In a sure sign that shareholder “say on pay” proposals and other executive compensation issues will again be the big battlegrounds for the 2008 proxy season, the proxy advisory unit of RiskMetrics has updated several of its compensation-related policies—and, notably, adopted a set of five principles to explain when the influential firm will recommend “no” votes on pay packages.
“What we saw from 2007 leading to 2008 can be summed up in two words: accountability and engagement,” says Martha Carter, head of RiskMetrics’ global policy board. “We’re hearing from proponents that they’re not only able to get contact with the board and have discussions; they’re telling us those discussions are very productive.”
Carter says another sign of engagement between shareholders and issuers is that roughly 30 percent of proposals in the 2007 proxy season were withdrawn as a result of discussion and engagement with companies.
“In 2008 we’re likely to see more of the same types of issues we saw in 2007,” Carter says. “Our policy updates reflect that.”
RiskMetrics, formerly known as Institutional Shareholder Services, unveiled its policies for U.S., Canadian, British, and other international companies just before Thanksgiving; they will apply to all shareholder meetings held on or after Feb. 1, 2008. Carter and RiskMetrics special counsel Patrick McGurn will discuss the 2008 U.S. proxy voting policy in a Dec. 5 Webcast.
The policy updates include:
Say on Pay. In response to strong shareholder support this year for proposals seeking advisory votes on executive pay and the expectation that more U.S. companies may adopt such resolutions next season, RiskMetrics says it will analyze those resolutions on a case-by-case basis, based on five global principles and U.S. market guidelines. One principle will be an evaluation of the board’s stewardship of investor interests regarding compensation practices.
Poor Pay Practices. The U.S. policy on poor pay practices has been updated to include base salary increases guaranteed as part of an employment contract without any tie to pay-for-performance, perks for former executives, and a new category of “poor disclosure” in light of the expanded executive compensation disclosures required under Securities and Exchange Commission rules.
Independent Chairmen. ISS added two new considerations in its evaluation of proposals calling for an independent board chairman: a comparison between the duties of the independent lead director and insider chairman, and an explanation for maintaining both an insider chairman and an independent lead director. If that disclosure is provided, ISS will evaluate the proposals on a case-by-case basis.
ISS is also refining a number of other policies, including those related to director independence in connection with an initial public offering; the adoption of a poison pill before an IPO; shareholder proposals calling for separation of chairman and CEO roles; and proposals asking companies to report on product safety.
Rule 144, 145 Changes Help M&A Deals
Players in the merger-and-acquisition world have received an early Christmas gift from the Securities and Exchange Commission in the form of amendments to Rules 144 and 145 of the Securities Exchange Act.
The changes, approved by the SEC in November, should make the “private placement” alternative in M&A transactions more attractive to privately held target companies in stock-for-stock transactions with publicly traded acquirers, according to a legal bulletin from the firm Wilmer Cutler Pickering Hale & Dorr. Among other things, the amendments shorten the holding period under Rule 144 to six months and remove the more burdensome restrictions on target company “affiliates.”
Leibowitz
“These changes will offer target company stockholders the potential for earlier liquidity in deals structured as private placements and, as a result, give acquirers and targets greater structuring flexibility, with the potential for earlier—and more certain—closing,” Wilmer Hale Partners Jay Bothwick, Rod Howard, and Hal Leibowitz wrote in a Nov. 26 alert.
By reducing the holding period for restricted stock from one year to six months and eliminating some restrictions that previously applied to target stockholders who were “affiliates” of the target but not the acquirer, the changes to the rules will significantly shrink the “liquidity gap” and narrow the lag between signing of definitive acquisition agreement and when target stockholders can begin selling the shares they receive, the alert notes.
Bothwick
The authors say faster and more certain closing may be attractive to buyers and targets for other reasons, too. In a registered deal, the transaction can’t close and stockholders generally can’t vote until after the Form S-4 is declared effective by the SEC. But with less time necessary to close a deal and sell the stock proceeds, “the ability to close quickly … can mean the difference between a completed deal and a broken deal, a deal at a different price or no deal at all,” the bulletin says.
Under related changes to Rule 145, “target-only” affiliates will no longer be subject to volume and manner-of-sale restrictions.
Still, there are limitations. The shorter holding period won’t apply to stock issued by acquirers that are shell companies, “blank check” companies or voluntary filers, or acquirers that aren’t current in their reporting obligations at the relevant time. In addition, the private placement structure won’t be available in every private company acquisition. Target companies with a large number of “non-accredited” stockholders won’t qualify.
Howard
“Careful analysis is required to determine if a transaction can be structured as a valid private placement, and whether risks exist … that may jeopardize a transaction’s status as a valid private placement,” the alert notes. “But where a private placement is possible, the new amendments to Rule 144 may make it advantageous to all parties to consider private placement structures for M&A transactions.”
The amendments will be effective 60 days after publication in the Federal Register.
Study: Media Exposure Drives Up CEO Pay
Perhaps we shouldn’t be reporting this, but anyway: A new study of business news coverage has found that media coverage of high-profile CEOs drives up their salary by an average of $670,000.
Researchers from the University of Colorado examined 3,500 companies that belonged to the Standard & Poor’s 500 at some point between 1997 and 2005. They first built a database of company and CEO mentions in major business media such as the Wall Street Journal, BusinessWeek, Forbes, and Fortune. They then looked at subsequent CEO pay increases, adjusted for actual corporate performance as measured by share price and operating data.
Once they removed a few outliers whose salaries had truly soared or tanked, the remaining results were clear, according to CU researcher Markus Fitza: Major business articles were worth an average of $670,000 to the profiled CEO. Cover stories netted $1.1 million.
The profile didn’t have to be fawning, either, Fitza says. “As CEOs appear in pictures and headlines of major business magazines, they are more likely to be perceived as legitimate and efficacious.”
Another statistical quirk: CEOs enjoying a profile in a major business publication, and who have a majority of company outsiders on their board, saw an average of $330,000 more in stock options and bonuses—surely music to the ears of Apple CEO Steve Jobs, the sole insider on his seven-person board.
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