say on pay

04/11/2023© Stephen M. Bainbridge 2011

Say on PayCorporate Governance SeminarUCLA School of Law 2011

04/11/2023© Stephen M. Bainbridge 2011 2

Executive Compensation and Corporate Governance Reform

The Dodd-Frank Act provides for the following reforms: Executive Compensation

Say on Pay Recoupment/Clawback Policies Compensation Committee Independence Additional Compensation Proxy Disclosure

Corporate Governance Mandatory Proxy Access Disclosure About Chairman and CEO Positions Broker Discretionary Voting Disclosure of Any Employee or Director Hedging

04/11/2023© Stephen M. Bainbridge 2011 3Slide 3

Dodd-Frank § 951

Applies to companies registered under Section 12 of the 1934 Act and therefore subject to the proxy rules.

1. Say on Pay: Mandated a non-binding vote on executive compensation beginning with the first shareholder meeting after January 21, 2011.

2. Say on Frequency: The initial proxy statement for the first meeting after January 21, 2011 must give shareholders the decision as to the frequency of such vote: annually, every two years, or at most every three years.

a. At least once every six years, shareholders must be provided with a new opportunity to vote on the frequency of Say on Pay votes.

3. Say on Golden Parachutes. A non-binding shareholder vote must be given to shareholders, by separate resolution, in connection with any vote on a merger, consolidation, sale of assets or similar transaction, to approve “golden parachute compensation”


Covered Executives

Requires a vote on compensation of CEO, CFO and three other most highly compensated executive officers No “Katie Couric” provision


Say on Pay Votes–Other

Companies must disclose in the CD&A whether and, if so, how their compensation policies and decisions have taken into account the results of the most recent say-on-pay vote.

A Form 8-K must be filed to disclose the company’s decision regarding the frequency of say-on-pay votes in light of the results of the shareholders’ frequency vote.

Companies must disclose in the proxy statement the current frequency of say-on-pay votes and when the next frequency vote would occur.

The company may exclude shareholder proposals on the same matters as the say-on-pay votes (e.g., provide for a say-on-pay vote, seeks future say-on-pay votes, or relates to the frequency of say-on-pay votes) if: A single frequency (one, two, or three years) receives support of

majority of votes cast Company adopts the frequency


Say on Frequency Results

(S&P 500 firms)


Say on Pay Results

Say on pay outcomes at first 100 Fortune 500 companies to hold votes


Say on Pay Results

Average support for Say on Pay votes at Russell 3000 companies was 91.2%

Say on pay votes failed at 37 Russell 3000 companies (1.6% of total companies reporting vote results)

S&P 500 Results:


ISS’ Impact


Effect of vote

Vote is non-binding by statute

Section 951 and legislative history further make clear that a vote will not be construed to: Overrule any board or company decision; Create or imply any change or addition to the

fiduciary duty of the board or the company; or Restrict or limit shareholder proposals relating

to executive compensation


Voluntary company actions

Disclosure

CD&A “executive summary” – focusing on pay for performance, risk alignment, peer groups, severance/change in control, executive benefits, and governance

Pay for performance supplemental disclosures

Program changes

Elimination of gross up provisions and other executive benefits

Establishment of performance conditions on long-term incentive grants

Shareholder Engagement

Proxy advisor “rebuttals”

Institutional shareholder outreach


Say on Pay Litigation

Jacobs Engineering — At the company’s annual meeting in January 2011, stockholders voted

44.8% to 53.7% against the compensation paid 5 highest paid SEOs Shareholders voted for an annual say-on-pay vote (the company had

recommended a vote every three years). Action filed February 4, 2011 against the company's management alleging

"excessive and unwarranted 2010 executive compensation" in the face of "abysmal" dropping revenues and net income.

Beazer Homes — At the company’s annual meeting in February 2011, stockholders voted

46% to 54% against the compensation paid 5 highest paid SEOs Voted for an annual say-on-pay vote (which is what was recommended by

the company). Shareholder derivative suit filed March15, 2011 against certain employees

and directors of the company and its compensation consultants alleging that raises for executives "violated the company's pay-for-performance policy and favored Beazer's CEO and top executives at the expense of the corporation.”


Say on Pay Litigation

Fact pattern in most suits: Corporation adopts a “pay-for- performance”

philosophy or guidelines Corporation experiences a decrease in financial

performance The board of directors and the compensation

consultant both recommend an increase in executive compensation despite the decrease in financial performance

Shareholders deliver a negative vote on “say-on-pay” The board of directors nevertheless approves or fails

to rescind, alter, or amend its plan for increased executive compensation


The Law


An Interesting Theory

Some plaintiff counsel have advanced a novel theory: The negative votes reflect the “independent business

judgment” of the shareholders that the executive compensation packages are unreasonable, disloyal, excessively large, irrational and not in the best interests of the corporation

The shareholders are equally capable of assessing, and did assess, the merits of the proposed executive compensation package based on the same information that the directors had at their disposal

Accordingly, the contrary position taken by the board of directors rebuts the presumption that the board is entitled to the protection of the business judgment rule


Blatant Disregard of Shareholder Preferences

“The board was on notice of what the shareholders wanted and purposely acted in disregard of the shareholders’ preferences.”

To what extent is board obliged to do as shareholders wish? Delaware Chancellor William Allen: “corporation law does not

operate on the theory that directors, in exercising their powers to manage the firm, are obligated to follow the wishes of a majority of shares. In fact, directors, not shareholders, are charged with the duty to manage the firm.” Paramount Communications Inc. v. Time Inc., 1989 WL 79880 at *30 (Del. Ch. 1989), aff’d, 571 A.2d 1140 (Del. 1990).

Allen further stated that the fact that “many, presumably most, shareholders” would have preferred the board to make a different decision “done does not . . . afford a basis to interfere with the effectuation of the board’s business judgment.”

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