Keywords: 2013 proxy annual reporting, say-on-pay, listing standards.
The time has come for calendar year public companies to begin planning for the 2013 proxy and annual reporting season. Key issues for the upcoming season are summarized below.
Say on Pay
Public companies now have two years of mandatory say-on-pay experience and precedents to draw upon when drafting the say-on-pay proposals for their proxy statements. The say-on-pay requirement makes a clear, userfriendly explanation of compensation very valuable. The compensation discussion and analysis (CD&A) section of the proxy statements, which often begins with an executive summary of the executive compensation program, is a key component of the say-on-pay process. Some companies also have used proxy statement summaries and supporting text within the sayon- pay section of the proxy statement to succinctly highlight the reasons why they believe their executive compensation programs should be approved.
Companies need to discuss in the CD&A the extent to which compensation decisions were impacted by the results of the say-on-pay vote. Because the 2012 proxy season was the first year for many issuers to have to make this disclosure, companies may want to review precedent from the 2012 proxy season to see how others handled it. Compensation committees should be reminded of this reporting obligation so that their deliberations can, if they so choose, specifically address the results of the say-on-pay advisory vote. However, because the say-on-pay vote is non-binding, compensation committees are not compelled to take any actions in response to the shareholder advisory vote.
In the event that a proxy advisory firm recommends that its clients vote against a company's executive compensation, the company should consider whether it wants to prepare letters, presentations or scripts, further explaining its compensation decisions and rebutting the report containing the negative recommendation. Any such materials should be filed with the Securities and Exchange Commission (SEC) as additional proxy materials.
While shareholders, for the most part, approved their companies' executive compensation proposals, often by wide margins, there were more instances of say-on-pay proposals receiving the affirmative vote of fewer than 50 percent of the votes cast in the 2012 proxy season than occurred in the 2011 proxy season, although the number of such failed votes was relatively small. Companies should be aware that litigation has been filed against a number of companies and their boards of directors where say-on-pay proposals failed to garner majority approval. Even if such lawsuits do not prevail on the merits, the costs of litigation can be expensive and may hurt the reputations of the defending companies and their compensation committee members.
Outreach to key investors can be an important October 15, 2012 element of a successful say-on-pay vote. Before the proxy season gets fully underway, it would be worthwhile for the investor relations department to contact any large shareholders that voted against executive compensation at the last annual meeting to discuss the reasons for the negative vote. This dialogue should deal with the investor's concerns, and should not involve any solicitation for the upcoming say-on-pay vote.
Say When On Pay
Because the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) only requires companies to hold an advisory vote on the frequency of say-on-pay proposals (often called a "say-when-on-pay vote) once every six years, it is likely that few companies will include a say-when-on-pay proposal in their 2013 proxy statements.
However, any company that has a management sponsored say-when-on-pay proposal in its proxy statement must disclose the policy it adopts regarding frequency of say-on-pay votesafter taking into account the shareholder advisory say-when-on-pay voteno later than 150 calendar days after the annual meeting, but at least 60 calendar days prior to the company's deadline for submission of shareholder proposals under Rule 14a-8 for the next annual meeting. This disclosure would generally be accomplished in, or in an amendment to, the Form 8-K reporting voting results pursuant to Item 5.07.
Compensation Committee Independence and Compensation Consultants
Listing Standards. In June 2012, the SEC adopted rules relating to compensation committee independence as well as to selection and use of compensation consultants and other advisers. New Rule 10C-1 under the Securities Exchange Act of 1934 (Exchange Act) implements the Dodd-Frank Act requirement for listing standards relating to compensation committees, addressing both compensation committee independence and compensation committee selection of compensation consultants, legal counsel or other advisers. The exchanges must have final listing standards regarding the independence requirements for compensation committee members that comply with the SEC's final rule not later than June 27, 2013. Rule 10C-1 requires the exchanges to consider relevant factors when determining independence requirements for compensation committee members, including, but not limited to:
The source of a board member's compensation, including any consulting, advisory or other compensatory fee paid by the issuer to such board member; and Whether a board member is affiliated with the issuer, a subsidiary of the issuer or an affiliate of a subsidiary of the issuer. The SEC left it to the exchanges to determine the details of compensation committee listing standards not expressly mandated by the Dodd- Frank Act, subject to SEC approval. Both the New York Stock Exchange and the Nasdaq Stock Market have submitted proposed amendments to their respective listing standards to the SEC for review, but neither exchange has proposed any additional factors for boards of directors to consider when determining the independence of compensation committee members.1
Because the schedule set forth in the SEC's adopting release does not require final listing standards with respect to compensation committees to be effective until June 27, 2013, new Rule 10C-1 does not directly impact the upcoming proxy season for calendar year companies. The NYSE has proposed that its listed companies have until the earlier of their first annual meeting after January 15, 2014, or October 31, 2014, to comply with its new compensation committee independence standards, and until July 1, 2013, to comply with the other provisions of its amended listing October 15, 2012 standards.
Nasdaq proposes that its listed companies would have to comply with the changes relating to compensation committee responsibilities and authority, such as the authority to retain and fund compensation advisers and the obligation to consider adviser independence factors, immediately upon the effectiveness of the amended Nasdaq listing standards. Nasdaqlisted companies would have until the earlier of their second annual meeting after Nasdaq's amended listing rules are approved, or December 31, 2014, to comply with the balance of its rule changes.
Rule 10C-1 also addresses compensation adviser conflicts of interest by providing that a compensation committee may select such compensation consultant, legal counsel or other adviser only after taking into consideration the following factors, as well as any other factors identified by the relevant exchange in its listing standards:
The provision of other services to the issuer by the person that employs the compensation consultant, legal counsel or other adviser; The amount of fees received from the issuer by the person that employs the compensation consultant, legal counsel or other adviser, as a percentage of the total revenue of the person that employs the compensation consultant, legal counsel or other adviser; The policies and procedures of the person that employs the compensation consultant, legal counsel or other adviser that are designed to prevent conflicts of interest; Any business or personal relationship of the compensation consultant, legal counsel or other adviser with a member of the compensation committee; Any stock of the...