March 2011

Last week House Republicans announced that they are drafting five bills to eliminate or change parts of the Dodd-Frank Act.  One of the five is the elimination of the provision to disclose the ratio between the CEO’s compensation and the median annual total of all employees.  Could this possibly come to fruition?  Unlikely given the hurdles of getting any kind action out of Congress lately, but it’s a space to watch.  The latest SEC timeline aims for proposing and adopting final rules on the pay ratio disclosure in the August-December timeframe.  

Contact Ning Chiu. 

Notable recent support for triennial say-on-pay include Viacom, with insiders controlling about 80%, and Franklin Resources, which barely squeaks in 57% support for triennial even though insiders own approximately 35%.  The tide is starting to turn as more companies recognize that triennial is a long shot without some kind of insider block.  Our data shows 416 large accelerated filers and 188 S&P 500 companies had filed their proxy statements, with 59% of large accelerated filers and 64% of the S&P 500 now recommending for annual say-on-pay.

Contact Ning Chiu.

We’ve all engaged in the “what-if” scenarios of close votes on the say-on-pay frequency vote, faced by Green Mountain Coffee Roasters.  The company recommended triennial say-on-pay frequency and received 49.37% for annual and 49.99% triennial.  Talk about close.  Instead of keeping us in suspense as they are legally permitted to do, the company has announced that they will adopt annual frequency and hold another vote next year.  Would more a .01% support that pushed triennial into majority support made a difference to the board? 

Contact Ning Chiu.

While ISS voting recommendation reports for companies are not “public”, sometimes additional soliciting materials filed by a company are informative.  On March 2nd, Disney filed its first communication indicating that the ISS recommendation to vote against its say-on-pay proposal is based on the disclosure of excise tax gross-ups that was granted in January 2010, and the compensation committee has since then adopted a policy that prohibits excise tax gross-ups in any future agreements (including any material amendments).  It’s tough to battle ISS recommendations, as on March 18th, Disney filed another communication indicating that the company has amended four employment agreements to remove excise tax gross-ups entirely. 

Contact Ning Chiu.

We did so well with our sound bites in our last interview that we were again quoted by Compliance Week (subscription required) on another Rule 14a-8 story, this time on substantial implementation.  It’s easy to show the SEC that you’ve substantially implemented a request to, for example, declassify your board.  But if the proposal asks for any kind of report with a specified list of “asks”, then it’s much harder if not nearly impossible to show that your report on the same subject already complies.

Contact Ning Chiu.

You can’t talk about governance these days without someone bringing up “shareholder engagement,” so it’s not surprising that there is now a study on the subject.  This ISS and IRRC study claims to be first ever benchmarking about engagement, polling 335 issuers and 161 investors, divided between asset owners and asset managers.  Highlights from the study:

• 50% of issuers, 53% of asset owners and 64% of asset manager report doing more on engagement than they have in the past
• 87% of issuers, 62% of asset owners and 70% of asset managers report that they’ve had at least one shareholder engagement in the past year
• In what the study dubs a “barbell effect”, investors either talk to a lot of companies or no one.  28% of asset owners and 34% of asset managers report talking to ten or more companies, but at the same time 45% of asset owners and 43% of asset managers report talking to none. 

No surprise that all sides claim that the biggest impediments to engagement is the lack of resources and staffing.

Contact Ning Chiu.

We were quoted in a recent Compliance Week story (subscription required) on the evolution of the ordinary business exclusion in getting the SEC staff to agree on companies’ no-action requests for Rule 14a-8 shareholder proposal.  The exclusion becomes more elusive over time, but requests that continue to be granted include proposals that the Staff agrees relate to the sale of a company’s products and services, terms of code of conducts and policies, managing marketing and other expenditures and income tax risks.  There are sometimes tough lines to draw, for example, proposals implicating board oversight of risk is not excludable, but if the proposal reaches into how management reviews risk, then it’s excludable.

Contact Ning Chiu.

The SEC staff issued a surprising CDI recently.  Seems that the biographies of directors who are not standing for re-election are required to be disclosed under both Item 401(a) and Item 401(e) of Regulation S-K, if not technically in the proxy statement, then in the Form 10-K.  Why investors would be interested in the bios of directors who won’t be continuing is a bit of a mystery.  And for those of you who have asked – Item 401(a) only applies to your current directors.  If they resigned before your published your proxy statement, you don’t have to worry about their biographies.

Contact Ning Chiu.

The SEC just issued a proposal to clarify that there will be no changes to the “beneficial ownership” rules for security-based swaps.  The concern was that language in the Dodd-Frank Act implied that if the SEC failed to enact new beneficial ownership rules for reporting security-based swaps by July 16, 2011, the SEC’s existing rules relating to derivatives reporting would no longer apply.  Yesterday’s proposal will dispel that notion (assuming the rule is made effective before July 16) by preserving the status quo for now.  Although this clarification is intended as a stopgap measure— the SEC is under pressure to reexamine its sections 13 and 16 rules in light of perceived abuses— I expect any rethink of sections 13 and 16 will be delayed by the overwhelming rule-making agenda arising out of Dodd-Frank.  Here’s the Davis Polk memo on the proposal.

Contact Phillip Mills.