The Society's 68th National Conference will be held June 25-28, 2014 at the Westin Copley Place Hotel in Boston, MA. Conference and room registration are open, but rooms are going fast.
We are pleased to announce that Keith Higgins, Director of the Division of Corporation Finance will give an SEC Update on Friday morning.  This year's conference will feature break-out sessions tracking skills-based, Large-Cap, Small & Mid-Cap, Private and Not-for-Profit Company and Specialty topics. 

In this edition of Governance Minutes, Darla Stuckey, Executive Vice President and General Counsel of the Society hosts new Society President and CEO Stephen Brown to discuss what's new at the Society, and how we can continually better serve our members.

Division of Corporation Finance Issues Guidance: No Stay of Conflict Minerals Disclosure  

Despite the joint statement of Commissioners Gallagher and Piwowar earlier this week, on Tuesday, the Division of Corporation Finance staff issued guidance that companies should file their Form SDs notwithstanding the Court ruling that vacated part of the rule on First Amendment grounds.  The guidance states: 

Thus, companies that do not need to file a Conflict Minerals Report should disclose their reasonable country of origin inquiry and briefly describe the inquiry they undertook. For those companies that are required to file a Conflict Minerals Report, the report should include a description of the due diligence that the company undertook. If the company has products that fall within the scope of Items 1.01(c)(2) or 1.01(c)(2)(i) of Form SD, it would not have to identify the products as "DRC conflict undeterminable" or "not found to be 'DRC conflict free,'" but should disclose, for those products, the facilities used to produce the conflict minerals, the country of origin of the minerals and the efforts to determine the mine or location of origin. 

 

No company is required to describe its products as "DRC conflict free," having "not been found to be 'DRC conflict free,'" or "DRC conflict undeterminable." 

And, thanks to Brian Breheny for initially alerting us to the first ever Conflict Minerals Report filed with the SEC. Siliconware Precision Industries Co., Ltd. filed its Form SD early, on April 24. 

Commissioners Gallagher and Piwowar stated that the rule should be stayed in the hopes that the Court will invalidate it in its entirety. They state that the Circuit Court's First Amendment concerns "permeate all the required disclosures" and that an issuer should not be "required to include a description of its due diligence procedures in its reports [because it] would suggest that the issuer may have "blood on its hands" for its products since it is sourcing certain minerals from the DRC." Furthermore, they state that the refusal to stay the litigation is a waste of staff resources and shareholder money: "Marching ahead with some portion of the rule that might ultimately be invalidated is a waste of the Commission's time and resources-far too much of which have been spent on this rule already-and a waste of vast sums of shareholder money." 

See also this Davis Polk memo and this Covington & Burling memo.  

House Passes Bill to Amend Treatment of Collateralized Loan Obligations Under Volcker Rule 

On Tuesday, the House passed, with bipartisan support, H. R. 4167, the "Restoring Proven Financing for American Employers Act" to exclude certain debt securities of collateralized loan obligations from the prohibition against acquiring or retaining an ownership interest in a hedge fund or private equity fund. 

According to the SIFMA website: 

H.R. 4167 is an important clarification of how the Volcker Rule should affect the securitization of commercial loans and will prevent unnecessary disruptions to the flow of capital to middle market and larger companies that rely on collateralized loan obligations (CLOs) for credit. 

Commissioner Stein Expresses Concern over WKSI Waiver for RBS 

Also this week, Commissioner Stein dissented from the Commission's order granting a waiver to Royal Bank of Scotland after its automatic disqualification from Well-known Seasoned Issuer ("WKSI") status for a criminal conviction relating to manipulation of the LIBOR index. Her dissent is strongly worded and notes that this is the second time the Commission has waived the disqualification where criminal conduct was involved. In Commissioner Stein's view, issuers who engage in criminal misconduct should not be given special status by the Commission through waivers: 

Say what you will about how isolated or insignificant this conduct was within the context of the entire institution, it still managed to wreak havoc on financial markets across the globe. Yet we provide our implicit "Good Housekeeping Seal of Approval," and tell the investing public that this issuer is still deserving of reduced Commission review and subject to fewer investor protections. 

 

If we are going to abrogate our own automatic disqualification provision on these facts, then we should consider discarding these disqualification and bad actor provisions entirely, along with the pretense that they have any real meaning. 

Also note the Division of Corporation Finance's Revised Statement on Well-Known Seasoned Issuer Waivers last week and Commissioner Gallagher's Statement on it.  

Canadian Regulator Seeks Feedback on Proxy Advisors 

Canadian Securities Administrators (CSA), the umbrella organization for Canada's mosaic of markets regulators, is seeking feedback on its proposals for a policy on proxy advisory firms. "National Policy 25-201 Guidance for Proxy Advisory Firms" is the result of its 2012 consultation paper which looked at possible issues with the shareholder voting research industry. The CSA says that its proposed policy is intended to "address concerns raised in the consultation process by certain market participants related to conflicts of interest, transparency and accuracy."  

California Senate Committee Passes Bill That Would Raise Taxes on Companies with High Pay Ratios

The California Senate Governance and Finance Committee passed a bill, SB 1372, this week in "[a]n effort to stop outrageous CEO pay." The bill "creates a new corporate tax table that decreases taxes for employers with reasonable differences between CEO and worker pay, and increases taxes on companies with large disparities between CEO and worker pay." The bill applies to any public issuer doing business in the state, and specifies escalating tax rates for CEO v. median worker pay ratios as low as "zero to 25" to "over 400," at which the tax rate tops out at 13%.

Comp Consultant Compares Policies of Institutional Investors and Proxy Advisors

Pay Governance has published a viewpoint that looks at what the largest investors say about their reliance on proxy advisors, whether proxy advisor recommendations are aligned with their client's guidelines, and how companies can effectively engage with investors on compensation issues. With respect to the alignment between proxy advisor recommendations and the publicly available voting guidelines of institutional investors, the report finds that investors and proxy advisors "share 'bigger picture' concerns (e.g., pay-for-performance alignment, preference for significant use of performance-based compensation), but that specific plan provisions...are less frequently called out as priorities in institutional investor voting guidelines."

Broadridge Posts Policy for Providing Interim Vote Results on Website 

Broadridge has posted on its website a description of the circumstances under which it will provide voting information to issuers and other soliciting parties. Broadridge's posting provides definitions and historical context to its past procedures with regard to providing parties with voting information, both issuers and investors who use the exempt solicitation process in non-contested situations as well as those soliciting proxies in a contest. Broadridge describes its current policy as follows:  

As of late 2013, Broadridge was prepared to facilitate provision of an issuer's vote status information to an exempt solicitor upon instruction from the issuer and upon execution of a three-party confidentiality agreement (among Broadridge, the exempt solicitor, and the issuer). Between December, 2013 and April, 2014, a few issuers inquired about the practice, and vote status information was provided to one shareholder proponent.

General Motors Adds Union Representative to Board 

General Motors has nominated Joe Ashton, a vice president of the United Auto Workers ("UAW") to its board. Ashton is being nominated based on an agreement, stemming from GM's 2009 bankruptcy, which gave the UAW Retiree Medical Benefits Trust, GM's largest shareholder, the right to designate a director, subject to the board's approval. Union representation is highly unusual for an American company, as this Washington Post article points out. Ashton is resigning from the UAW in June; per a GM spokesman he will be expected to adhere to the same governance guidelines as other directors. The GM proxy notes that Ashton's experience will be an asset to the board, noting his "deep understanding of how labor strategy can affect a company's financial success," and his "expertise in areas such as manufacturing processes, pension and health care costs, government relations, employee engagement and training, and plant safety." He will not be considered independent.

Results from Select Meetings

Annual meeting season is finally here, with a flurry of meetings taking place in the last couple weeks. Here are select highlights. In all cases, the percentage of votes calculation is based on For/(For + Against).

Ameren Corporation had two shareholder proposals come to a vote; a proposal to establish an independent chair received 26% of shares voted, and a proposal requesting a report on lobbying received 37% of shares voted. A third proposal on reducing greenhouse gas emissions was included in the proxy, but withdrawn prior to the meeting.

Pfizer also faced a lobbying activity report proposal, but it received only 6% of shares voted. A proposal requiring that shareholders actually approve political expenditures received only 4%, while a written consent proposal received 44% of votes cast. Pfizer's say on Pay (96%) and stock plan passed easily (88%).

A proposal to establish written consent at AT&T received 41% of shares voted, while proposals requesting reports on lobbying and political contributions each received 25% of votes cast. Citigroup also faced a lobbying proposal, which received 26% of shares voted. Other shareholder proposals did not fare as well: the popular proposal that executives retain a significant percentage of shares acquired through equity pay programs until reaching normal retirement age received 4%, a proxy access proposal received 6%, and a proposal requesting that the Board institute a policy to make it more practical to deny indemnification for Directors received only 2%. Citigroup's say on pay proposal received 85% support, while its equity compensation plan received 97%, and directors received an average of 97% support.

Coca-Cola's meeting received plenty of attention. Its say on pay proposal received 91% while its much talked about equity compensation plan received 83% of shares voted. There was considerable commentary around Warren Buffet's decision to abstain from voting on the plan, and his decision not to communicate his view that the plan was excessive until after the annual meeting (see here). A shareholder proposal to establish an Independent Board Chairman received 32% of votes cast.

Six shareholder proposals came to a vote at General Electric. Two received more than 20% of votes cast: cumulative voting (26%) and written consent (21%). The others all received less than 4%: Senior Executives Hold Option Shares for Life (3%), Multiple Candidate Elections (3%), Cessation of All Stock Options and Bonuses (4%), Sell the Company (1%). Say on Pay received 94%.

Johnson & Johnson's say on pay proposal received 96%, while a shareholder proposal that executives retain a significant percentage of shares acquired through equity pay programs until reaching normal retirement age received 26%.

We have begun to add vote results to the Shareholder Proposal Database located here. We are also including the average support received by the board for companies that had shareholders proposals on their ballot.

Proxy Monitor is also tracking shareholder proposal and say on pay vote results for Fortune 250 companies here.

Proxy Statements 

The number of proxy statements coming out has slowed, especially among larger companies.  

Wal-mart's proxy contains an effective summary, including attractive graphs describing director demographics and experience. The proxy also has an extensive discussion on peer groups, of which it uses three, as well as a comprehensive "What We Do; What We Don't Do" table on pay practices. The company also provides shareholders with many ways to contact the board and company, including individual email addresses for each director, and a smartphone app where shareholders can provide feedback to the investor relations department. UnitedHealthcare has a summary of its entire proxy, as well as an executive summary of its executive compensation. It also has a detailed list of the duties of an independent Chair of the Board or Lead Independent Director. Other companies with effective summary statements include Priceline, Activision Blizzard, Inc., Roper Industries.

Devon Energy contains an extensive discussion of realizable pay, including a unique four quadrant box that maps Devon's realizable pay and TSR versus that of its peers. Other companies that discuss realizable pay include Western Refining, Approach Resources Inc., and Momenta Pharmaceuticals, Inc. LifePoint Hospitals has an especially attractive schematic (pg. 31) that provides an overview of its executive compensation program.

Supplemental Proxies - Peer Groups; Burn Rates; ESG Proposals

Anadarko Petroleum filed in response to ISS's negative recommendation on say on pay noting a settlement of an adversary proceeding that had kept the stock price, and consequently, TSR, depressed: "Anadarko's relative total stockholder return for 2013 did not reflect the company's exceptional operational and financial performance largely due to uncertainty relating to the Tronox Adversary Proceeding."

Colfax Corp announced the extension of the CEO's employment contract and new equity grants in connection with the extension.

EnteroMedics filed a supplemental proxy to solicit support for its equity incentive plan, noting its burn rate, which apparently ran afoul of the maximum ISS burn rate test for their industry group, and total potential dilution:

The Company's . . . burn rate, was 9.39% as of December 31, 2013, which is slightly higher than the maximum burn rate of 9.08% for the Company's industry group under Institutional Shareholder Services Inc.'s ("ISS") applicable policy guidelines for 2014 and slightly lower than the maximum burn rate of 9.92% for the Company's industry group under the ISS's applicable policy guidelines for 2013. . . The total potential dilution (on a fully diluted basis) as of December 31, 2013 if the increase to the number of shares authorized under the Plan is approved would be approximately 6.9%."

Broadcom seeks approval of its executive pay despite negative recommendations by both ISS and GL. It notes the cyclicality of the industry, and future changes to reduce stock-based compensation and more directly align pay with performance.

The semiconductor industry is cyclical and as such we use relative revenue performance and operating performance, as well as achievement of pre-defined strategic objectives. We believe relative revenue growth is an important measure of our success in growing our market share. We further believe that the non-GAAP operating margin metric delivers meaningful economic value within our target economic model and that in cyclical periods where the market declines, a free cash flow metric is important to encourage and maintain tight fiscal management and protect Broadcom's assets. The final metric - a list of pre-determined strategic objectives - permits our Compensation Committee to award a bonus component based on strategic accomplishments (such as technology advancement, key customer wins, environmental consciousness, etc.) that are not purely financial but are critical to our long-term success, as well as the Committee's qualitative assessment of individual performance and achievements. We disagree with ISS' comment that the program is overly "discretionary."

Assured Guaranty Limited takes issue with ISS's peer group selection noting that only one other company does the financial guaranty insurance business, and it is privately held. It also notes that the company has a market cap of nearly 3X that of the average of the the ISS peer group.  "Our achievements cannot be measured according to a strictly applied formula"

Consol Energy also disputes ISS's peer groups, as well as other assertions: "Contrary to ISS' Assertion, CONSOL Has Not Lagged in Total Shareholder Return ("TSR") or other measures of performance." The filing notes changes made in its stock plan program (reducing threshold payouts to 50% of target) and its LTIP (pay-out contingent on achieving both TSR and Return on Capital Employed), as well as reduced pay for the CEO and President. Consol also notes that Glass Lewis gave the company credit for its changes whereas ISS did not:

Glass Lewis evaluated these changes and concluded "[o]n balance, we believe these changes should serve to strengthen the link between executive payouts and the Company's overall performance, and go a ways toward addressing certain longstanding concerns that Glass Lewis has raised with regard to the Company's compensation practices."

ISS acknowledges these substantial changes as addressing some key issues, but takes the position that it is too early to determine whether the programs will fully address concerns.

Core Laboratories NV files to modify (decrease) the number of shares sought for its equity plan.

Xylem's filing relates to management's recommendation for a special meeting proposal at a 25% threshold in response to a proposal the previous year. The supplemental reiterates its description in the proxy regarding investor outreach resulting in the conclusion that a 10% threshold was too low:

• We proactively engaged our 25 largest shareowners, holding over 100 million shares representing more than 50% of our outstanding shares of common stock at the time.
• As a result of this engagement, we conducted extensive interviews with the 17 shareowners . . . . [which] held over 76 million shares representing more than 40% of our outstanding shares of common stock. . . .
• Of those interviewed, holders of 80% of the shares indicated that a 10% threshold was too low and that they would support a management proposal with a threshold of 25%, while only 11% indicated that they supported the 10% threshold contemplated by the 2013 shareowner proposal. One shareowner, representing approximately 9%, could not provide a view at that time.
• In establishing the 25% threshold in the 2014 special meeting proposal included in our 2014 proxy statement, the Board considered this feedback from investors which overwhelmingly supported a 25% threshold.

Capella Education explaining the details of a one time grant award to the CEO seeking support for its say on pay proposal.

Veeco Instruments takes issue with Glass Lewis' negative recommendation on pay and withhold against directors. 

Strayer Education notes that the CEO voluntarily gave up a legacy tax gross up and single trigger change in control clause after learning that shareholders did not approve.

Borg-Warner files to disclose its stock incentive plan burn rate and total potential dilution even though ISS and GL both recommended in favor of its say on pay proposal, at a shareholder's request. See also Covanta Holdings filed to supplement its disclosure on burn rate and overhang, which it noted passed ISS's tests. It also added language regarding the Criteria Relied Upon for Equity Award Grant Decisions and its Security Ownership Guidelines. 

Similarly, Murphy Oil Corp. filed additional information including certain performance metrics in connection with payouts under its annual incentive plans, and information about how its retirement plan was administered, apparently in response to a shareholder request. 

EOG Resources filed a supplemental proxy urging holders to vote against two shareholder proposals on hydraulic fracturing and methane emissions. The filing sets forth the company's existing disclosures "regarding the environmental, health and safety aspects of our operations and our practices for managing the related risks" and notes that Glass Lewis supports the Board's position on the proposals.

PwC Publishes First in a Series on Audit Committee Effectiveness, and Study on Prevalence of Clawback Policies

PwC released late last month the first paper in a series of papers designed to provide practical "insights, perspectives and ideas to help audit committees maximize committee performance." This edition of the Audit Committee Excellence Series focuses on a company's guidance practices and the potential risks of consensus estimates. PwC recommends that companies "reflect on their current policy to determine whether the frequency and extent of providing guidance is appropriate, or if policy changes are needed," and that Audit Committees "pay close attention to areas that can be 'gamed' to meet consensus estimates."

PwC also studied the prevalence of clawback policies in a study released this month. The study "evaluated the various features of clawback policies along with other related data for 100 large US public companies." Among the findings were that that:  

92% [of the companies in the study] have policies to recoup compensation if there's a restatement of financial results. However, of those 92%, 73% require evidence that the employee caused or contributed to false or incorrect financial reporting, while 27% require repayment in the event of a restatement without personal accountability.

The study also cited misconduct (84% of policies), fraud (44%), misrepresentation (24%) and others as clawback triggers.

An Experienced Look at Board Leadership

On This Week in the Boardroom, TK Kerstetter, Chairman, NYSE Governance Services - Corporate Board Member interviews John Elstrott, Chairman, Whole Foods Market Inc..

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