As Adam Prussin reports in the current issue of The Pomerantz Monitor, one of the prime agitators against excessive executive pay packages is Institutional Shareholder Services, the influential proxy advisory firm. According to the Wall Street Journal, ISS “consistently delivers about 25% to 35% of the say on pay vote.”
In setting compensation packages, most board compensation committees – and ISS as well – rely on analyses of what executives are being paid at “comparable” companies. Because there are no universally accepted criteria for selecting comparables for pay purposes, the opportunities for “cherry-picking” to produce a desired result are obvious. The WSJ reports that “disputes between publicly held companies and Institutional Shareholder Services over how those peer groups should be chosen are playing a big role in shareholders’ advisory votes on pay this year, with the companies and the influential proxy advisory firm both jockeying to justify their choices.“
So far this year, twenty-six companies have filed proxy supplements disputing ISS’s choices of comparable companies for arriving at its “nay” recommendation. ISS says that, in selecting “comparables,” it looks at companies of the same size as the company it is analyzing, even if those companies may not be in the same business. The companies themselves, on the other hand, often look to their principal competitors, even if they are much larger than themselves. Bloomberg News quotes Thomas DiPrete, a Columbia sociologist who has studied executive compensation, as saying that “there is pretty straightforward evidence of cherry-picking, and it’s pervasive.” Bloomberg mentions that “CBS gave Leslie Moonves $69.9 million after looking at pay at ‘comparable’ companies that are, on average, twice CBS’ size (the largest of which is 15 times the size of CBS), and many of which are not in the media business.”
Asking shareholders to decide which are the more appropriate comparisons is an exercise in futility. That is why ISS (as well as Glass Lewis, the other major proxy advisory firm), have so much influence in this matter.
As Adam Prussin reports in the current issue of The Pomerantz Monitor, although “say on pay” votes have been a requirement in the United States only since Dodd-Frank was passed two years ago, England has had such a requisite for about 10 years; and some eyebrow-raising votes have recently occurred there. Notably, shareholders of Barclay’s, a major British bank, gave only 73% approval to the CEO’s pay package this year, down from 90% the previous year. This made waves, because dissent from 25% or more of the shareholders is considered a sign of significant discontent.
Barclays’ chairman, Marcus Agius, has apologized to shareholders for not considering their views, and Barclays’ executives have revised components of their compensation in an attempt to address shareholder grievances.
At Aviva, Britain’s leading insurance company, a majority actually voted against the pay package for CEO Andrew Moss – who promptly resigned.
In the current issue of The Pomerantz Monitor, Adam Prussin reminds readers that a few months ago, Pomerantz settled a shareholder derivative action against Aubrey McLendon, chairman and CEO of Chesapeake Energy Corp. McLendon agreed to repay Chesapeake $12.1 million (and to retake ownership of his rare map collection, which the company had bought from him a few years ago, when McLendon was in financial trouble).
As the Wall Street Journal noted, this settlement represented a rare concession for the 52-year-old executive, who has run the company largely by his own rules since he co-founded it in 1989.
The settlement, however, did not end McLendon’s compensation problems. McLendon is the beneficiary of a highly unusual “Founders Well” program that allows him to buy a 2.5% interest in all the wells drilled by the company. When the program first went into effect in 1993, Chesapeake drilled only a few dozen wells each year; now it drills about 1,700 wells annually, and McLendon has invested in all of them. The costs, obviously, have zoomed into the stratosphere, and over the years McLendon has been forced to borrow about $846 million to cover his investment expenses under the program.
It turns out that EIG Global Energy Partners, the company that was lending McLendon most of this money, was simultaneously negotiating to buy hundreds of millions of dollars in Chesapeake corporate assets. Not only that, but several major Wall Street banks that had also lent him money have received lucrative work as public-offering underwriters or financial advisers to Chesapeake. In fact, in 2008 McClendon sold off over $130 million in his well assets to Wells Fargo, which then lent him money in 2010. Wells Fargo has acted as financial advisor to Chesapeake on 10 deals since 2005. All these deals created an obvious conflict of interest.
These disclosures did not sit well with either shareholders or analysts. Leading the charge was Southeastern Asset Management, an activist investment firm from Memphis that, with 17% of Chesapeake’s shares, is the company’s largest investor. It didn’t help, either, that the SEC opened an informal inquiry into the subject.
Finally, Chesapeake’s hitherto somnolent board woke up and announced that it would terminate the Founders Well program and that McLendon, while he will remain as CEO, will be replaced as chairman by an outsider.
A spokesman for the New York Comptroller issued a statement saying that the state pension fund planned to withhold votes for the company’s directors in the next election. “The fund believes that there needs to be an infusion of new and independent board members.”
As reported in the current issue of The Pomerantz Monitor, shareholders of Citigroup made news in April when 55% of them voted against the pay package awarded to CEO Vikram Pandit. Citi’s shares have plummeted by over 80% the past few years, and yet Pandit was set to receive not only a $12 million salary but a bonus package worth just as much. As a Wall Street Journal columnist pointed out, shareholder outrage was probably piqued by the fact that the financial targets that must be met to trigger incentive awards are preposterously low: Pandit and four other senior executives would be entitled to incentive compensation totaling $18 million even if Citigroup loses $7 billion this year.
The negative shareholder vote was the first time that investors had rejected a compensation plan at a major U.S. bank. The WSJ calls the vote “more than a stinging rebuke for its board and management. It is a shot across Wall Street’s bow.”
A subsequent WSJ article stated that “Vikram Pandit is looking awful lonesome,” because influential shareholder advisory firms Institutional Shareholder Services and Glass Lewis recommended votes in favor of executive-compensation plans at Bank of America, Morgan Stanley and Wells Fargo; and ISS subsequently gave its stamp of approval to Jamie Dimon’s $23 million 2011 compensation package at J.P. Morgan Chase. As the WSJ opined, “That leaves Lloyd Blankfein as Mr. Pandit’s last hope for some company in his misery.”
Some of you may recall our post from last year regarding the surprise rejection of the Citibank SEC settlement whereupon Judge Rakoff expressed his disdain with the evasive language "neither admit nor deny."
In their Dealbook article, Why S.E.C. Settlements Should Hold Senior Executives Liable the authors Claire Hill and Richard Painter review the findings of the Congressional hearing on the subject and make a provocative argument to hit the defendent in their wallets instead.
Hill and Painter say that "Requiring settlements to include an admission of guilt is not the best way to proceed. A more effective approach would be to make senior, highly compensated officers of the bank pay some portion of the fine."
"The Congressional hearing addressed the fact that a penalty assessed against an entity is effectively paid by its shareholders. The shareholders neither caused the behavior that led to the fine nor were they responsible for preventing it. By contrast, the Citigroup officers who were responsible do not bear a significant portion of the penalty, except to the extent they are shareholders or their bonuses are tied to earnings, now reduced by the penalty. They thus have little incentive to change their behavior."
On February 22, 2012 the Harvard Law School Forum on Corporate Governance and Financial Regulation published a report entitled “Lessons Learned: The Inaugural Year of Say-on-Pay” Anne Sheehan, the Director of Corporate Governance at the California State Teachers’ Retirement System (CalSTRS), says “For CalSTRS the first year of Say-on-Pay was a learning opportunity as it helped us to refine our voting process for future years.”
Showing a number of charts and metrics considered in their votes Sheehan continued “CalSTRS believes that all companies should use value-creating performance metrics for short- and long-term incentive plans. While we understand that boards of directors require some flexibility when determining compensation, we believe the majority of executives’ incentive pay should be transparent and easily understood by shareholders. Although there is no one-size-fits-all solution to executive compensation, we believe the over-use of discretion in most plans can lead to outsized compensation levels and fails to meet the spirit of section 162(m) if the Internal Revenue Code which requires performance-based pay to be predetermined and objectively measurable…. we believe that poorly structured pay packages harm shareholder value by unfairly enriching executives at the expense of owners – the shareholders.”
As Kevin LaCroix of the D&O diary observes: “Sheehan’s post and her description of the approach of CalSTRS heading into the second say-on-pay cycle makes it clear that there will be continued pressure on many companies regarding their compensation practices and disclosures,”
New York City Comptroller John C. Liu and the NYC Pension Funds submitted shareholder proposals to JPMorgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley requesting that they “hold senior executives financially accountable for losses that result from excessive risk-taking or improper or unethical product.” The proposals would strengthen the banks’ existing clawback policies “that allow them to recoup incentive pay from employees who act improperly,” and would also “prevent the perverse incentives and bad practices that were at the heart of the financial collapse of 2008” by increasing executives’ accountability; holding supervisors responsible for bad behavior; and disclosing clawback actions.
JPMorgan, Goldman Sachs and Morgan Stanley were targeted as “they are among the largest and have each come under scrutiny for improper practices leading up to the financial crisis.” Moreover, each company “has paid more than $100 million over the past 18 months to settle state or federal charges in connection with mortgage securities.” Indeed, an article by Bloomberg News reported that Goldman Sachs agreed to pay $550 million in July 2010 to settle the government’s claims it misled investors concerning financial products connected to subprime mortgages. Similarly, JPMorgan agreed to pay $153.6 million to settle a suit in June. Also, “Morgan Stanley agreed to pay $102 million in June 2010 to settle claims by Massachusetts that the firm financed and securitized unfair residential loans.”
According to Comptroller Liu, “No one should profit to be rewarded with bonuses when engaged in improper or unethical behavior. These tougher clawback provisions will not only recover money that shouldn’t have been paid in the first place, but also set the tone for a stronger standard of conduct for company executives as well as their bosses.”
Following up on our September post "Big Bucks, No Whammies?" about the SEC's apparent inaction on the wells notices they had served to the execs of Fannie & Freddie. We write to report that Whammies finally came with Friday's headlines . The SEC brought fraud charges after all, not just against Daniel Mudd, former CEO of Fannie Mae but also five others now charged with deliberately misleading government officials about the extent of their subprime exposure.
The NYTimes explores the charges in greater detail and there are new reports that an FBI investigation into the same conduct is underway which means the guys could face criminal charges. Following the SEC announcement speculation had already begun that Mudd would soon step down as CEO at Fortress Investment Group (FIG).
“Can you really run a trading and investment firm with a guy accused of fraud in the corner office?” a Fortress employee was reported to have asked. Apparently not when the accusations become official. (UPDATE: Mudd took leave as CEO of Fortress on Wednesday December 21)
Mudd has been on the board at Fortress since 2007,and was appointed CEO of Fortress when he left Fannie amid scandal after the bailout in 2008 Fortress is a publicly traded hedge fund which recently introduced new subprime mortgage bonds onto the market....
A New York Times article has revealed that long before Occupy Wall Street, the Sisters of St. Francis of Philadelphia were battling Wall Street over corporate responsibility. For the last thirty years, the Sisters have used the investments in their retirement fund to become Wall Street’s moral minority.
Using their status as shareholders, the nuns fought with Kroger over farm worker rights, with McDonald’s over childhood obesity, and with Wells Fargo over lending practices. They have met face-to-face with the heads of Lockheed Martin, BP, and General Electric. Most recently, they advised Goldman Sachs executives that the bank should protect consumers, rein in executive pay, increase its transparency, and remember the poor.
With their moral authority, the Sisters of St. Francis “can really bring attention to issues,” said Robert McCormick, chief policy officer of Glass, Lewis & Company, the proxy voting firm. “You haven’t seen shareholder activism until you see a nun battling it out with the CEOs. They can be devastating,” said Michael Passoff in a 2005 article on religious shareholder activists. Passoff works in the Corporate Social Responsibility Program for As You Sow, a leading organization in the strategizing and organizing of shareholder campaigns.
The nuns have been waging this war since 1980, when St. Francis Sister Nora Nash formed a committee with her community to combat troubling developments at the businesses in which they invested their retirement fund. The Roman Catholic order of over 500 nuns has teamed up with other orders and faith-based investing groups on shareholder resolutions. Much of Sister Nora’s activism takes place under the Interfaith Center on Corporate Responsibility, an umbrella group which includes Jews, Quakers and Presbyterians.
Sister Nora said that she and the order “want social returns, as well as financial ones.” She added, “when you look at the major financial institutions, you have to realize there is greed involved.”
The full New York Times article can be found here.
|Disclaimer: PomTalk may be considered to be attorney advertising under applicable rules of the State of New York . Prior results obtained by the Pomerantz Firm in any case do not guaranty future results.|