"On Demand CLE Credit: The Latest: Your Upcoming Proxy Disclosures"

Originally Aired: January 30, 2024

Following up where our Fall conferences left off, this critical webcast will provide you with the latest guidance on how to improve your executive and director pay disclosure - including pay versus performance disclosure and clawbacks - to improve voting outcomes and protect your board.

Joining us are:

• Mark Borges, Principal, Compensia and Editor, CompensationStandards.com
• Alan Dye, Partner, Hogan Lovells LLP and Senior Editor, Section16.net
• Dave Lynn, Partner, Goodwin Procter LLP and Senior Editor, TheCorporateCounsel.net and CompensationStandards.com
• Ron Mueller, Partner, Gibson Dunn & Crutcher LLP

Topics Include:

1. Clawbacks
2. Pay vs. Performance Disclosures
3. CD&A Enhancements & Trends
4. Shareholder Proposals
5. Proxy Advisor & Investor Policy Updates
6. Perquisites Disclosure
7. ESG Metrics & Disclosures
8. Say-on-Pay & Equity Plan Trends, Showing "Responsiveness" to Low Votes
9. Status of Related Rulemaking

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Program Transcript

Meredith Ervine, Editor, CompensationStandards.com: Welcome to today's webcast, "The Latest: Your Upcoming Proxy Disclosures." With us, we have Mark Borges, Principal at Compensia and Editor at CompensationStandards.com; Alan Dye, Partner at Hogan Lovells LLP and Senior Editor at Section16.net; Dave Lynn, Partner at Goodwin Procter LLP and Senior Editor at TheCorporateCounsel.net and CompensationStandards.com; and Ron Mueller, Partner at Gibson Dunn & Crutcher LLP. I'll turn things over to Dave to kick off our discussion.

Clawbacks

Dave Lynn, Partner, Goodwin Procter LLP and Senior Editor, TheCorporateCounsel.net and CompensationStandards.com: Proxy season is upon us, so we're going to focus on some of the key topics for this year. The first one is clawbacks. I know everybody probably feels like I do - you spent so much of last year working on clawback policies and got to what felt like the finish line by December 1 when the companies are required to have those policies in place by the exchange rules. Now you have the policy, but there's a lot of other considerations that need to be addressed going into proxy season.

First, from a disclosure perspective, you have to file the clawback policy as an exhibit to the annual report. That's new this year. That requirement went into effect when the exchanges' rules requiring clawback policies went into effect. That's one I've seen not showing up on a lot of exhibit lists that come across my desk, so it's a good reminder to double-check everybody's exhibit list to make sure that we're all filing those clawback policies because that is also a requirement of the exchange listing standards that you have filed your clawback policy and provided the disclosure.

Then, there are the "new" checkboxes that appear on the cover page of a 10-K or 20-F. One indicates whether the financial statements included in the report reflect the correction of an error to previously issued financial statements, and the other indicates whether any of the error corrections require a recovery analysis under the listed company's clawback policies. There were some questions about those checkboxes and whether they were included on the cover pages of annual reports last year, but this year they're obviously required. The situations in which you'd actually have to check the boxes are fairly unique and companies have only had these clawback policies in place, by and large, for a couple of months now, so I don't anticipate we'll see too much in the way of people checking those boxes at this point.

If you have applied the clawback policy in the last completed fiscal year due to a financial statement restatement that was completed or you had an outstanding balance of excess incentive-based compensation by virtue of the application of the policy, then a whole additional group of detailed disclosures is required in the proxy statement. Again, I think it would be an unusual situation this proxy season that a company would have adopted this clawback policy toward the end of 2023 and then have already triggered it within the last completed fiscal year. That's definitely one to keep on your checklist going forward, and it's disclosure that I would categorize as the kind that people want to avoid having to make.

You also have to keep in mind that the preexisting disclosure requirements about clawback policies continue to apply. From a disclosure perspective, the CD&A has a requirement in Item 402(b)(2)(viii) in Regulation S-K, which calls for disclosures of policies and decisions regarding the adjustment or recovery of awards or payments if the relevant registrant performance measures upon which they are based are restated or otherwise adjusted in a manner that would reduce the size of an award or payment. That disclosure has been required since 2006, and the requirement that drives most of the CD&A-type discussion of clawback policies today. Basically every listed company is going to have to go back and revisit that disclosure this year because now they've adopted the exchange-compliant policy.

Many companies ended up with multiple clawback policies. There were a lot of reasons for that. The main one is that it was difficult to integrate the exchange-required clawback requirements into an existing policy that had other triggering events, accorded the board more discretion in how to implement the policy than what was contemplated by the Dodd-Frank mandated exchange requirements and had different provisions for recovery and different provisions for timing. Many public companies have two or more clawback policies that exist for a discrete purpose. From a disclosure perspective, that will require some additional disclosure to explain why there is more than one clawback policy and how they work together to the extent there might be some overlap in terms of triggering events. That makes the disclosure more complicated than just describing one omnibus clawback policy.

In terms of having more than one policy, last year we had some additional guidance from the Department of Justice's Criminal Division when they updated their guidance on evaluation of corporate compliance programs. That document is used to guide prosecutors making charging decisions but it's also a tool that companies can use to just understand the DOJ's Criminal Division's perspective when considering corporate compliance issues.

What that update did was focus attention on incentives for compliance and disincentives for noncompliance with company policies and procedures and applicable law. It focused prosecutors on whether the company has gone far enough to disincentivize bad conduct including through the use of recoupment policies. In this context, it would be much broader than just a financial restatement, whether it's "Big R" or "Little r" restatement. We're talking about a whole range of other things that could happen that would compel restatement if criminal authorities are involved. That might include misconduct or something causing company reputational harm or conduct contrary to company policies and those kinds of things.

The DOJ's Criminal Division also launched a pilot program that was focused on compensation incentives and clawbacks. Essentially, they're going to look at whether compensation is being clawed back in connection with every corporate resolution of a criminal matter and will consider giving credit to the company if the company has made an attempt to claw back compensation related to that situation, even if it isn't successful. For some companies, this put in the back of their mind, "I might need something broader than just my Dodd-Frank exchange-compliant clawback policy if I want to be seen as a good corporate citizen in the event things go terribly wrong and the Criminal Division comes knocking on my door."

For institutional investors and proxy advisory firms, there's a perspective that compensation clawback policies should be broader than what the exchanges have mandated as a result of Dodd-Frank. Part of that is purely a consequence of the fact that it took a dozen years for the SEC and the exchanges to finally reach some resolution on this rulemaking that Dodd-Frank required. We moved forward and people look at clawbacks a lot differently than they might have a dozen years ago. There's just not as much focus on the financial statement restatement situation as there is on the whole range of other situations where other types of triggering events would be appropriate. That's something we'll continue to see evolve in this proxy season as we see institutional investor proxy voting guidelines. We've already seen it from Glass Lewis. It's definitely a topic to keep in mind when you're out there doing your engagement with investors and thinking about the disclosure that you're going to include in the proxy statement.

I'll mention a couple of other things on clawbacks that I think are worth keeping in mind now that we have to live with the policies that we put in place last year.

The first is trying to prepare yourself for the unfortunate circumstance of when the clawback has to be implemented. The company should be recovering the amount of erroneously awarded incentive-based compensation reasonably promptly. They made a big deal in the SEC release and ultimately in the exchanges' rules that they were going to look at this holistically. I've seen examples where companies put in a time frame of a specific number of days or months when they felt that it was appropriate for action to take place. A lot of other policies are silent on this point. I think now is the time to try to work out what the timeline should be and bake that into some process or procedure that the compensation committee is comfortable with so that in the event something happens, you could meet that reasonably promptly expectation.

The second point is on the method of recovery. There was variability in terms of how specific clawback policies were about the method of recovery. This is the one area where the SEC gave the board some discretion and the exchanges followed suit. There wasn't a prescriptive approach to the method of recovery. That's another one similar to the timing of recovery, where it would be helpful if your policy isn't explicit on this to try to reach some sort of agreement with the comp committee or whoever else is administering the policy to understand exactly how the company will seek recovery going forward. And that method should recognize the SEC's guidance in the adopting release that the efforts at recovery should effectuate the purpose of the statute, which is to prevent current or former executive officers from retaining compensation that they received but to which they were not entitled under the restated financial results.

The third thing in terms of follow-up is enforcement. A lot of people took care of this concept when the policies were adopted, but it will be a continuing effort in that there have been situations in the courts where questions arise as to whether the actual clawback policy is enforceable. Companies are taking into account how they can incorporate binding language in award agreements, plans, separate acknowledgments and things of that nature that provide a hook in the event that enforceability is questioned.

The last point I'll make is there's an express prohibition in the rule on indemnifying executive officers for the recovery of incentive-based compensation. You'll often see forms of indemnity agreements having language that excludes recovery of incentive compensation. That is a legacy of the Sarbanes-Oxley clawback provision, but it's a good idea to go back and look at that language and also any language in your charter to make sure it's clear in terms of how indemnification will be handled in this context.

That's all I had on clawbacks. I'm going to turn it over to Alan to talk about pay versus performance.

Pay vs. Performance Disclosures

Alan Dye, Partner, Hogan Lovells LLP and Senior Editor, Section16.net: As we launch into drafting pay versus performance disclosures for the second year, I want to focus on what we've learned since drafting the first round of pay versus performance disclosures.

I thought drafting the disclosure last year was a little difficult. The pay versus performance disclosure rule was the last of the four Dodd-Frank mandated executive compensation disclosure requirements to be adopted. In some respects, it's more complicated than the other three. At the same time, it came with a shorter compliance deadline, at least for calendar-year companies. Companies had to include the new disclosure in their 2023 proxy statements filed last Spring, which meant they had to start preparing that disclosure almost immediately.

In addition to the time pressure that companies were under, the new rule presented a fair number of interpretive issues relating both to the calculation of compensation actually paid and the presentation of all the required disclosures. In a lot of cases, there wasn't time to wait for the Staff to provide interpretive guidance. That meant companies had to make their best effort to understand and comply with the rule and hope their disclosures met the Staff's expectations.

Fortunately, we're in a much better position this year. We have a year of experience to draw on, and a lot of the information that was included last year, assuming it was calculated and presented correctly, can be pulled forward into this year's proxy statement. Although companies will have to add - at least for companies that aren't smaller reporting companies - a fourth year of information in the tabular presentation and the discussion, based on the phase-in requirements of the rule.

In addition to prior experience, the Staff has issued three rounds of compliance and disclosure interpretations ("CDIs") that address pay versus performance disclosure. On top of that, the Staff has been reviewing some proxy statements with the new disclosure, and they've provided further input through their comment letters. They've issued comments on dozens of proxy statements as far as I can tell. For the most part, they've pointed out errors in either the company's calculations, particularly of compensation actually paid, or presentation of the information. We have this Staff input that, together with the lessons that we learned last year, should make it easier to prepare this year's disclosures.

There are way too many CDIs and staff comments to address them here, but I will point out a few things that people should pay attention to particularly because the Staff's perspectives on these issues may not have been obvious last year from a reading of the rule or preparation of the disclosures.

One of the interpretive issues involves adjusting the summary compensation table total compensation for equity awards that vested during the year based on the officer's retirement eligibility. Initially, the Staff had expressed a view that the awards should be deemed vested as of the date that the officer became retirement eligible, even though the officer hadn't actually retired. But in a later CDI, the Staff refined the guidance to say that the award may not be deemed vested on the retirement eligibility date if the payout remains subject to additional conditions. I've learned, as a result of working on some of these disclosures, that there are a lot of intricacies to retirement vesting. Revisiting that issue early in the process this year may be advisable with knowledge of the Staff's guidance on whether or not the retirement eligibility of an executive officer should be treated as a vesting event.

Another point - and this can affect either the calculation of compensation actually paid or just the presentation - relates to what I call the reconciliation of the summary compensation table total compensation to compensation actually paid. You must disclose the mandated adjustments to the summary compensation table total compensation to determine compensation actually paid. That information can be presented in either tabular format or narratively, but most companies chose a tabular format, which seems to be a simpler and more understandable way to present the information.

The Staff made clear, and some companies failed to do this in the first year of disclosures, that the adjustments have to be disclosed on an item-by-item basis. In the comment process, the Staff called out some companies that had disclosed their adjustments either on a net basis or on an aggregated basis. For example, some companies aggregated all adjustments to the changed values of options and the changed values of stock awards. The Staff has made clear that there needs to be a separate disclosure of each adjustment made for those awards. The same is true for adjustments for pension values. You need to break out separately the subtraction of the change in pension value that was reported in the summary compensation table and the addition of the service costs for the fiscal year in question. The takeaway from the Staff's comments has been to provide all of the details item-by-item as you adjust the summary compensation table total compensation and can't use shortcuts by showing aggregated or net disclosures.

Next, the company-selected measure ("CSM") that is included in the tabular presentation needs to be the most important measure that affected executive compensation for the most recent fiscal year. Once that CSM is identified, then it needs to be discussed in the relationship disclosure. The relationship between compensation actually paid and the CSM needs to be discussed for each of the years that are presented in the table, which will be four years this year. For companies that had a change in incentive compensation arrangements for the year, there could be a different CSM for this year than was used last year. Companies need to take another look at that. You're looking at the performance measure that the company considers to be most important to the payment of its compensation for the most recent fiscal year and then you must discuss the relationship of that performance measure to the compensation actually paid for all of the years in the table.

Finally, on the selection of a peer group for disclosing total shareholder return in the table, the rule allows companies to use a peer group that's included in the company's CD&A, whether or not that peer group is used for benchmarking. So if a peer group that the company has selected is discussed in the CD&A, a company can use that peer group in the pay versus performance table, or they can use the industry-specific or line-of-business index from the Item 201 disclosures.

Some companies missed that this year. In the comment process, I saw that some companies went to their Item 201(e) disclosure and chose the S&P 500 as their peer group for disclosure. The rule is clear – and the Staff has made it even clearer – that if you're going to use an Item 201(e) total shareholder return index, it needs to be the industry-specific or line-of-business index. Most companies did that. A smaller number of companies decided to use the peer group that they used in the CD&A.

I think that's because the disclosure becomes burdensome if you're using a peer group from your CD&A and then the company changes the composition of that peer group to some extent from year to year. In that case, they'll need to disclose in the pay versus performance section of the proxy statement the reason for the change and then run the comparison for both the prior peer group and the revised peer group. So the disclosure becomes much more complicated if you're using a CD&A peer group. If you used one of those peer groups last year, it's not too late to make a change. You're not stuck using that peer group from year to year, and it might make sense to use your Item 201(e) line-of-business index for your TSR disclosure.

I want to quickly address mistakes that some companies made. It's always great to learn from your mistakes. It's even better to learn from other people's mistakes. The SEC noted in a few proxy statements that companies had failed to disclose the relationship between compensation actually paid and all three of the performance measures that were included in the table. The relationship needs to be disclosed between CAP and company income, CAP and total shareholder return, and CAP and the company-selected measure for performance. Those relationships were typically disclosed graphically – most companies used three graphs – although the presentation could be done in any number of ways, narratively or graphically. Either way, it is important to disclose the relationship between compensation actually paid and each one of those three performance measures and to do so for all years covered by the table.

To wrap it up, I'll offer a few tips for this year's disclosure. Based on our experience last year, keep it as simple as possible. At least in the proxy statements I saw, few companies included supplemental disclosures to try to explain their pay-for-performance program, for example, by including tables showing realizable pay or realized pay. Given that ISS and Glass Lewis, at least at this point, aren't paying much attention to or giving much weight to these disclosures in their own assessment of the company's pay-for-performance program, it's probably not worth the effort to complicate the disclosure or make it more difficult to try to further explain the company's pay-for-performance program. It's probably better to deal with those issues in the CD&A and leave those types of disclosures out of the pay versus performance section.

Next, read the CDIs. Although there are quite a few of them, they're pretty simple. If you start to read through them, you'll realize that some don't even apply to you. Reading the CDIs could be a helpful starting point before jumping back into the disclosures again this year and relying on what you knew, or thought you knew, last year. I'd say the same thing about the Staff comment letters. There are plenty of services that wrote summaries of the Staff's comment letters on this disclosure. It's probably helpful to see what mistakes others have made, or what kinds of things the Staff is looking for in the proxy statement, to help guide you for the upcoming disclosures.

Finally, it's important to line up your team to prepare these disclosures. The calculations required for compensation actually paid are numerous and need input from others – not just from the legal team. Not every company has the expertise or capacity to handle all the calculations that must be made. There are some great consulting firms that assist with this process, but there aren't that many of them and they tend to book up early. Companies that haven't done so already or don't have a team in place from last year may want to be mindful of how complicated the process can be, and make sure that they've lined up their team as early as possible before beginning drafting.

I'll stop there and turn the program over to Mark.

Mark Borges, Principal, Compensia and Editor, CompensationStandards.com: Since much of our lives has been spent preparing pay versus performance disclosures this last year, I have two brief observations to mention before I talk about the CD&A.

If you are a company that prepared pay versus performance disclosure last year and you are now doing Year 4 or Year 3, depending upon whether you're a smaller reporting company, you may recall that you not only have to adjust your summary compensation table total compensation to compensation actually paid, but you also have to disclose how you got there. In 2023, companies provided fairly significant reconciliation tables and footnotes to their disclosure. There's a CDI that says when you're now doing Year 4, you only have to provide the reconciliation adjustments for the fourth year in your footnotes. You don't have to bring down the other three years unless doing so is necessary for a material understanding of your compensation arrangements for the fourth year. I don't know if companies will take advantage of this relief, but it does offer you the ability to shorten your disclosure by making the reconciliation footnotes shorter than they were last year.

The other thing is if you are not planning to use the same peer group for your '23 disclosure that you used for your '22 disclosure, there's a CDI that says that you would use your 2023 peer group to determine your cumulative peer group TSR for all of the years in the pay versus performance table. It's one of the rare places where the information that's in the table itself for one of those prior years may actually change if you're now using a different peer group. The good news is that the vast majority of companies whose disclosures I looked at used their published industry or line-of-business index for determining peer group cumulative TSR. This doesn't affect them. It only affects companies that used a compensation peer group that was included in their CD&A. You should make note of this because you don't just use your TSR each year based on the peer group that you used for that year, but you have to go back and change those prior years to reflect the TSR of the peer group that you used in your most recently completed year.

CD&A Enhancements & Trends

Borges: Now I'm going to talk about the CD&A. 2024 is the 17th year that we will be providing a CD&A in our proxy statements. There's not much that we don't know about the CD&A at this point, but there are five items I want to mention.

The first one is regarding shareholder engagement. If you fail a Say-on-Pay vote or if you receive significant opposition to your Say-on-Pay proposal - which means more than 20% opposition if you are concerned about Glass Lewis and 30% if you're concerned about ISS - you have to provide disclosure in your CD&A about your response to that significant opposition or failed vote. That typically takes the form of disclosure about your engagement with shareholders and what you learned from that discussion as to why they voted against your Say-on-Pay proposal.

Most companies do a fairly good job of providing this information. While there's no required format, a standard practice has evolved where companies will indicate what they did to reach out to shareholders; how many they reached out to, either in terms of number of shareholders or voting power represented; how many they actually spoke with; who was involved; and what they learned. Typically, the company will also describe how they responded to what they learned – that is, what changes they made in response to the information or the concerns that were voiced by shareholders. That often takes the form of, "Here's what we heard, here's what we've done and here's when it goes into effect."

Obviously, the best case for this disclosure is where you've made a change in the interim between last year's shareholders' meeting and the upcoming shareholders' meeting. But even if you're only going to be making the changes prospectively, it's still important to the proxy advisory firms that you indicate what changes you're making and why. That's probably the biggest development in CD&A in the last half dozen years, where we now have this very important, "quasi-required" disclosure in the CD&A. I generally put this information at the beginning of the CD&A, especially if it's included due to the vote results that you received in the prior year. I've seen some companies that disclose it in the middle of the CD&A where it's not likely to draw the same amount of attention, but this is something that you want your shareholders and their advisors to see because it means that you've engaged in the expected dialogue and that you're listening to your shareholders.

The second thing I would focus on is your pay-for-performance discussion in CD&A. Virtually every single pay versus performance disclosure I looked at for 2023 said somewhere, typically at the very beginning, that "While we're required to provide this information, this isn't necessarily how we correlate pay and performance. For a discussion of how the Compensation Committee evaluates and views pay and performance, see our CD&A." It's important, particularly this year, that companies be conscious of the fact that if you do have a pay for performance section in your CD&A, that it's robust and it addresses this subject in a substantive way because you're basically telling shareholders that's where they should be looking and what they should focus on.

The third thing point that if you are omitting target performance level disclosure from your CD&A, which a company may do when it has a long-term incentive compensation plan with a multiyear performance period, remember that you're required to include a statement about the "degree of difficulty" your executives or company are going to have in achieving that performance target. I often don't see that information. That's something investors look for and is a required substitute for putting the performance target levels themselves into the CD&A.

The fourth point is the emphasis in the last year or so on better disclosure around non-GAAP performance measures. Remember that if you're using a non-GAAP performance measure in your incentive compensation plans, you're not subject to reconciling that with your GAAP measure for purposes of Item 10 and Regulation G, but the SEC and investors do want to see how that non-GAAP performance measure is calculated.

In this year's policies, Glass Lewis and ISS have made it clear that they'd like to see detailed disclosure of any adjustments that you make between the GAAP financial measure and its non-GAAP version. Particularly if using a non-GAAP measure increases the amount of the payout that your executives receive, it's important to address the impact of the adjustment, the nature of it and the rationale. Why are you doing this? A lot of companies have made that transition and do a fairly good job of that disclosure. If it's not an area that you're focused on, recognize that it is something that the proxy advisory firms and their clients are looking for and it's an area where it's worth spending some time since so many companies tend to use non-GAAP measures in their bonus and their long-term incentive plans.

Finally, with all of the Dodd-Frank provisions now in effect, we've got about five additional pages of disclosure in the proxy statement that we didn't have a couple of years ago. The average pay versus performance disclosure was about four pages. When you add in the CEO pay ratio, that's five pages of new information. That just adds to the length of your executive compensation disclosure. I've certainly been an advocate of looking for ways to shorten your CD&A to offset that additional information. Use of graphics is something that you ought to consider. I'm certainly seeing more of that in CD&As now than I did 17, even 15 or 10 years ago. That's one way to not only make the presentation more understandable but also convert the CD&A from a lengthy document to one that's perhaps of a more reasonable length.

Let me turn things over to Ron, who will talk to us about shareholder proposals.

Shareholder Proposals

Ron Mueller, Partner, Gibson Dunn & Crutcher LLP:I realize not every company receives shareholder proposals. There are those fortunate few that do not. But I think it's important for everyone to be aware of what's going on in the shareholder proposal world. I'll have some takeaways at the end not only for those of you that do have shareholder proposals, but also for those that have managed to escape them this year.

I'm going to throw out some statistics. It's always a little dangerous doing this because people measure proxy seasons differently and rely on different sources. I'm relying on some of our own reviews here. Just to give a preview, it looks like this is going to be a record or near-record year for shareholder proposals based on no-action submissions to the Staff. As of this time last year, there had been 143 no-action letters submitted to the Staff. For all of last year, there were 175. This year, we have 190 submitted already. We may not hit the peak that happened in 2021 when there were 272 no-action letters, but there's certainly a lot going on.

There are also a lot to be decided. This time last year, there were 21 decided and 11 withdrawn. This year, there have been 15 decided and 16 withdrawn - which is hopeful, showing a little bit of an uptick in withdrawals. Of those that have been decided, the company prevailed on excluding the proposal in a majority of them. Just to put things in comparison, there were 889 shareholder proposals submitted last year. About 490 of them went for a vote. Others were excluded through the no-action process or negotiated out. About 16% of them were withdrawn, which was lower than typical. We may have a higher number of withdrawals this year.

What are the trends we're seeing in no-action letters? Well, first of all, there's a continued increase in proposals from groups with a conservative perspective. It's no longer just social advocates seeking shareholder votes on social topics or environmental topics. You now have a number of conservative perspectives seeking reports or other types of information, sometimes in direct conflict with those on the socially active front. We often have some conflicting shareholder proposals or viewpoints going up for a vote at the same companies.

We're seeing a number of new proponents from across the political spectrum. There's a new animal rights group that is submitting shareholder proposals this year, and a number of conservative organizations that are new to the game and submitting a good number of proposals. As a result, we're also seeing a number of novel or first-time proposals that we've not seen before. Some of those factors are contributing to the increased number of no-action letters. We have new topics, so people are testing whether they're vague, whether they're ordinary business, whether they violate state or SEC rules. Then, there are a number of new issues coming up in procedural challenges, and we see shareholders who have not been through the process and are not familiar with the process run into procedural issues.

To dig into the weeds on some of the topics on executive comp, there were two proposals that were around last year that we've seen come back. The most prominent of those is asking for a policy to seek shareholder approval for any severance compensation that exceeds 2.99 times salary plus bonus - a more restricted formula than under the golden parachute rules. John Chevedden has introduced this proposal with some of his colleagues for a couple of years now. They're getting some pretty good votes. We're having companies resurrect policies. This was a topic he had advocated for more than a dozen years ago, but it fell off the radar screen. Now it's back.

There are three new executive compensation proposals this year. One is requesting that companies amend their clawback policies. Again, it's a John Chevedden proposal. It's unclear exactly what the proposal is asking for, but the supporting statement alludes to the fact that if one executive engages in misconduct and, as a result, payouts are higher than they should have been, then other executives should also be forfeiting their compensation regardless of whether those executives themselves engaged in misconduct.

From the conservative side, there were some proposals out there asking companies to eliminate greenhouse gas reduction metrics as performance measures. More and more companies are including environmental metrics as part of their bonus programs, as one of their performance metrics. Here's a proposal saying, "No, stop doing that." It'll be interesting to see what kind of traction that gets.

Lastly, another new proposal is asking for an annual Say-on-Pay vote on director's compensation. As if that's not novel enough, the two twists on that are that it has to be an advance vote before the directors get paid, not after the fact vote like Say-on-Pay for executives, and the proposal is in the form of a binding bylaw amendment. If it was approved by shareholders, it would go into effect automatically under most corporate law programs and most bylaws.

Outside of the executive compensation area, there are two different proponents putting forth proposals about advance notice bylaws and asking for company policies about how they're going to administer their advance notice bylaws. This is coming after a majority of the S&P 500 and other large companies have amended their bylaws and their advance notice bylaw requirements in light of universal proxy.

The Carpenters, who over a decade ago had what I consider one of the most successful shareholder proposal campaigns when they asked companies to adopt majority voting on the election of directors, are back with a proposal seeking to tighten the standards on what happens if a director does not receive a majority vote. The proposal is not just going to companies where directors have failed to get majority votes, but going very broadly. They're trying to move the needle again on policies around that situation.

There are proposals on AI - of course, someone had to jump on that bandwagon - and proposals around paying a living wage. That's on top of the usual governance proposals. Moving voting standards to a simple majority vote, which was one of the few proposals that received majority votes last year, is back, as are some of the other governance proposals like special meetings.

What does this mean for companies and whether you're receiving shareholder proposals or not? First of all, if you are receiving shareholder proposals, one of the changes to Rule 14a-8 from a few years ago is that the proponent has to offer to engage with the company over the proposal, and we've been encouraging companies to pursue that engagement. As many of you know, the shareholder often has concerns that are different from what their proposal relates to.

Also, institutional shareholders are increasingly asking companies, "Did you try to engage, did you try to negotiate this out?" This crescendo in the number of shareholder proposals and the number of topics being addressed in them is putting a lot of pressure on institutional shareholders. They're having to take a lot of time to focus on these proposals. Again, many of them are novel, they've not seen them before, so they're having to say, "What's this proposal asking for? What are you doing?" There's an element of, "Why couldn't you negotiate out the proposal? Did you meet with the proponents?" It's worthwhile seeing what you can do on that and being able to tell your institutions, "We tried, and what we're finding is increasingly these proponents are pretty dogmatic about their proposals and not willing to withdraw."

If you have proposals, you'll want to spend a lot of time on the statements in opposition. There are some trends in how statements in opposition are being phrased. A lot of them in the past would be delicate around the issue and hesitant to criticize a proposal or a proponent. Both institutional investors and companies are getting a little fed up with some of the games that are going on with shareholder proposals. You're seeing some more blunt discussions. Again, maybe some of these discussions about, "We tried to negotiate with this proponent, they actually want something entirely different than what this proposal is asking for. Here's why we think the way we're doing this or why we think what they're asking about is not an appropriate response." More pointed rebuttals.

The second trend in statements in opposition is trying to make them easy to access. By that I mean bullet points, summaries, something that will allow your institutional shareholders to look quickly at this and say, "Do I need to read this whole thing, or do I basically agree with the company or the proponent on this?"

Finally, as I said, there are a lot of proposals that walk around the same topics but take different perspectives. If you have two proposals that address the same topic, help your institutional shareholders distinguish between them. You'll probably recommend that they vote against both, but help them understand why these are two different proposals and what the differences are in case the shareholder is interested in the topic but not necessarily the details of one of the proposals.

Along that line, companies are trying to do a better job of disclosing shareholder proposals at a glance. We see companies filing additional soliciting materials that are focused only on bullet points about their shareholder proposals. If you look at Apple's proxy statement, they only had five or six proposals, but they had a summary, table of contents and a chart at the beginning before all the proposals that briefly summarized what each proposal was asking for. Is it asking for a report, an audit or a new board committee? Here are some bullet points about it so that shareholders could quickly look at that and say, "OK, which of these do I need to spend the most time with?"

The final point, if you do have shareholder proposals, is to pay attention to the PX14A6 filings. These are the notices of exempt solicitation that are increasingly common. The reason it's important to pay attention to them is that ISS and Glass Lewis will pay attention to them. They will mention them in their analyses and sometimes rely on them. If you think there's something inaccurate in these, it's worth considering whether you're going to do additional soliciting materials to rebut those inaccuracies.

PX14A6 filings hit a record last year. There were 347 filings in the first five months of last year. That was up from 285 in the year before. The three most prolific filers were As You Sow, the National Legal Policy Center ("NLPC") and John Chevedden. NLPC was interesting in that they were filing these materials not only in favor of some of their own proposals at companies, but also criticizing proposals that were submitted by other proponents at other companies.

Now, for those companies that are lucky enough not to have shareholder proposals, what does all this mean to you? It means that your large institutional investors are going to have their hands full. They have fiduciary duties to pay attention to some of these proposals. Even if you're having a routine meeting or you have no shareholder proposals, you should be aware of the fact that your shareholders may not have the time to engage with you. They may not have the time to devote to your proxy statement that they normally would like.

So, some of the pointers that Mark and others have been giving about how to highlight key changes or call attention to facts are important to keep in mind. That is, if there's something you want to be sure that shareholders pay attention to about a change in your executive compensation programs or a change in your governance program, put it up front, put it in a box, highlight it, put it in bold language, do something to make sure that that's easy to find. Another good practice that's increasingly common is to include more tables of contents. We're increasingly seeing not only one that just goes numerically through the pages but also a table of contents that has key data points. You'll see a little box to the side that says here's where this key information is.

The final thing to think about, as reflected in these proposals, is that the proxy statements are increasingly becoming politicized. Obviously not by companies or institutional shareholders, but by different advocacy groups. It's important to be mindful of trying to avoid political missteps on some of these issues. We do see both in 10-Ks and proxy statements, companies being more cautious in how they are talking about their DEI and sustainability programs. The acronym "ESG" has been widely reported as falling out of use. Instead, companies are using more descriptive terms that say, "This is exactly what we're doing for inclusion, this is what we're doing for sustainability, this is what we're doing to address the environment," and making the point about how that ties into the business and supports the success of the business. Whether it's in recruiting and retaining employees, in avoiding controversies or in appealing to consumer preferences.

With that, let me turn it back to Dave to talk about our friends at the proxy advisory firms.

Proxy Advisor & Investor Policy Updates

Lynn: I'm going to spend a few minutes talking about proxy advisory firms and institutional investor voting guidelines. It's a relatively light year in terms of the updates that have been made. I would note that ISS has updated guidelines that apply for meetings held on or after February 1, 2024, whereas Glass Lewis's guidelines apply to the meetings held on or after January 1, 2024.

In terms of ISS updates, there were few changes and not a lot of significant policy updates. With respect to Glass Lewis, they did make several policy updates, but this year they sought input before making their policy changes from both the issuer community and from investors through a policy survey. Similar to what ISS has done for a number of years.

For ISS, the main takeaway was they changed their approach to golden parachutes for 2024. Previously, they recommended voting case-by-case on proposals that sought to ratify or cancel golden parachutes and recommended in favor of shareholder proposals requiring golden parachutes or executive severance agreements to be submitted for shareholder ratification. In 2024, they're going to also recommend voting case-by-case on the proposals that require severance arrangements to be submitted for shareholder ratification. They're essentially harmonizing the factors that they use to analyze either regular termination severance and change-in-control related severance. It's tweaking the policies around those types of arrangements.

With respect to Glass Lewis, their changes were much more wide-ranging. On the topic of cybersecurity, which we're all focused on right now as we seek to draft the disclosures that are appearing in annual reports as a result of the SEC's rule changes, Glass Lewis encourages issuers to provide clear disclosure about what the board's role is in overseeing cybersecurity issues and how directors are informed about these topics. Also, in the situation where a company has been materially impacted by a cyber event or incident, they believe there should be updates to shareholders on the progress toward remediation until systems are fully restored and clarity around the resources that are necessary to accomplish that. Starting this year, Glass Lewis may recommend against directors at companies that have been materially impacted by a cyber security incident if their oversight response or disclosures about those cybersecurity issues seem insufficient.

On broader topics around the environment and climate and social issues, Glass Lewis in 2024 is going to examine more closely the company's committee charters and the governing documents to make sure that oversight responsibilities are appropriately designated and codified. They're also expanding the application of their climate policy to all S&P 500 companies with material exposure to climate risks stemming from their own operations per SASB standards. That means they're going to be looking at the climate-related disclosures of these companies and they're going to assess whether those are in line with the TCFD recommendations. They're also going to look to see whether companies have disclosed board-level oversight responsibility around climate-related issues. If not, they may recommend against the chair of the committee that's charged with climate issues or the entire board.

On clawbacks, consistent with what we were talking about earlier, Glass Lewis expressed in its updated policy that they believe companies should have a discretionary clawback policy where they can recoup incentive compensation from executives when there's other types of triggering events beyond restatements, like problematic decisions or actions or material misconduct, material reputational failure, failure of risk management, operational failures, etc. If they don't exercise discretion, then Glass Lewis is going to be focused on the rationale for that decision.

With respect to executive ownership guidelines, there was some additional clarity around the fact that they think companies should have share ownership guidelines and have them adequately disclosed in CD&A, and that companies should not be counting unearned performance-based full value awards or unexercised stock options when determining whether executives have met those ownership requirements.

Generally in the past, Glass Lewis supported very limited net operating loss poison pills. Now beginning in 2024, they're going to take into account whether those pills have an acting-in-concert provision, which they are not in favor of. That's a provision that broadens the definition of beneficial ownership. They're going to look at that closely in making their voting recommendations.

They have a new policy now at Glass Lewis where they're going to hold the audit committee accountable when you have a situation where a company hasn't adequately disclosed its remediation plan for a material weakness, or you've had a material weakness that's been ongoing for over one year and they haven't updated their remediation plan to outline the progress toward remediating that weakness. They don't like it if the remediation disclosure is just boilerplate going forward.

They made some clarifying changes to a number of policies in terms of board responsiveness. They generally believe boards should engage with shareholders and demonstrate an initial level of responsiveness when 20% or more of shareholders vote against the recommendation of management (or abstain), including on say-on-pay. They're going to evaluate other types of interlocking relationships that arise with respect to directors, such as interlocks with close relatives of executives or within group companies. That's going to be done on a case-by-case basis. They're going to review disclosure around diversity considerations, and they may refrain from recommending against the boards that are lacking gender and underrepresented community diversity if the company provided enough of a rationale or some sort of plan or timeline for addressing the issue.

They're also focused, as mentioned before, on adjustments that are applied on a non-GAAP measure with respect to incentive programs. They're looking for reconciliations in that regard so they can adequately evaluate that. On pay versus performance, they did say that they're going to start using that pay versus performance disclosure as part of their supplemental quantitative assessments that are in support of the primary pay versus performance grade. They are going to factor that in, which I don't think was unexpected in that regard.

There have been a few other investor voting guidelines, so check out the coverage of that on TheCorporateCounsel.net and CompensationStandards.com. We've seen BlackRock issue updates to their voting guidelines without huge changes there. We also recently saw Fidelity update its proxy voting guidelines as well. Again, the guidelines were not massively changed in this year's update.

With that, I'm going to turn it back to Alan to talk about our favorite topic: perks.

Perquisites Disclosure

Dye: I'll make two quick points about perquisite disclosure. I won't belabor them because neither point that I want to make is particularly novel or new.

One is that companies need to make sure they have in place disclosure controls and procedures or internal controls that are designed to ensure that perks and other personal benefits both come to the attention of the people who are responsible for making disclosure decisions and who understand what the SEC considers to be a perk.

It's abundantly clear that the SEC Enforcement Division looks for opportunities to bring perks cases. It's not easy to find undisclosed perks, so when the SEC can send that message, they will. Back in June, the SEC sued Stanley Black & Decker and the former CEO of Stanely Black & Decker, in a cease-and-desist proceeding. It was settled. The issue was that the company had incurred expenses well over $1 million for perks and personal benefits that were for the benefit of the CEO, who was one of the named respondents, along with three other named executive officers and one director. Most of that money was spent on personal use of corporate aircraft, but nearly a third of it was for chauffeur services, personal meals, clothing and car repairs for the executives on their personal vehicles.

Maybe not corporate aircraft, which presents some tricky issues, but most of those expenditures would've been easily and quickly identified as perks if the company had appropriate procedures in place. I should add that I don't know all the facts underlying the Stanley Black & Decker enforcement proceedings, so I don't know if there was active concealment or an intention to avoid the disclosure requirements but it seems clear from this enforcement action and so many others that some companies don't have in place the right procedures to make sure that they detect personal benefits and perquisites disclosure, and to avoid enforcement actions, they should put those in place.

The other point I'll make is to be principled and careful in analyzing whether an executive's use of company aircraft is personal use as opposed to integrally and directly related to the performance of the executive's duties. I find it can be extremely difficult sometimes to draw a line between use that's personal and use that's business-related.

A lot of the confusion stems from a helpful CDI the Staff issued during COVID that, although this may be oversimplifying the point, effectively treats an executive's remote workplace as the office when executives were restricted to their homes by COVID directives. That could change the nature of expenses that were incurred for things like home security or commuting into the office. Work life has changed a lot as a result of COVID, and no longer solely due to COVID directives. People work remotely. Executive use of corporate aircraft to travel to and from their vacation homes or to a home where they're located permanently or semi-permanently because they are effectively working remotely as their primary office doesn't necessarily mean that leaving from that destination and going to the company's headquarters or vice versa is or isn't personal use. I don't think bright lines can be drawn.

I heard someone say recently they'd been advised that as long as a new executive officer negotiated as a term of his employment that he would work in his home state and would have use of corporate aircraft to travel to company headquarters, the company could treat that as a business expense and not a personal expense. Perhaps that may be the right answer in a particular circumstance, but I'm not sure that that would be true in all circumstances. When analyzing a person's use of corporate aircraft, it's important to determine whether or not it's fair and consistent with the principles of the rule, based on guidance in the SEC's adopting release for the perquisites disclosure requirement, to treat that use as personal or instead as integrally related to the corporate executive's duties.

I'll turn it back over to Mark to discuss ESG issues.

ESG Metrics & Disclosures

Borges: Over the last five years, ESG metrics have become more common performance measures in company incentive compensation plans. The open issue that we're going to face over the next 12-24 months is whether, because of the new clawback rules and the increased attention on clawbacks of incentive-based compensation, we're also going to see companies move to more operational performance measures of which ESG- measures would certainly be one category.

The big news here isn't so much the fact that these ESG metrics continue to be used by companies. It's that they've become a political flashpoint. Ron mentioned a moment ago that we're starting to see shareholder proposals basically telling companies they don't want them to incorporate ESG performance measures in their incentive compensation programs . It's become an issue about whether companies Have become too "woke." For example, with respect to diversity and inclusion. Some parties see this characterization at as just another word for "quotas" and believe that these metrics are not related to a company's core financial objectives. As a result, while we're not seeing a drop-off from companies that have adopted these types of performance measures, we've certainly seen a slowdown and we're also seeing a "rebranding" of how they are described.

Companies are now talking in terms of a "responsible business" perfomance objective rather than an ESG performance objective. Companies are also being more cautious in their disclosure in terms of the information that they present. Short-term incentive compensation plans still tend to be the more favored location for ESG-type metrics. There is a push to add them to more long-term incentive compensation programs, but that still remains fairly challenging. The metrics have to be aligned with the company's strategic plan in order to be truly effective, and it can be difficult for certain types of these metrics to be measurable. As we see more emphasis on climate-related issues and disclosure, it could be that those become more the focus of long-term incentive plans and other types of social, environmental or even governance-related metrics are largely included in short-term incentive plans. Today, most goals continue to be in short-term programs, which is what we've seen over the last couple of years.

From a disclosure standpoint, if you're using ESG metrics in your incentive compensation plans, companies are not being terribly specific about the goals that they're using. To the extent that you're using a qualitative goal, you don't need to disclose the specifics unless the metrics are material to the company's ultimate compensation decisions. Still, most ESG metrics tend to represent a fairly small portion of a plan's performance metrics or the scorecard that a company is using to determine how its incentive compensation awards are to be earned.

There's also the issue about whether the disclosure of the metrics is so specific and particular to the company that their disclosure could result in competitive harm. There are a couple of reasons why companies may not be providing disclosure with the same level of specificity that you see with financial and other types of operational performance measures. While we're seeing a continuation toward adding these types of metrics to incentive compensation plans, I believe they're going to be "re-branded" and the rate at which they're used may slow a bit over the next couple of proxy seasons.

To the extent that your company uses ESG metrics, I believe the disclosure will continue to be more general than specific. Even if you don't provide meaningful disclosure, it's still important to tell a compelling story about why you've included this metric and how it contributes to the achievement of your overall long-term or intermediate business objectives, even if you're not providing specific details as to how these metrics are going to be measured. We're in an interim period right now where we're not seeing the level of growth in the use of ESG metrics that we saw the last couple of years, but I do believe they're going to continue to be used. It remains to be seen how the political issues they have created are going to be resolved.

Say-on-Pay & Equity Plan Trends, Showing "Responsiveness" to Low Votes

Mueller: I'm just going to touch briefly on Say-on-Pay and stock plan approvals. Mark already discussed Say-on-Pay and how companies are showing responsiveness. Based on statistics from our friends at Semler Brossy, the number of companies that failed their Say-on-Pay votes was down this year, as was the number of companies that received less than 70%. On the flip side, the companies who received more than 90% didn't really increase year over year. What happened was more companies received between 70% and 90%, and fewer received less than 70%.

Of those that did receive lower Say-on-Pay votes, they were primarily in three industries: health care, tech and communication services (phone and social media companies, if you classify them by GIX code). I don't think it's a coincidence that those seem to be industries where competition for executive talent is fiercest. You see companies say, "We're going to pay what it takes to get, attract and retain good executives, whether it's through large grants or retention bonuses or things like that that may result in a lower Say-on-Pay vote, and then explain it to our shareholders and have engagement in the following year."

Again, the caution this year is that if you have not already started some engagement after a low vote last year, you need to get on this soon because it's going to be a busy proxy season again between shareholder proposals. There's already a couple of prominent proxy contests on the horizon. Those are going to be consuming a lot of your institutional investors' time. If you haven't talked to them already about any concerns they have about your Say-on-Pay vote last year, the hour is now.

On stock plans, it was a different story. There was the highest percentage of ISS recommendations against stock plans at 28%. Typically, ISS is recommending against somewhere in the mid-20s, but they were recommending against more stock plans this year. Also, the number that failed was higher than usual, but still a small number. By failure, we mean truly less than half the votes. Eight plans failed to get less than half the votes.

If you have a plan going up for a vote this year, it's important to know that ISS has re-weighted some of the factors that they consider. As you can tell from the data (they recommended against 28% of the plans and only eight plans failed to pass), ISS doesn't determine the outcome, but they sure can make it a lot more nerve-racking.

The factors that are going to be given more attention this year are some of the plan features. Particularly, the ability to accelerate vesting, the absence of a minimum vesting requirement or the exceptions, such as for retirement, will be weighted more heavily in ISS's evaluation of the plan, and likewise liberal share counting. If you have a plan going up, it's going to be worth revisiting to make sure that your provisions are consistent with standard practice these days.

With that, let me pass it on to Dave.

Status of Related Rulemaking

Lynn: I'm going to close out with an update on SEC rulemaking activity related to proxies, proxy disclosure and annual reporting. We're down to three proposals on point that I'll just mention briefly.

The first one is shareholder proposal changes to Rule 14a-8. Back in summer of 2022, the SEC had proposed amendments to Rule 14a-8 dealing with the bases for exclusion that address substantially implemented, substantially duplicated and substantially the same subject matter for resubmission purposes. That's for Rules 14a-8(i)(10), 14a-8(i)(11) and 14a-8(i)(12). People saw that as a series of amendments that might make it harder to argue those bases for exclusion. There were comments submitted on that. We don't know when the final rules are coming out, except that in the Fall 2023 Reg Flex Agenda, it said that it expected that to be in final rule stage with a projected date of April 2024.

The next set of rules is human capital disclosure. As you recall back in 2020, the SEC adopted a number of amendments to Item 101 of Regulation S-K, including Item 101(c) where they added a provision that mandates that companies talk about human capital resources to the extent material to an understanding of the company's business. We've seen people disclosing a lot of information in response to that.

Ever since the beginning of 2021, we've heard from the SEC that perhaps what people have disclosed hasn't been enough. Over time, there's been talk about addressing more specifically things like workforce turnover, skills, training and development, compensation, benefits and workforce demographics more broadly. Then the investor advisory committee weighed in on this and made a number of recommendations in terms of potential disclosures, including some more specific disclosure for MD&A on this topic. The latest Reg Flex Agenda said that could be expected by April 2024.

Then the last one is board diversity, which is rulemaking that's been talked about for quite some time. The SEC addressed board diversity changes back in 2009. After that, Mary Jo White talked about the Staff looking at adopting or proposing a set of rule recommendations around board diversity. We've had a lot of developments since then and a lot of changes in perspectives, including Nasdaq's requirements around board diversity disclosure, but we've never seen this proposal. It's been talked about for all this time, not seeing the light of day. In the Reg Flex Agenda, the SEC said this one was in proposed rule mode and the projected date was October 2024. Hard to say if we'll actually see that one come to pass.

Ervine: Thanks so much, Dave, and thanks again to Mark, Alan and Ron for all those practical tips as we head into proxy season. Have a great day.