by Raphael M. Russo
from Paul, Weiss, Rifkind, Wharton & Garrison LLP
The economic crisis fanned the flames of activist sentiment on the issue of executive compensation during the 2009 proxy season. Shareholder advisory votes on executive pay policies, referred to as “say on pay,” were thrust to the forefront. The economic crisis also focused attention on the vigilance of boards regarding risk management and their oversight over corporate pay practices. As a result, boards also faced increasing scrutiny of their independence from management, leading to increased calls for independent board chairs. Both of these trends were evident in 2009 and are likely to continue to have strong momentum going into next year’s proxy season.
Say on Pay
Heading into the 2009 proxy season, shareholders submitted proposals to approximately 100 companies to adopt say-on-pay policies. Then, in February, the say-on-pay movement received a considerable boost from the inclusion in the American Recovery and Reinvestment Act of 2009 (also known as the “stimulus bill”) of a requirement that financial institutions that accept federal financial assistance must provide their shareholders with a say-on-pay vote. This led several hundred financial companies that had received federal financial assistance in the financial crisis to add say-on-pay votes to their 2009 annual meeting agendas. In 2008, just six companies included say-on-pay votes in the annual meetings. More importantly, many observers believe that the inclusion a say-on-pay provision in the stimulus bill for financial companies is a harbinger of future federal legislation that will require say-on-pay votes at all public companies.
Interestingly, of the companies that had adopted say-on-pay policies in the past, shareholders generally voted to approve the company’s pay practices. One notable exception (outside the United States) is Royal Bank of Scotland, where the British government joined a 90% majority in voting against the company’s pay practices. The British government had become RBS’ largest shareholder as part of its financial rescue of the bank and has subsequently negotiated with the bank on a number of executive compensation reforms.
Say-on-Pay Alternatives
Rather than include a say-on-pay vote at its 2009 annual meeting, Schering-Plough Corp. took a different course going into the 2009 proxy season. In October 2008, it announced that it would conduct a shareholder survey on director and executive pay. At the time the survey was announced in October 2008, Schering had planned to distribute the compensation survey with its 2009 proxy materials and said it would discuss the survey results in its 2010 proxy statement. However, in the interim, Schering entered into an agreement to merge with Merck & Co. Schering nevertheless did send the survey materials to shareholders in May 2009 with the materials for its 2009 annual meeting as promised (the Merck merger has yet to close). According to material sent with the survey, the company is evaluating a process to complete and discuss the survey before the proposed transaction with Merck closes.
In a similar move, Amgen Inc. included in its proxy materials a link to an on online survey on executive compensation with questions developed by TIAA-CREF, a large institutional investor that has been active in the say-on-pay movement. In the face of a shareholder proposal calling for adoption of say-on-pay policy, Prudential Financial Inc. offered its shareholders a place on the company’s website where investors could view compensation information and provide feedback to the company. The company suggested that this was a sufficient alternative to the shareholder proposal.
Independent Board Chairs
In addition to executive pay, shareholders also kept up pressure to separate the role of board chair and CEO. Overall, independent chair proposals have averaged just under 40% support on average at the 11 U.S. companies holding meetings so far this year, up from 30% average support last year. At Bank of America, where there was considerable shareholder dissatisfaction over the company’s acquisition of Merrill Lynch, a binding independent chair proposal garnered majority shareholder support. Independent chair proposals were on the agenda at a number of other companies and received majority support at several of them.
Looking Ahead to 2010
As the 2009 season comes to a close, two developments are front and center, presaging important changes for 2010 and beyond. The first is that the SEC is expected to take up proxy access again. Chairman Schapiro has indicated that the commission will put forward several alternative rulemaking proposals in May 2009 that would allow shareholders an opportunity to include director nominees in company proxy materials.
The second development on the horizon is a change in the rules regarding the voting of securities held in street name brokerage accounts. SEC approval of a proposal by the NYSE to change its rules on discretionary voting is expected to come soon. Currently, NYSE-member brokerage firms who hold shares for a customer are permitted to vote those securities on routine matters (which currently include uncontested director elections) in their own discretion if the customer does not otherwise instruct the broker on how to vote. Historically, most brokers have voted in accordance with management’s recommendation, although in recent years a number of brokers have begun to divide these votes in proportion to the instructions given by those customers who provide instructions. The proposed rule amendment would eliminate director elections from the list of routine items for which brokers can vote in their discretion.
This could have an impact on the ability of public companies to ensure that a quorum is present at shareholder meetings as well as on the outcome of director elections, especially at companies that have adopted some form of majority voting.
These two items and continued attention to compensation issues are likely to be important topics to watch as we get ready for next year’s proxy season.
About the Author
Raphael M. Russo is a partner in the Corporate Department at law firm Paul, Weiss, Rifkind, Wharton & Garrison LLP. Russo focuses on capital markets and securities transactions as well as corporate finance and the representation of public companies. As part of his domestic and international issuer practice, Russo advises public companies on a range of corporate governance and disclosure issues.