It’s December, so its time for the usual blizzard of End-of-the-Year lists, reviews, recaps and predictions. Since I was already digging through a heap of these on corporate law, I figured I would save you the trouble of doing the same. So here it is, your corporate governance Review and Preview Review, highlighting the major regulatory themes of 2011 and expectations for 2012.
2011 Review
Say-on-Pay (SOP): This was the inaugural year for Section 951 of the Dodd-Frank Act, which requires public companies to hold advisory shareholder votes on named-executive compensation practices. Already, it’s had a major impact on the relationship between pay and performance, leading many compensation committees to reduce the amount of non-performance-based pay, increase shareholder alignment and increase disclosure in the Compensation Discussion and Analysis required in proxy statements.
In 2011, over 40 companies received negative say-on-pay advisory votes. That sounds bad, until you realize that this is less than 2% of companies holding a SOP vote. That said, 10 of these 44 companies have be subsequently struck with shareholder derivative suits, leading some to believe that negative votes lead to lawsuits. Personally, I wonder if this is more correlation than causation, but it’s a trend to watch out for regardless. Still, the average SOP vote received 92.1% approval.
According to ISS, the major contributory factor to a negative vote was pay-for-performance concerns. Basically, a combination of higher pay but lower performance compared to peer firms caused shareholders to express their displeasure.
Anti-Anti-Takeover: “Among governance proposals, the biggest story of this year was the greater support for shareholder proposals that seek board declassification. These resolutions averaged 73.5% support, up more than 12% from 2010, and won majority support at 22 out of 23 large-cap firms.” Moreover, shareholders and proxy advisors both fought to remove poison pills – according to a Conference Board survey, now only 20% of companies have a shareholders rights plan in place.
2012 Preview
Say-On-Pay: Laurel Hill’s Francis Byrd wants compensation committees to “prepare with a similar level of intensity as last year” noting that institutional investors revise their voting guidelines annually. He’s right, they do, and have: the Glass Lewis Proxy Season Preview warns “absent evidence that a board is actively engaging shareholders on [say-on-pay votes] and responding accordingly, we will recommend holding compensation committee members accountable.” The ISS 2012 Policy Update goes into gross detail on how exactly it will determine whether an executive is getting paid too much. Tax gross seem to be in the crosshairs of many governance advocates this year.
Clawbacks: §954 of Dodd-Frank will lead to a clawback requirement for companies listed on the national securities exchanges. Listed companies need to develop and implement a policy providing for the clawback of a named-executive officer’s incentive-based compensation awarded during a 3-year period preceding an accounting restatement. 954 overlaps somewhat with SOX 304, but unlike SOX it does not require misconduct and only claws back the “extra” compensation erroneously awarded, rather than everything.
Clawbacks will be one of the hardest of Dodd-Frank’s governance provisions to implement, and it intends on tackling it sometime during the first half of 2012. Some companies have already begun to update their previous clawback policies in expectation for this change, but many compensation committees still need to address this issue in the coming year.
Anti-Management Entrenchment: Activist Shareholders and hedge funds will continue the fight to remove poison pills and declassify boards.
Proxy Access: SEC revisions to Rule 14a-8 came into effect in September, and a few activist investors have already filed proposals. Expect more of these in 2012. Both Glass Lewis and ISS say they will review these proposals on a case by case basis.
Environmental and Social Issues: We can expect continued fallout from the Supreme Court’s Citizen United decision. Already, a collection of big names in the academic world – the folks who wrote everyone’s Sec Reg book, basically – has petitioned the SEC for a rulemaking to require corporations to disclose spending on political activity. Laurel Hill notes that public pension funds and labor-related pension funds are looking to make more proposals this year. Glass Lewis will vote in favor of proposals requiring more disclosure. ISS is changing its policy from case-by-case to generally being in favor of these proposals.