Edward A. Hauder, Senior Executive Compensation Advisor, Exequity LLP and Reid Pearson, Managing Director & Corporate Governance Advisory Practice Co-Leader
This week, The Altman Group and Exequity, LLP have released a study of equity plans submitted to shareholders (2007-2009), how they fared and what issues companies should consider when preparing to submit a plan to shareholders. Below is an executive summary, the full report is available on our website.
Equity Plan Proposal Failures: 2007–2009
Equity Plan Proposal Failures: 2007-2009 – Lessons to Consider When Requesting Shares
Executive Summary
Ever since the exchange listing rules were modified to require shareholder approval of almost all equity compensation plans, there has been an ever-increasing focus on securing shareholder approval for equity plan proposals, both new equity plans and amendments to existing plans. The stakes are higher now that shareholder approval is required. So how did voting on equity plan proposals go during the past three years (2007–2009)? Overall, there were approximately 2,200 equity plan proposals submitted to shareholders of Russell 3000 index companies for the period 2007 through 2009. Of these proposals, only 38 failed to be approved by shareholders. Our report looks at the voting on these equity plan proposals and then focuses on the 38 proposals that failed to see what, if any, lessons can be learned. Hopefully these lessons will prove valuable for companies seeking shareholder approval of their own equity plan proposals.
We conclude that if your dilution meets or exceeds 15 percent with your equity plan proposal, and you are not a small cap company or in an industry that permits a higher level of dilution, you should be a little nervous and your level of nervousness should grow right along with the dilution as it exceeds that level. If your dilution would be above 20 percent, you should likely be quite concerned and perhaps seek out your top shareholders to ask their opinion about dilution levels before even submitting an equity plan proposal to shareholders. To the extent your company’s dilution would be out of step with its peers and/or industry group, you should be even more concerned. Much of the success or failure of an equity plan proposal depends on the composition of a company’s shareholders, so a detailed analysis of the shareholder base must be undertaken. Some of the questions that need to be asked include:
- What is the level of influence of RMG among my shareholders?
- What are the voting guidelines of my non-RMG influenced shareholders?
- What is the “message” for my equity plan proposal?
- Can I leverage my retail shareholders to help the equity plan proposal pass?
As with most things, it is often easier to ask and receive when times are good, i.e., when the company stock has performed well and shareholders have experienced some gains. In recent proxy seasons that hasn’t always been the case. But, it isn’t an absolute necessity. Most institutional shareholders understand that company equity programs are necessary in today’s compensation arrangements. For many investors, so long as they have faith in management, and management can demonstrate that it has been a responsible steward of the company, they will support reasonable share requests. What is reasonable? It depends on the investor, but generally it will take into account the company’s dilution level, how equity has been used in the past, and how long the shares requested might last (ideally, somewhere between 3 to 5 years for most investors).
For further information on Edward A. Hauder and Exequity LLP please use the links below:
Ed’s Equity Compensation Blog: http://www.edwardhauder.com Follow Ed on Twitter: http://www.twitter.com/ExeCompAdvisor www.exqty.com
Francis H. Byrd, Managing Director and Corporate Governance Advisory Co-Leader
From the 2010 Proxy Season to Conference Season: Some Early Questions for 2011
As we enter the tail end of the 2010 proxy season, members of our firm are off to conferences and summits following-up on this season and seeking to identify the key issues and challenges for 2011 and beyond. The Governance & Proxy Review will provide you with information, context (and where possible guidance) on the key questions raised by the companies, institutional investors, regulators, governance observers and commentators.
Among the some of the questions concerning issuers are:
- With proxy access and “Say on Pay” as new and permanent features of the American corporate governance landscape, what should companies do to prepare for 2011?
- What will the activist institutional investors (pension and union funds) do with these new powers?
- For companies who have engaged in dialogue with shareholders, how will proxy access and “Say on Pay” change, if at all, the nature of engagement.
- How should companies approach executive compensation, and planning, discussions and disclosure in the wake of votes to reject pay plans at Occidental, Motorola, KeyCorp and Abercrombie & Fitch?
- How will the institutions and the proxy advisory firms manage the prospective mandatory “Say on Pay” voting in 2011?
Among some of the questions concerning activist institutional investors are:
- How will the public and union funds define and refine the circumstances that would call for the use of proxy access?
- Will there be an expansion of institutional activism to mid-size and small companies and can the institutions be as effective with these firms as they have been with large- and mega-cap companies?
- If the Senate provision for mandatory majority voting fails to make it into the final bill, can the institutions effectively campaign to establish broad adoption of majority voting for companies outside of the S&P 500/Fortune 100?
Among the questions facing the Securities and Exchange Commission (SEC):
- What shape will the rules for proxy access take, and can they be promulgated in time for the 2011 proxy season?
- In what direction will the SEC take the reform of “proxy mechanics” and shareholder communications?
We have couple of our own as well:
- Did the enhanced disclosure, as mandated by the SEC, provide the value sought by investors?
- What further steps should be taken to increase retail holder voting?
These are among a small sample of the questions that we have heard during the past few weeks. Many of these queries have been posed at NIRI, Kaplan Fox’s Institutional Investor Summit and the International Corporate Governance Network (ICGN), and will be the subject of further discussion and debate at the annual conferences of the Millstein Center for Corporate Governance and Performance, and the Society of Corporate Secretaries and Governance Professionals. We will report back to you later this month and also in July on what we have heard and on how it affects boards/senior management and investors.
