One of the many changes introduced by the Dodd-Frank Act was the requirement for a shareholder vote to approve executive compensation. Under the Act’s provisions, the vote is not binding on the company or its board, but is purely advisory. Nevertheless, companies whose shareholders vote against their “Say on Pay” resolutions are finding that lawsuits are following in the wake of the vote, according to Broc Romanek’s April 26, 2011 post on the TheCorporateCounel.net blog (here).
Section 951 of the Dodd Frank Act provides that not less frequently than every three years public companies must provide their shareholders with an opportunity for an advisory vote on the compensation of the most-highly compensated employees. On January 25, 2011, the SEC adopted rules (here) implementing the requirements of Section 951. All public companies must hold Say-on-Pay votes at shareholder meetings starting on January 21, 2011. The rules are delayed for two years for companies with public float of less than $75 million. A March 2011 Investor Bulletin describing the Say on Pay requirements can be found here.
In view of public sentiment regarding executive compensation, it may not be a surprise that at some public companies the shareholders have voted against the Say on Pay resolution. According to Romanek’s April 25, 2011 post on the TheCorporateCounsel.net blog (here), a total of eight companies so far during this proxy season have seen their shareholders vote against the Say on Pay resolution. The most recent companies to have shareholders vote against their say on pay resolutions are Black and Decker (refer here) and Umpqua Holdings (refer here).
Umpqua Holdings filing on Form 8-K describing the shareholder vote on the say on pay resolution includes some interesting commentary, including among other things a statement that “our board of directors takes the results of this vote seriously and is considering ways to address this concern. “ The filing also states that “the vote against the ‘say on pay’ resolution was primarily the result of votes cast by institutional investors that followed the recommendation of Institutional Shareholder Services (ISS), a proxy advisory service,” adding that “the ISS report found a ‘disconnect’ between our CEO’s compensation in 2010 and the company’s total shareholder return.” The company then went on to explain why it disagreed with the ISS position.
What has started to happen now that the “no” votes are starting to accumulate is that some of the company’s whose shareholders voted against the lawsuits are now finding that the lawsuits are following along after the vote. These lawsuits are being filed in the form of shareholders derivative suits against the individual board of directors, the members of the board compensation committee, and in some instances even the company’s compensation consultants.
One example where a lawsuit followed after shareholders voted no on a say on pay resolution involves Beazer Homes. As Ted Allen noted on the Risk Metrics Group Insights blog (here), at the company’s February 2, 2011 annual meeting, over 53% of its shareholders voted against the company’s say-on-pay resolution. The company’s filing of Form 8-K discussing the vote can be found here.
On March 15, 2011, a Beazer shareholder filed a derivative lawsuit in Fulton County (Georgia) Superior Court, against the company, as nominal defendant, the company’s board, its accountant and its compensation consultant. A copy of the court’s docket can be found here. A copy of a March 15, 2011 Bloomberg article about the lawsuit can be found here. The lawsuit alleges that compensation increases for executives “violated the company’s pay-for-performance policy and favored Beazer’s CEO and top executives at the expense of the corporation.”
Another company that became involved in a shareholder suit after a say-on-pay vote, albeit before the Dodd Frank Act was enacted, was Occidental Petroleum. As described in its February 24, 2011 filing on Form 10-K (here) , the company was involved in a total of three different shareholder suits relating to compensation issues after shareholders voted on a compensation resolution. The first lawsuit, filed in federal court in Delaware in May 2010, alleged that the company’s board and certain of its executive officers had made a “false and misleading proxy solicitation” in connection with seeking shareholder approval of bonus compensation standards. All three lawsuits alleged corporate waste and breach of fiduciary duty for excessive compensation. The 10-K states that the first of the two suits was settled and the other two suits were dismissed with prejudice. However the filing does not disclosure the terms of the settlement.
In an April 17, 2011 post on the Harvard Law School Forum on Corporate Governance and Financial Regulation blog (here), attorneys from the Schulte Ross & Zabel law firm note that there are a number of negative consequences that follow in the wake of a negative say on pay vote, obviously referring to the Occidental case described above as well as other possible litigation:
The vote may translate into votes against directors. It also is likely to result in significant unfavorable publicity, which was the case at all 3 of the companies that received negative votes on [Say on Pay] iin 2010. In addition, lawsuits alleging breach of fiduciary duty and corporate waste were filed against directors at 2 of the companies that received a negative SOP vote in 2010. In one case, the lawsuit was settled, while it is still pending at the other company. At both of these companies, there also were changes to executive compensation policies and/or leadership.
At the 2 companies that have thus far had negative outcomes on SOP resolutions in 2011, in preparation for a possible lawsuit, plaintiffs’ firms already have announced investigations on behalf of shareholders concerning breaches of fiduciary duty …
The fact that there is litigation relating to executive compensation is not all that surprising, given what a hot button issue executive compensation as been in recent years. What is surprising is that the litigation is attempting to capitalize on the say on pay vote. For starters, the statute is quite clear that the required vote is not binding on the company or its board. Moreover, Section 951(c) expressly states, among other things that the shareholder vote “may not be construed” to “create or imply any change to the fiduciary duties of such issuer or board of directors” or to “create or imply any additional fiduciary duties for such issuer or board of directors.”
But even with the seeming limitations in the statute, the simple fact is that the vote is required and shareholders get to say that they disapprove of the company’s compensation practices. In April 26, 2011 post on his eponymous blog (here), UCLA Law Professor Stephen Bainbridge states that he knew these kinds of problems were coming when Congress incorporated the advisory say on pay provision in the legislation, having warned that the process “would be abused and turned from a supposed non-binding voting exercise into a club to beat directors with.” As Professor Bainbridge notes, that appears to be exactly what is happening.
Of course, merely because lawsuits are filed does not mean the suits are meritorious, and there is nothing that says that these cases are necessarily going anywhere. But they will still be costly to defend. And the fact that the Occidental case noted above was settled (albeit under undisclosed provisions) suggests that there could at least potentially be expense involved in trying to resolve these cases as well.
The defense expense involved as well as the possible costs of resolution make these kinds of cases a problem for D&O insurers. (Indeed, at least one observer noting the arrival of these kinds of suits expressly stated that the D&O insurers had “better start watching what happens with Say on Pay.”).
One of the recurring discussions amongst D&O insurance professionals since the enactment of the Dodd Frank Act has been the extent to which the Act may increase or exacerbate D&O claims activity. The full impact of the Dodd Frank Act will only be revealed in the fullness of time. But while the full picture develops, one thing that is clear is that the Act’s Say on Pay provisions could be contributing to increased D&O claims activity.
Maybe You Can’t Save the World, But You Can Help People Help Themselves: The Hesperian Foundation is a non-profit organization that publishes a book for people who do not have access to professional medical care called “Where the Is No Doctor.” The book has been translated into many languages and has been distributed around the world.
Here is a letter that was recently sent to the Foundation from someone who had received one of the books years ago:
About sixteen years ago, I was honored to receive from your august foundation the 1992/94 revised and reprinted precious book …”Where There is No Doctor.” I learn with great pleasure that you’ve published the 2010 revised edition…
I’m thus applying to you once again to kindly post me one book of this 2010 revised edition. I’m a teacher living and working in this densely populated suburb of Dakar where illiteracy and poverty rates are still very high. Infectious diseases like malaria, TB, STDs and influenza, and contagious but still deadly diseases like cancer, high blood pressure, diabetes, asthma, sickle cells, kidney failure, hepatitis, ulcers, general and particularly joint pains, etc., are widespread here. Dermatosis, worms, eye problems (cataract, glaucoma), teeth ache and depression or stress-related psychiatric disorders are also very frequent. In the neighboring countries, heavy rainfall forest nations like Sierra Leone, Liberia and the two Guineas …deadly diseases like typhoid, cholera and AIDS add up to the above mentioned somber list.
I’m persuaded that your in-depth and well illustrated book will again be of great help to us. As an underdeveloped country, the vast majority of people here don’t have access to computers and to the Internet. We thus very largely still depend on books like yours to learn from and to teach people in the community. We shall thus be very grateful to you and your Foundation to receive one from you…
The first thing I did when I read this letter was that I got out a checkbook and wrote the Foundation a check for $50, which is the all-in cost for processing and shipping the book to East Africa. If one book can help with so many different kinds of problems then it needs to be provided to as many people as possible.
The Foundation gets letters like this all the time, asking for copies of the book in specific languages or addressing specific situations. Among other things, the Foundation recently posted a Japanese language version of the book online, because so many earthquake victims, who may previously have the best medical care in the world, now do not have access to a doctor. Victims of the Haiti earthquake continue to depend on the book as a guide to the prevention of the spread of cholera.
The thing I particularly like about this book is that it is not a mere handout; it is a form of personal empowerment. The people who have access to one of these books can learn what they need to do to care for themselves, which is the first and most important step of self-improvement.
I was absolutely delighted to be able to make a donation so that a book could be sent to the Senegalese teacher whose letter I reproduced above. If you would like to help others just like him, please consider making a donation by visiting the Foundation’s website, here.