Foley recently had the honor of bringing together prominent corporate governance leaders for an in-person National Directors Institute Executive Exchange program in Chicago. The all-day program featured a series of panel- and roundtable-format discussions on key issues facing boardrooms and C-level executives across the country. The interactive peer group exchanges fostered candid dialogue on real-world situations and practical solutions for effective governance.
Now in its 10th year, NDI has become the forum of choice for business leaders looking to explore best practices and the latest developments impacting the corporate governance landscape. Following are brief summaries of select sessions from the Executive Exchange program, and we encourage you to visit our NDI Web site (http://www.foley.com/NDI) to learn more about opportunities to attend NDI Checkpoint Web conferences and receive our electronic NDI News publication (http://tinyurl.com/488joqv).
Implementing Say on Pay — How to “Get in the ‘Good’ Pile”
During a breakout session on Compensation Committee Hotbuttons, Foley Partners Jay O. Rothman and Carolyn T. (Carrie) Long led a panel of leading corporate governance experts on key issues facing public companies under the say on pay (SOP) regime.
In detailing pay practices in proxy materials, a clear theme emerged on the importance of “getting in the ‘good’ pile.” As Patrick McGurn of Institutional Shareholder Services discussed in the NDI Executive Exchange opening session (http://tinyurl.com/4vcazuf), investors’ resources will be strained as they cast votes on multiple SOP proposals this proxy season. In addition to providing clear and illustrative explanations in the Compensation Discussion and Analysis (CD&A), panelists suggested an executive summary that includes a succinct description of executive pay practices and how executive pay aligns with company performance. Although panelists expect the majority of SOP proposals to receive favorable shareholder votes, they cautioned that if investor support is not gleaned in a cursory review, a company’s proxy statement may be moved to the “needs further analysis” pile.
Understanding your shareholders and any warning signs based on how they have historically reacted to your existing executive pay practices also is vital, according to the panel. The panel suggested that, in addition to highlighting positive practices, companies should use their proxy statements to explain and justify any of their executive compensation practices that may raise red flags for investors.
Panelists also addressed the debate over the separate advisory shareholder vote required by Dodd-Frank to determine SOP vote frequency. While an annual vote provides more regular feedback from shareholders, proponents of the triennial option argue that executive compensation policies are often designed from a longer-term perspective and that a vote every year may be too reactionary. The point also was raised that triennial pay votes risk shareholder “withhold vote” campaigns against compensation committee members during the years the company is not holding an SOP vote.
Although a non-binding vote on compensatory change in control arrangements (or golden parachutes) is not required until there is a shareholder meeting to approve a merger or similar corporate transaction, the panel discussed the pros and cons of voluntarily including this element in the SOP vote at the annual shareholder meeting in 2011 to avoid a separate vote at a later date. Companies that already disclose the golden parachute data required by the SEC and that have change-in-control agreements with “double triggers” and no excess parachute excise tax gross ups may choose to roll this into the larger SOP vote with minimal changes to disclosure. This tactic may have limited usefulness under the SEC’s final rules, however, as a separate vote would still be required to the extent golden parachute arrangements are modified after the SOP vote in a way that increases the compensation payable (including through increases in base salary or ordinary-course equity grants). Those that would prefer to put off the vote until a shareholder meeting to approve a merger or similar corporate transaction will instead include the disclosure traditionally required in the CD&A.
SEC Enforcement Activities Roundtable
The importance of effective policies and procedures were a recurring theme as Foley Partners Barry J. Mandel, Lisa M. Noller, and Samuel J. (Sandy) Winer hosted an interactive session on SEC enforcement activities. The session also included panelists representing the accounting and commercial insurance industries as well as a participant from a UK-based law firm providing perspective from across the pond.
The roundtable kicked off with a detailed discussion regarding the various "gray areas" of insider trading, namely the increasingly common mosaic theory, which states that insider trading can occur by assembling pieces of non-material information to create a “mosaic” of material information. The panelists stressed that an agreement to keep information confidential does not constitute an agreement not to trade, citing the recent Mark Cuban case as a prime example.
The panel stressed the importance of developing effective internal policies against trading on material, non-public information as well as effective agreements with third parties who may be treated as "insiders" with access to material information. The importance of these agreements and policies was clearly illustrated when the panel discussed the new Dodd-Frank provisions involving whistleblowers that include, among other things, awards to whistleblowers who are eligible to receive 10 percent to 30 percent of any monetary sanctions. The panel noted that the SEC has set aside $425 million for potential awards and stressed that companies should establish policies that encourage internal reporting while protecting confidentiality of sources.
The panel then shifted its focus to a discussion of the Foreign Corrupt Practices Act (FCPA) and the United Kingdom's 2010 Bribery Act. In discussing the FCPA, panelists stressed that when investigating a potential violation, the U.S. government will first analyze a company's compliance program and then require the company to prove that it is working. Organizations should work in these situations to create a defensible position, realizing that there are elements of FCPA compliance that simply cannot be controlled or avoided based on the actions of certain individuals within the organization. Effective policies that articulate values and procedures to be used to prevent bribery while clearly stating management's full support and commitment to compliance are an important step toward establishing a defensible position.
Shifting to the United Kingdom’s 2010 Bribery Act, the panel noted that the Act is wider than FCPA in that it covers commercial bribery as well as bribery of foreign government officials. The Act creates a number of difficult issues for companies, including the question of whether corporate hospitality and gifts are appropriate under the Act and how companies can effectively monitor the activities of subsidiaries, sister companies, joint ventures, and other third parties. Ultimately, the group stressed the importance of clear and actionable policies to guide activities in these areas and ensure compliance.
An Activist Shareholder’s View on Governance
Foley Partner Phillip M. Goldberg, who has represented activist investors for more than 15 years, led an eye-opening panel discussion on governance from the activist’s perspective.
Panelists shared various “war stories” illustrating the importance of management collaborating with shareholders and treating them in a fair and open manner. The panel agreed that a simple shareholder inquiry can escalate into an unnecessarily hostile situation if management refuses to engage or meet with the shareholder. Alternatively, a communications strategy that treats shareholders as the owners of the company and allows for active engagement with investors can often defuse activist inquires in the short term, according to the panel.
In discussing common roadblocks companies may employ, panelists characterized the end result as “push me and I’ll push back harder.” In other words, the shareholder’s problem will not go away and ultimately needs to be fixed or addressed to avoid costly litigation and utilizing media to communicate grievances, among other risks.
On a positive note, some panelists predicted a sea change where companies provide investors with more direct access to management to avoid future shareholder proposals. As companies realize the benefits of a proactive communications strategy, panelists are seeing steps taken such as developing a comprehensive investor relations policy, training directors and CEOs on engagement, and maintaining ongoing communications with key shareholders.
Leading CEOs Discuss Cutting-Edge Governance Issues
The final panel discussion of the day focused on hot-button corporate governance issues from the viewpoint of top CEOs.
Benjamin F. (Ben) Garmer III, the Foley panel moderator, kicked off the discussion with a question on how CEOs communicate with their boards of directors. Panelists emphasized the critical role of regular and transparent communication with the board to ensure members are up to speed on key issues in the company and to keep management aware of their concerns. In contrast to stories of management refusing to engage with shareholders detailed during the panel of activist investors, CEOs indicated that they meet regularly with key shareholders and that investor calls are rarely ignored.
CEOs also detailed their companies’ policies toward several hot-button governance issues discussed throughout the NDI Executive Exchange program, including:
- Independent Chair. While CEOs used various structures, they agreed that the end result is more a function of substance than format. The most appropriate structure often depends on the unique characteristics of the company, but if leadership is effective and has good intentions, either structure can be successful.
- CEO Succession Plans. Panelists agreed that ensuring a company has the right CEO is a key responsibility of the board and that a detailed succession plan is a vital element of this process. The participating CEOs each indicated a robust process for continually updating their succession plans to account for a wide variety of potential situations.
- Majority Voting. While one CEO noted the potential value of majority voting for keeping board members accountable, concerns also were raised as to the power wielded by proxy advisory firms. This is often an area of frustration for CEOs, as these firms do not have a relationship with company but exert considerable influence on how shareholders cast their votes.
- Say on Pay. Although CEOs do not expect the new rules to impact compensation levels and structures in the short term, panelists articulated concerns unique to CEOs that were not raised in the previous panel on SOP considerations (http://tinyurl.com/4b3zkbl). One panelist indicated that the new rules could make the United States less competitive as top talent is driven away from public companies, while another views the rules as misguided, as a committee is already in place to administer proper compensation and shareholders may not be in a position to understand each company’s unique policies.
NDI News is part of our commitment to providing timely insight to help keep you on target as you navigate the legal risks arising from increasing and evolving governmental regulation and reform.
If you have any questions about this newsletter or would like to discuss the topic further, please contact your Foley attorney or the following individuals:
Jay O. Rothman
Carolyn T. (Carrie) Long
New York, New York
Samuel J. (Sandy) Winer
Lisa M. Noller
Phillip M. Goldberg
Benjamin F. (Ben) Garmer III
About Foley's National Directors Institute
Now in its 10th
year, Foley’s National Directors Institute has become the forum of choice for business leaders looking to explore best practices and the latest developments impacting the corporate finance and governance landscape. In this tradition, our latest National Directors Institute comprises a year-long series of interactive programs and timely e-newsletters — all aimed at keeping you on target as you navigate the legal risks arising from increasing and evolving governmental regulation and reform across all industries.