to the new SEC site. 

A company will work directly with Office of the Chief Counsel on the exact content of the letter, but in general the information may include:

• Whether the company has an existing Form S-3 registration statement or is planning to file one
• A request for the waiver, including any requests to use an existing Form S-3 registration statement or the ability file a new one
• Background on the frequency vote conducted and the board's decision as to the frequency selected
• The reasons for the failure to file the Form 8-K on a timely basis
• Whether the company received a shareholder proposal on the frequency of the advisory vote on executive compensation for the 2012 meeting
• Whether the company has previously failed to make any required Exchange Act filings on a timely basis
• Processes and procedures implemented to ensure timely Exchange Act filings in the future

The Staff will respond orally and will not confirm in writing. 

In year two of say-on-pay, we find that companies continue to file additional materials to solicit for favorable votes. These additional materials are generally in the form of a brief letter to shareholders highlighting aspects of executive compensation.  Most are in the form of descriptive narratives, although a few companies use graphs and charts and even PowerPoints. While a few are filed early on following the proxy statement, the majority appear to be in response to negative recommendations on say-on-pay from proxy advisory firms. 

Proxy disclosure this season has been thorough and detailed, which would suggest that additional materials are not technically necessary. However, even with lengthy disclosure on executive compensation, companies have many reasons to want to file additional materials. They may wish to highlight key aspects of compensation without worrying about including all the different aspects necessary for compliance with SEC rules, or the proxy advisory firms' reports have narrowed the main issues that become important to discuss. Some materials provide companies with a set of talking points or script for conversations with shareholders, and others believe that investors benefit from having a clear set of reasons in summary form as ammunition to reject the proxy advisory firms' recommendations.

A threshold question is whether to directly address the criticisms from the proxy advisory firms' reports. Most companies do usually focus at least on ISS pay-for-performance analysis (a favorite statement this season has been that the ISS peer group methodology is deeply flawed). This is not a surprise, since that analysis appears to be the primary source of most of the negative recommendations in the first place. 

So far, we have not seen many companies actually modify existing compensation in any way, along the lines that Disney and GE did last year. Recently however, NCR Corp. initially filed materials that advocated for the company's say-on-pay vote, explained its compensation decisions and rebutted ISS, but about a week later, the company indicated that after discussions with shareholders, it decided to add performance conditions to the CEO's existing special retention award that were initially granted as time-based restricted stock units.  This reportedly changed ISS' recommendations, and the company's vote was ultimately about 80% favorable.  

The Occupy Wall Street Movement has turned its focus on annual meetings, which one media outlet is calling "a rare public forum in U.S. business." News reports indicate that a coalition of unions and other organizations calling itself the "99% Power" intends to target more than 200 meetings, although only a few dozen companies were listed on its website. Some of these organizations sponsored trainings for those interested shareholder protests. Reportedly, over 1,000 demonstrators descended upon the Wells Fargo meeting site, where activists bought single shares of stock to gain entrance and over a dozen were ejected for disrupting the meeting. The press today reported that GE's annual meeting was delayed in order to remove two dozen people chanting at the beginning. GE confronted about 100 protestors in Detroit. Videos of the demonstrations outside the meetings, as well as the protestors' efforts during the meetings, have been posted online.

The focus of these particular agitators are not the items on the proxy ballots. At Wells Fargo, demonstrators targeted the bank's foreclosure and lending practices and mortgage operations.  The anger directed at GE stems from reports about its tax rate. The protests also did not seem to affect the voting results. Wells Fargo saw over 96% support for its advisory vote on executive compensation and GE received over 92% in favor. It appears that the first proxy access shareholder proposal to be voted on this season at Wells Fargo did not pass. According to various articles, the shareholder proposal that received the highest support at that meeting, at 38%, was one to split the chairman and CEO roles. The same proposal won 22% of the vote at GE. As Ted Allen discussed recently in his blog, shareholders of 44 companies will vote on independent chair proposals this season. 

Glass Lewis released a brief overview that it calls a "Primer for Issuers." Glass Lewis reiterates that it does not engage in discussions with companies during the proxy solicitation period because of concerns about the possibility of receiving material, nonpublic information. However, it will sometimes host a Proxy Talk conference call during which a company's management or board can speak directly to Glass Lewis' clients.

Board Matters. It is not always clear when a director will run afoul of Glass Lewis' voting recommendations. The Issuer FAQ provides some information about related person transactions, noting that a director who controls more than 20% of voting stock would be deemed an affiliate. Different types of relationships receive varying levels of scrutiny assessed against different financial thresholds. The condensed proxy voting guidelines are truly "abridged" and only provide the most general of discussions on different voting matters.

Pay-for-Performance Analysis. Some information in this section also raises more questions than provides answers. The Glass Lewis model examines six indicators (stock price change, change in book value per share, EPS growth, total return, return on equity and return on assets) and the total compensation of executives against four different peer groups (industry peers, sector peers of similar size, companies of similar market capitalization and companies in the same geographic regions). Each peer group is assigned a weight based principally on the market capitalization of the company. In the Issuer FAQs, Glass Lewis notes that it uses market-based data to calculate shareholder returns from FactSet and, like ISS, finds peers from the Global Industrial Classification System (GICS).

In the end, the model calculates an executive compensation percentile and a performance percentile against peers. A final numeric score is then calculated for each company based on these weighted-average percentile scores, which are then placed on a forced curve, producing the infamous Glass Lewis letter-grade on compensation.  20% of companies receive As and 10% receive Fs.  The remaining distribution is not disclosed. 

Say-on-Pay Analysis.  The above pay-for-performance discussion makes up only the quantitative aspect of the Glass Lewis say-on-pay analysis.  Here issuers will find more lists and charts and general descriptions of items examined to come up with the say-on-pay recommendations.  With more negative recommendations on say-on-pay when compared to ISS, one thing to note that makes Glass Lewis quite different is its focus on proxy disclosure, particularly with respect to performance metrics.

In a recent study trying to determine whether and how any of this matters, The Conference Board, NASDAQ, and the Rock Center for Corporate Governance at Stanford University surveyed 110 companies.  More than 70% reported that their compensation programs were influenced by the guidance received from proxy advisory firms or by the policies of these firms.  The study found that a negative recommendation from ISS, on average, influences between 13.6% to 20.6% percent of say-on-pay votes.

The impact is further detailed in a different study that examined the reports issued for the S&P 1500, concluding that a negative recommendation from ISS is associated with 24.7% (12.9% for Glass Lewis) more votes against say-on-pay. When both advisors make negative recommendations, voting dissent is higher by 37.9%.  According to this study, not all "Against" recommendations have the same impact.  The impact is greater when ISS identifies a problem in pay-for-performance and change-in-control agreements, and when it identifies a problem in more than one category.  In the case of Glass Lewis, the impact is higher for companies with the worst letter-grade ratings. 

Yesterday, the SEC sued two former executives of Arthrocare Corporation, a manufacturer of medical devices, to recover bonuses and stock profits they had received after the company had filed false financial statements. In doing so, the SEC continued its policy of seeking to apply Section 304 of Sarbanes-Oxley to executives who have not been personally charged with the fraudulent financial statements.

Under Section 304, if “an issuer is required to prepare an accounting restatement due to the material noncompliance of the issuer, as a result of misconduct,” then its CEO and CFO is required to reimburse the issuer for certain compensation received or profits made from the sale of the issuer’s stock during the 12-month period after the fraudulent financial statement was filed. While the SEC had previously settled charges against two other Arthrocare executives who were charged with fraudulently overstating the company’s revenues and earnings, it did not charge the CEO or CFO with any personal misconduct in its current complaint.

In a previously litigated case, SEC v. Jenkins, the District Court of Arizona held that disgorgement of compensation and profit pursuant to Section 304 of Sarbanes-Oxley does not require personal misconduct.

In its press release, Robert Khuzami, the Director of the SEC’s Division of Enforcement, stated that clawbacks under Sarbanes-Oxley are “yet another reason for CEOs and CFOs to be vigilant in preventing misconduct and requiring that companies comply with financial reporting obligations.”

On Tuesday, I was fortunate to co-moderate a NYSE-sponsored webcast with Judy McLevey at the NYSE, as we discussed the leading proxy and governance issues for 2012 with a group of recognized experts that included Doug Chia from Johnson & Johnson, Michelle Edkins and Robert Zivnuska from BlackRock, Gordon McCoun from FTI Consulting and Pat McGurn from ISS.  An archive of the webcast is available here. Judy first informed us that while 285 companies have held annual meetings, 430 more are slated for April with another 970 currently scheduled for May.  The panelists then provided interesting perspectives and useful advice on several issues relevant to public companies today, including the following:

Proxy Statements.  Doug discussed J&J's efforts to start from scratch for this year's proxy statement with an eye toward redesigning it for the individual investor, noting that a number of companies have attempted to make their documents attention getting, almost like glossy annual reports.  Due to its large volume of holdings, Bob stated that BlackRock's starting point for proxy review are the summaries generated by proxy advisor firms, before they dive into the proxy statements themselves.  CD&A summaries with the board's perspective, clarified through tabular and graphical disclosure, has been a helpful innovation, but they are not as enthusiastic about proxy summaries that may be trying to get ahead of proxy advisors and fail to include data that BlackRock would find important, such as conflicts of interests.

Say-on-Pay.  Pat reiterated that ISS has changed its methodology to place more emphasis on the three-year and five-year timeframe in its initial quantitative pay-for-performance analysis, as well as review overall pay magnitude.  More companies are providing proxy disclosure that already anticipates investor (and ISS) concerns, as a preemptive strike, which has proved to be helpful in allowing ISS to get information out to their clients faster and possibly avoid the need for so many of the ancillary filings made last year.  As a result of these and other improvements, Pat predicts that there will not be a substantial increase in opposition in 2012.  There has only been one instance so far of ISS making negative recommendations against the compensation committee as a result of unresponsiveness to the prior year's low votes.  Overall, average support levels are at 91% with 9% against, and the number of ISS' negative recommendations are currently running in the low teens.

Shareholder Engagement.  According to Bob, BlackRock has seen a significant increase in shareholder engagement during the post-season period, from July through February, as companies reach out to investors to interpret their vote result in order to build in those perspectives into their compensation committees' processes.  Board members have even met directly with investors when there have been real concerns.  While triggered by compensation, BlackRock has used these engagement opportunities to also speak to companies about other governance or performance questions.  Since BlackRock and likely other investors are not looking at the proxy statements until a week or two before the vote is due, Michelle emphasized that building an existing relationship with investors is the best way to facilitate those last-minute panicked calls to try to obtain support in the face of negative proxy advisory firm recommendations.  Doug recounted J&J's broad outreach efforts in light of the company's 61% support for say-on-pay in 2011, as they devoted more time and resources to gain an understanding of the vote results and explain their story.  On his part, Gordon believes that the 2012 proxy vote will be as much about the engagement process companies have undertaken in response to the 2011 say-on-pay vote as on the compensation paid. 

Shareholder Proposals.  Shareholder engagement is also the reason that there are fewer proposals this year, as companies and proponents agree on compromises after negotiations.  After speaking with hundreds of investors, Pat stated that it continues to be difficult to predict the level of support that proxy access shareholder proposals will receive.  About a dozen proposals are likely to come to vote.  Investors have indicated that rights to access should only be available at a reasonable ownership level, but have not quite agreed upon what level is reasonable.  Interestingly, the length of the holding period seem to be less of a concern to investors.  In giving their views on several different proposals, Bob and Michelle indicated that BlackRock believes a strong lead independent director can provide sufficient independent oversight without the need for an independent chair in all instances, but that a declassified board coupled with majority voting really enhances the accountability of directors.  With respect to the popular political contributions proposals, BlackRock conducts a case-by-case analysis on the nature of the proposal and the kinds of disclosure the company is already making.  Their advice for company opposition statements in proxy statements is to avoid starting with the conclusion that the proposal is not in the best interest of the company and instead focus on how the company has already addressed the concerns raised in the proposal. 

At the Walt Disney Company’s annual meeting of shareholders today, shareholders approved Disney’s controversial executive compensation plan and voted to reelect Disney’s slate of directors, despite negative recommendations by the ISS.  ISS had recommended against voting for the members of Disney’s Governance and Nominating Committee because of the decision to appoint its Chief Executive Officer, Bob Iger, as Chairman of the Board at the annual meeting, thereby reversing “a commitment to independent board leadership without conducting outreach to shareholders beforehand.” Disney had not combined the roles of CEO and Chairman since 2004.   ISS also recommended against Disney’s say-on-pay vote.

Disney had vigorously opposed the negative ISS recommendations. In recent SEC filings, Disney asserted that its action of combining the CEO and Chairman roles was part of a well thought-out succession and transition plan for its CEO who is expected to retire in 2016. Disney also stated that it expected to appoint an independent lead director with duties and responsibilities “that, ironically, exceed in scope those recommended by ISS.” Disney found that ISS’s recommendation on its compensation plan are “based on both flawed premises and methodology.”  Disney disputed ISS’s choice of peer group and also compared its total shareholder return to that of the S&P 500 and found that it was four times greater during Mr. Iger’s tenure as CEO.   

Disney’s executive compensation plan was reportedly approved by 56.6% of the shares cast while 42.8% opposed.  This is down from last year when 76.8% shares supported the compensation plan and 22.7% opposed it.  Although Disney might deem this a “win”, it will be interesting to see if this relatively low approval rate will result in greater scrutiny of its compensation plan by shareholders and proxy advisory services next year.

A number of companies have been unhappy to discover that ISS' recent adoption and resulting move to GRId 2.0 changed "low" or "medium" concerns to move up a notch (to "medium" or "high" concerns), especially in the compensation category.  Others were pleased to find that GRId 2.0 caused movement in the opposite direction.  Any dissatisfaction, or relief, may be short-lived, because the compensation data reflects information from the 2011 proxy statement, meaning 2010 pay.

ISS has confirmed that they will update the data when companies file their 2012 proxy statements. When a company's proxy voting recommendation is published by ISS, the answers to the pay-for-performance related GRId questions will be updated along with the rest of GRId.  GRId scores will be reflected in the voting report.  The new GRId aligns more closely with the ISS proxy voting reports.  Note in particular that the pay-for-performance section under GRId is the same pay-for-performance analysis that ISS conducts for its voting reports. 

These answers will not change until the following year’s proxy filing. Companies need not input anything through the data verification process, though should check the answers, as well as the proxy voting recommendations, for accuracy.

Having spent some time with the new GRId, we find that it is quite difficult if not impossible to discern how a company attained its particular compensation score, and what would constitute sufficient changes to move (up or down) to another level of concern.  Perhaps it is no surprise that ISS offers a consulting service on GRId.

The SEC Staff has agreed that several companies can exclude their proxy access shareholder proposals that were modeled on a template provided by the United States Proxy Exchange, which also became known as the "retail" version because they were generally submitted by retail shareholders. 

- For Sprint, MEMC and Chiquita, the Staff agreed the proposal is vague or indefinite for referring to "the SEC Rule 14a-8(b) eligibility requirements," since the proposal doesn't describe the specific requirements and they are a "central aspect of the proposal."  The Staff went on to say that "while we recognize that some shareholders voting on the proposal may be familiar with the eligibility requirements of Rule 14a-8(b), many other shareholders may not be familiar with the requirements and would not be able to determine the requirements based on the language of the proposal." The basis for this decision may be a bit surprising given that the Staff disagreed this season with companies that had argued that proposals that request the board to have an independent board chairman, by the standard of the New York Stock Exchange, are vague or indefinite by referencing the NYSE standard without sufficiently describing them. 

- For Textron, Goldman Sachs and Bank of America which included the procedural argument, the SEC Staff agreed that the access proposal consists of multiple proposals because paragraph 6 raises a "separate and distinct" proposal relating to events that would not constitute a change of control, while the other paragraphs (1-5 and 7) contained a proposal related to shareholder nominations. 

In addition, as suspected, the Staff rejected KSW's argument that they had substantially implemented a binding proposal that had a threshold of 2% ownership requirement by adopting a bylaw with a 5% ownership requirement.

CalSTRS recently released a paper, “Lessons Learned: The Inaugural Year of Say-on-Pay,” in which they detailed their reasons for voting against companies’ 2011 Say-on-Pay proposals.

Surprisingly, CalSTRS voted against 23% of the say-on-pay proposals on which they voted during the 2011 proxy season, citing a pay for performance disconnect as the primary reason. In looking at the pay for performance disconnect, CalSTRS found that most of the companies they voted against had negative 5-year performance numbers. Other pay for performance issues noted by CalSTRS were companies’ failure to prioritize or fully explain the “laundry list” of performance metrics listed in the proxy statement and problems in peer group selection, including: a failure to adequately disclose the rationale of the peer group selection, too large a peer group, mismatch of size of peers and inclusion of companies in an unrelated industry.

CalSTRS’s second reason for negative say-on-pay votes was the ratio of CEO to named executive officer pay.  CalSTRS said that, although it would not be the sole factor in determining their vote, a pay ratio over 3 times would cause them to question a company’s practices.

A CEO base pay of over $1 million was listed as the next reason for a negative vote.  CalSTRS also found it troubling when companies used peer benchmarking to pay above the median, “particularly when companies targeted the 75th and 90th percentile.”  CalSTRS noted that this type of pay benchmarking would be a “renewed focus” next year.

Finally, in an effort to make proxy disclosure more understandable for the average investor, CalSTRS lauded the use of plain English executive summaries and additional tables to describe actually realized executive pay.

In a sampling of the companies against which they voted, CalSTRS found that the industries receiving the most negative votes were consumer discretionary, energy and industrials.

CalSTRS’s “Lessons Learned” can be found here.

The SEC Staff made several recent decisions on questions of proof of ownership for submission of shareholder proposals, in light of the requirement under Staff Legal Bulletin 14F, which we previously discussed.  SLB 14F makes clear that only DTC participants are viewed as record holders of securities that are deposited at DTC. 

The Staff declined to grant no-action relief to companies that argued that the proof of ownership was not from a DTC participant when the brokers' letters were from TD Ameritrade, Inc. instead of TD Ameritrade Clearing, the entity named on the DTC participant list.  The proponents in some of these situations provided an additional letter of support from TD Ameritrade in response to the company's no-action letter request, but the SEC Staff gave the same ruling even when proponents did not.  The Staff noted that the proof of ownership from TD Ameritrade, Inc. was sufficient since it was provided by a broker that provides proof of ownership statements of behalf of affiliated DTC participants. 

But even when the Staff agreed with Allergen that the proponent, John Chevedden, failed to provide a statement from the record holder evidencing appropriate documentary support of continuous beneficial ownership, the Staff gave Mr. Chevedden seven additional days to address the deficiency.  Mr. Chevedden had provided proof of ownership only from Ram Trust and not the DTC participant.  The Staff indicated in its response that the company failed to informed the proponent of what would constitute appropriate documentation in its request for additional information from the proponent, and noted SLB 14F states that they will grant no-action relief to a company on the basis that a proponent's proof of ownership is not from a DTC participant only if the company's deficiency letter describes the required proof.  It appears from the filed correspondence that while the company clearly pointed out the problem to Mr. Chevedden in its notice, only a copy of Rule 14a-8, and not a copy of SLB 14F, was included with the letter.   The Staff denied the company's request to reconsider its decision.

Among the new proxy disclosure requirements under the Dodd-Frank Act is the mandate that issuers disclose in their CD&A “[w]hether, and, if so, how the registrant has considered the results of the most recent shareholder advisory vote on executive compensation… in determining compensation policies and, if so, how that consideration has affected the registrant’s executive compensation decisions and policies.”  Thus far, the vast majority of the 110 large accelerated filers who filed proxy statements in the 2012 season through February 29, 2012 have addressed this new requirement in their CD&As.  Generally, the disclosure has been fairly predictable: those that received lower shareholder approval ratings on say on pay in 2011 have provided lengthier disclosure, often addressing changes made to their compensation programs, while those that received stronger shareholder support have simply stated that they have considered the results and decided to continue their previous compensation practices in light of the support.

However, 14 large accelerated filers have failed to disclose the effect of the 2011 say on pay vote results in their CD&As.  Of these, 9 did not mention the say on pay vote in their CD&A at all.  Five companies reported last year’s vote results but did not go on to discuss whether or how the company considered the result.

Interestingly, the failure to disclose the effect of last year’s say on pay vote has not negatively affected either ISS recommendations regarding this year’s say on pay proposals or say on pay results in 2012.  Of the 14 companies discussed above, the 9 that have received a recommendation on their 2012 say on pay proposal from ISS have all received a “for” recommendation.  Of the 14 companies discussed above, the 6 that have reported their 2012 say on pay results as of February 29, 2012 have all received above 90% shareholder support.  The lack of focus on the new disclosure by ISS and shareholders may be because all of these companies received at or above 89% shareholder support in 2011.  Query whether the SEC will be as forgiving with respect to companies that do not address the new disclosure requirement.

Today, February 20, ISS has posted a preview of its updated GRId 2.0 data profiles for U.S. companies.  Company representatives can access the GRId profile (for free) through the ISS data verification site to review the information and alert ISS as to any mistakes or other areas for corrections.  To obtain a data verification user name and password if you do not already have one, contact ISS by email at or call 301 556 0570.

As we previously discussed, GRId 2.0 adds many new questions, particularly in the compensation area, and adjusts the scoring system.  For the first time, actual scores in each of the categories of Board, Compensation, Audit and Shareholder Rights, will be displayed in addition to the overall “high,” “medium,” or “low” system.  A copy of the lengthy technical document with all the questions being scored is available here.

The revised GRId score will be available for the entire GRId universe of US companies, largely the Russell 3000 companies, on Monday, February 27.  ISS will make the data available for the Yahoo Finance page of companies on March 1 (a company's GRId score can be found under Business Summary - Company Profile on its Yahoo Finance page).  A page showcasing the GRId data is also part of a company's ISS annual meeting voting recommendation report. 

• Just in time before most proxy statements are issued, the SEC staff has issued a CDI on how say-on-pay resolutions should be described on proxy cards and voting instruction forms, with specific examples given of resolutions that would be considered compliant.  The four examples (To approve the company’s executive compensation; Advisory approval of the company’s executive compensation; Advisory resolution to approve executive compensation; and Advisory vote to approve named executive officer compensation) all contain the notion of "approval" in casting the vote.   The Staff indicated it was concerned that some resolutions, such as "To hold an advisory vote on executive compensation," are not sufficiently clear.
• Western Union has announced that it will drop its plans to adopt a proxy access bylaw, in light of its decision to declassify its board and "its ongoing assessment of whether proxy access should be included in the Company’s corporate governance structure."
• CalPERS, other pension funds and investors submitted a letter to the SEC asking that the Commission focus on certain priorities in the next 12 months.  The list includes proxy access, the remaining executive compensation provisions required under the Dodd-Frank Act, International Financial Reporting Standards (IFRS) and corporate disclosure on sustainability issues, such as environmental matters and board diversity. 
• As noted on TheCorporateCounsel.net, Apache and John Chevedden have reached a settlement in the Southern District of Texas, permitting Apache to exclude Chevedden's shareholder proposal, which Apache had disputed with respect to Chevedden's proof of ownership.  Chevedden's appeal in the Fifth Circuit with respect to a similar prior case (KBR v. Apache), is pending. 
• The NY Post reports that a whistleblower has filed a complaint with the SEC alleging that an employee in the Boston office of ISS has been providing proxy solicitors with shareholder voting data in exchange for cash and gifts. 

Instead of being the first company with a proxy access shareholder proposal voted on at its meeting, Hewlett-Packard recently became the third company to agree to implement proxy access.  If approved at the 2013 meeting, HP would allow shareholder groups that own at least 3% for 3 years to nominate candidates for up to 20% of the board.  HP follows in the steps of Western Union and KSW, in making efforts to permit proxy access in response to these shareholder proposals.  HP managed to get its proposal, submitted from Amalgamated Bank, withdrawn, but Western Union and KSW are seeking exclusion through the SEC no-action letter process and are still waiting to hear. 

Contact Ning Chiu.

As companies are in the midst of preparing their proxy statements, some may have forgotten an interpretation that the SEC Staff issued last summer regarding the use of non-GAAP financial measures in CD&As that could affect your disclosure.  The CDI in Question 118.08 indicates that if the non-GAAP financial measure is not a target level that is subject to exemption from the non-GAAP disclosure rules, but rather, included in CD&A or other parts of the proxy statement to perhaps explain the company's results in relation to compensation paid, then some form of GAAP reconciliation is necessary.

Contact Ning Chiu. Contact Kyoko Takahashi Lin.