The first "say on pay" vote on executive pay has taken place in America. Aflac - an insurance company - explained in its Annual Report why its board decided to provide shareholders with an advisory vote on directors' pay:
"We have a responsibility to listen to our shareholders, as they have placed their trust and financial resources in Aflac. After all, they own the company ... our shareholders have the right to know how executive compensation works, and ... we should provide a meaningful way for shareholders to give us input on our compensation practices. It’s as simple as that. Our shareholders tell us that we’re a very transparent and responsive organization, and Say-on-Pay is consistent with that approach. Our board of directors unanimously agreed. And we are proud to be the first company in the United States to adopt a resolution giving shareholders this type of advisory vote on compensation".
Over 90% of the votes cast supported the company's remuneration policy. For further information, see the following articles: The Wall Street Journal, The Financial Times, The Guardian. Senators McCain and Obama have criticised the level of directors' pay during their campaigns: see here.
Friday, 9 May 2008
Thursday, 8 May 2008
UK: Building societies and corporate governance
The Financial Services Authority's Chief Executive, Hector Sants, delivered a speech titled "The future of financial regulation" on 7 May at the Building Societies Association Conference. During his speech, Mr Sants identified areas of weakness in the governance of some building societies:
"I would like to finish with a few words about corporate governance. There are three reasons for doing this. Firstly, we have seen inadequate review, assessment and challenge of proposed new initiatives. As I have already highlighted, we have particularly found this around the liquidity and funding issues with which societies have been confronted. Some societies have been very slow to appreciate the nature and scale of the market turbulence or react prudently.
Secondly, if a building society is to survive, prosper, and bring real benefits to its members, it must have a good quality board. A board, together with the senior management team, has to lead their society through these challenging, competitive and more complex times.
And thirdly, because, as you will be aware, we have maintained the guidance that says that building societies should have regard to the Combined Code when establishing and reviewing their own corporate governance arrangements. To this point may I highlight two matters that are set out in the Combined Code: That the board should undertake a "formal and rigorous" annual evaluation of individual directors and that non-executive directors should scrutinise the performance of management in meeting agreed goals and objectives.
I would ask you to consider whether this is a process which is well established at your society; and, in particular, is it "formal and rigorous". Do your Boards act on the results of the evaluation? In most cases there may only be behavioural changes to make. But in exceptional cases this might mean going further and questioning whether the person is still right for the role. Most societies do evaluate their executive directors, and many have processes that could be regarded as clearly demonstrating best practice, but in some cases we have seen this does not involve a structured process with, for example, agreed objectives and performance criteria against which the assessment is made. Such processes look neither "formal" nor "rigorous".
I would now like to say a few words about succession planning. This is, I am afraid, another area where we believe improvements should be made. I am sure you will agree it is vitally important for the long term health of a society that it has management depth and a credible management development and succession planning process. I am afraid that we do not believe that the practice in this area is always at the level we would expect.
Such deficiencies can carry considerable risk for a society, not least of which is the risk of stagnation and lack of focus which can result from a lengthy transitional period. May I thus use this opportunity to remind boards and non-executives in particular of their responsibilities in this area. This will be a theme we shall be returning to in the future.
In conclusion on governance, I would just like to underline the importance of boards focussing on what we say in the Building Society Regulatory Guide, namely “Society boards and management have a special responsibility to protect the interests of their members through the highest standards of corporate governance.” Public companies have the added pressure of institutional shareholders you are not subject to this additional scrutiny and thus must be extra diligent. I am sure you are all aware of this point, but I feel it bears repeating".
"I would like to finish with a few words about corporate governance. There are three reasons for doing this. Firstly, we have seen inadequate review, assessment and challenge of proposed new initiatives. As I have already highlighted, we have particularly found this around the liquidity and funding issues with which societies have been confronted. Some societies have been very slow to appreciate the nature and scale of the market turbulence or react prudently.
Secondly, if a building society is to survive, prosper, and bring real benefits to its members, it must have a good quality board. A board, together with the senior management team, has to lead their society through these challenging, competitive and more complex times.
And thirdly, because, as you will be aware, we have maintained the guidance that says that building societies should have regard to the Combined Code when establishing and reviewing their own corporate governance arrangements. To this point may I highlight two matters that are set out in the Combined Code: That the board should undertake a "formal and rigorous" annual evaluation of individual directors and that non-executive directors should scrutinise the performance of management in meeting agreed goals and objectives.
I would ask you to consider whether this is a process which is well established at your society; and, in particular, is it "formal and rigorous". Do your Boards act on the results of the evaluation? In most cases there may only be behavioural changes to make. But in exceptional cases this might mean going further and questioning whether the person is still right for the role. Most societies do evaluate their executive directors, and many have processes that could be regarded as clearly demonstrating best practice, but in some cases we have seen this does not involve a structured process with, for example, agreed objectives and performance criteria against which the assessment is made. Such processes look neither "formal" nor "rigorous".
I would now like to say a few words about succession planning. This is, I am afraid, another area where we believe improvements should be made. I am sure you will agree it is vitally important for the long term health of a society that it has management depth and a credible management development and succession planning process. I am afraid that we do not believe that the practice in this area is always at the level we would expect.
Such deficiencies can carry considerable risk for a society, not least of which is the risk of stagnation and lack of focus which can result from a lengthy transitional period. May I thus use this opportunity to remind boards and non-executives in particular of their responsibilities in this area. This will be a theme we shall be returning to in the future.
In conclusion on governance, I would just like to underline the importance of boards focussing on what we say in the Building Society Regulatory Guide, namely “Society boards and management have a special responsibility to protect the interests of their members through the highest standards of corporate governance.” Public companies have the added pressure of institutional shareholders you are not subject to this additional scrutiny and thus must be extra diligent. I am sure you are all aware of this point, but I feel it bears repeating".
Saturday, 3 May 2008
US: CEO pay
The results of the Wall Street Journal & Hay Group CEO Compensation study have been published. In Hay's press release it is stated:
"The year 2007 marked a major milestone in the history of CEO pay, according to the study. For the first time, performance-based plans overtook stock options as the most popular form of long-term incentive compensation, with 129 of the companies using a performance plan, up 5% from 2006. The two more traditional equity vehicles of stock options and time-vested restricted stock showed significant declines in 2007, with options declining 7% to 128 companies, and time-vested restricted stock plans declining 14% to 63 companies. Performance plans tie the level of a CEO’s pay directly to how the company performs relative to key business goals and strategic priorities. In most plans, if the company fails to achieve a certain level of performance, the awards will be worth nothing to the CEO ... The 2007 study focused on 200 companies with more than $5 billion in annual revenue that filed their proxy statements after October 1, 2007".
Elsewhere, research has been published exploring how compensation consultants influence the level and pay-performance sensitivity of CEO pay in America. The research - by Cadman et. al. and published here on SSRN - looked at a sample of 880 firms from the S&P 1500 for the fiscal year 2006. The authors state, to quote directly from their abstract on SSRN:
"We find evidence of greater compensation in the presence of a compensation consultant, consistent with theory that these consultants facilitate rent extraction. However, we find no evidence of less pay-performance sensitivity when compensation consultants are hired. Among firms that retain consultants, we also examine whether there is greater rent extraction for clients of consultants with potentially greater conflicts of interest. Using a variety of specifications, we are unable to find widespread evidence of more lucrative CEO pay packages for clients of conflicted consultants despite anecdotal evidence to the contrary. Overall, we conclude from our findings that the potential conflict of interest between the firm and consultant is not a primary driver of excessive CEO pay."
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NB: For a survey of directors' pay within UK FTSE350 companies, see KPMG's report "Directors' Compensation 2007", available here (you may need to provide your name, postal address and e-mail address to view the report).
"The year 2007 marked a major milestone in the history of CEO pay, according to the study. For the first time, performance-based plans overtook stock options as the most popular form of long-term incentive compensation, with 129 of the companies using a performance plan, up 5% from 2006. The two more traditional equity vehicles of stock options and time-vested restricted stock showed significant declines in 2007, with options declining 7% to 128 companies, and time-vested restricted stock plans declining 14% to 63 companies. Performance plans tie the level of a CEO’s pay directly to how the company performs relative to key business goals and strategic priorities. In most plans, if the company fails to achieve a certain level of performance, the awards will be worth nothing to the CEO ... The 2007 study focused on 200 companies with more than $5 billion in annual revenue that filed their proxy statements after October 1, 2007".
Elsewhere, research has been published exploring how compensation consultants influence the level and pay-performance sensitivity of CEO pay in America. The research - by Cadman et. al. and published here on SSRN - looked at a sample of 880 firms from the S&P 1500 for the fiscal year 2006. The authors state, to quote directly from their abstract on SSRN:
"We find evidence of greater compensation in the presence of a compensation consultant, consistent with theory that these consultants facilitate rent extraction. However, we find no evidence of less pay-performance sensitivity when compensation consultants are hired. Among firms that retain consultants, we also examine whether there is greater rent extraction for clients of consultants with potentially greater conflicts of interest. Using a variety of specifications, we are unable to find widespread evidence of more lucrative CEO pay packages for clients of conflicted consultants despite anecdotal evidence to the contrary. Overall, we conclude from our findings that the potential conflict of interest between the firm and consultant is not a primary driver of excessive CEO pay."
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NB: For a survey of directors' pay within UK FTSE350 companies, see KPMG's report "Directors' Compensation 2007", available here (you may need to provide your name, postal address and e-mail address to view the report).
Friday, 2 May 2008
UK: Section 644, Companies Act (2006): commencement date brought forward
The Department for Business, Enterprise and Regulatory Reform (BERR) has announced that Section 644 of the Companies Act (2006) will now come into force on 1 October 2008 and not 1 October 2009 as previously stated. According to BERR:
"Until 2 May 2008 the publicly stated position as regards the commencement of section 644 was that it would commence in October 2009, and that between October 2008 and October 2009 matters relating to the registration of documents at Companies House would be dealt with by amendments to section 138 of the Companies Act 1985, amendments that would have simply enabled suitable changes to be made to existing forms. This approach was agreed to provide sufficient time for Companies House to implement all necessary processes and procedures to ensure the proper operation of the solvency statement route for reducing share capital. Companies House, however, is confident that it can now have in place all necessary processes and procedures to ensure the proper operation of the solvency statement route by October 2008. That being the case there is now no barrier to commencing section 644 of the 2006 Act in October 2008, and that is what we now propose to do".
For further information see here.
"Until 2 May 2008 the publicly stated position as regards the commencement of section 644 was that it would commence in October 2009, and that between October 2008 and October 2009 matters relating to the registration of documents at Companies House would be dealt with by amendments to section 138 of the Companies Act 1985, amendments that would have simply enabled suitable changes to be made to existing forms. This approach was agreed to provide sufficient time for Companies House to implement all necessary processes and procedures to ensure the proper operation of the solvency statement route for reducing share capital. Companies House, however, is confident that it can now have in place all necessary processes and procedures to ensure the proper operation of the solvency statement route by October 2008. That being the case there is now no barrier to commencing section 644 of the 2006 Act in October 2008, and that is what we now propose to do".
For further information see here.
Thursday, 1 May 2008
England and Wales: Articles of association and implied terms
The extent to which terms can be implied into the articles of association was recently considered in Dashfield & Anor v Davidson & Ors [2008] EWHC 486 (Ch). Argument centred on a provision in a company's articles of association which required the personal representative of a deceased shareholder to transfer the deceased shareholder's shares to the company. The trial judge, Lewison J., implied a term requiring the company to take reasonable steps to procure the auditing of the company's accounts, for the last completed financial year, before the value of the deceased shareholder's shares was certified by an auditor. His Lordship observed (at para. [83]):
"... it is possible to imply a term into articles of association, but only if the term can be implied without recourse to extrinsic evidence. Such a term will therefore only be implied where it is a necessary inference, so as to give business efficacy to the obvious intention of the parties (see Tett v Phoenix Property and Investment Co Ltd [1986] BCLC 149, 159); or where it passes the officious bystander test (Tett v Phoenix Property and Investment Co Ltd [1986] BCLC 149, 160)".
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NB: The issues raised by Dashfield are not unique to English law: see, e.g., Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd [2006] FCAFC 144.
"... it is possible to imply a term into articles of association, but only if the term can be implied without recourse to extrinsic evidence. Such a term will therefore only be implied where it is a necessary inference, so as to give business efficacy to the obvious intention of the parties (see Tett v Phoenix Property and Investment Co Ltd [1986] BCLC 149, 159); or where it passes the officious bystander test (Tett v Phoenix Property and Investment Co Ltd [1986] BCLC 149, 160)".
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NB: The issues raised by Dashfield are not unique to English law: see, e.g., Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd [2006] FCAFC 144.
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