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Corporate Governance Panel Discusses Compensation Disclosure and Shareholder Proposals

Among the biggest surprises in the first year of staff comments on executive compensation disclosure was the seriousness of the comments and the difficulty many companies experienced in getting the staff to accept their position, according to Meredith Cross, a partner at Wilmer Cutler Pickering Hale and Dorr. Cross was a panelist at Practising Law Institute's recent conference on corporate governance in 2008. The staff has sent out comments on executive compensation disclosure to about 350 companies, she noted, and the letters are still coming.

In some cases, the staff's comments caused companies to realize that their disclosure was inaccurate, she said. Some companies mentioned tally sheets in their disclosure, but when staff comments forced the companies to take a closer look they realized that they did not actually use tally sheets. Similarly, several companies that were asked to provide more detail about how they used benchmarking discovered that benchmarking did not directly affect executive pay, she said.

Cross said that the major areas where staff comments are resulting in a change in behavior are requiring lists of companies with which a company benchmarked, how a company benchmarks, the use of compensation consultants, tally sheets and targets. Individual performance and how it affected pay was another hot area, she said. Many companies are concerned that the SEC seems to want a performance evaluation for each of the top five executives, she noted.

One area where it was difficult to get the staff to back down was comments asking for details on raises that were only 2% or 3%, Cross said. Clients pushed back on these comments, she noted, because they felt that the amount of the increase was not material and did not need to be disclosed. It took two or three rounds of comments before the staff deferred, she said.

The biggest disconnect with the staff was on the issue of targets, according to Cross. In her view, the SEC's position is that companies have to publish targets even though some are supposed to be able to qualify for non-disclosure. The comments on targets are changing companies' behavior, she said. Companies are nervous that some targets will not qualify for non-disclosure, so this year they plan to make their disclosure more general or to leave targets out altogether.

Cross also said that Congressman Henry Waxman's (D-CA) investigation into compensation consultants' conflicts of interest also is changing companies' behavior. The publicity surrounding the issue is leading companies to enlist compensation consultants that do not do other work for the company.

Waxman's investigation found that firms were providing other services to companies for which they acted as compensation consultants. Waxman is concerned that, because they receive other fees from a company, the consultants are not objective in providing compensation advice.

Patrick McGurn, special counsel in the RiskMetrics Group of ISS Governance Services, reviewed the top three issues likely to be the subject of shareholder proposals in 2008. All three have to do with holding a company's board accountable, he noted.

The top issue once again is majority threshold voting. Five years into the campaign on this issue, it is becoming common practice, he said, and eventually will become universal practice. He expects the issue to appear on nearly 200 proxy ballots in 2008.

Pay for performance is the number two issue this year, according to McGurn. Several hundred companies are likely to get proposals or be subject to letter-writing campaigns to tie performance to pay. Shareholders want full disclosure of targets and performance metrics, he noted, so the proposals will be aimed at companies that did not provide these.

The number three topic this year is say-on-pay, he said. More than 75 different institutions have now sponsored or co-sponsored a proposal on the issue. The proposals have had an impact in Australia and the U.K., he noted.

The proposal permits shareholders on a non-binding basis to comment on a company's executive compensation practices. It allows shareholders to highlight problems in executive compensation in a non-confrontational way, McGurn said. He expects to see many majority votes on the issue in 2008.