In a January 2015 webcast, Latham & Watkins partners Jim Barrall, global Co-chair of the firm's Benefits and Compensation Practice, and Steven Stokdyk, global Co-chair of the firm's Public Company Representation Practice, discussed how companies can prepare for the 2015 proxy season. In this Q&A interview Barrall and Stokdyk share highlights from their presentation.
A recorded version of the full webcast, 2015 Proxy Season: What You Should Know as You Draft Your Proxy Statement and Prepare for Your Annual Meeting, is available through January 13, 2016.
How would you characterize the overall climate for the 2015 proxy season?
Stokdyk: There are not any significant new SEC or stock exchange disclosure requirements, so the focus is on enhancing disclosure. The proxy advisory firms and investors continue to play a very active role in shaping the issues, particularly in corporate governance and compensation, and they will continue to play a significant role during this proxy season. We also expect many clients to face activist investors this year – whether the issues arise in connection with the annual meeting or later in the year.
What trends or changes will we see with regard to say-on-pay in 2015?
Barrall: We are now in the fifth year of say-on-pay after Dodd-Frank’s enactment in 2010. I think it is largely going to be steady state this year. We are going to see continuing focus on pay-for-performance under the ISS (Institutional Shareholder Services Inc.) rearview mirror look over the last one, three and five years – asking how does a CEO’s pay align with the company’s total shareholder returns (TSR)? We will see continued developments with respect to how companies disclose that alignment – how they justify their peer groups and how they define pay – is it summary compensation table pay, realized pay, realizable pay? I think all of those things will be incremental and we will see improved proxy disclosures about all of that. Beyond that, I do think, based on what we saw in 2014, that we will see more pressure on companies to disclose performance goals, not only in the rearview mirror in valuing grants that were made in the past, but even for grants made more recently, to evaluate their value as incentives. We will see the proxy advisors and some investors saying the goals as we understand them are too low relative to the company’s performance last year – how can you have a goal for revenues or even EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) at 50 percent of what you have been hitting for the last few years? This will put a burden on companies to do a good job of first designing their goals, making sure that they are in fact rigorous, and then secondly disclosing them in ways which demonstrate their rigor.
What do companies need to know about the new guidelines from ISS on equity plan approval votes?
Barrall: I think is important to be mindful of these guidelines, to be aware of them, to make sure to think about them as you draft your proxy disclosures, but I don’t think we need to go off the deep end about them. I think we need to keep this all in context; in context, out of the Russell 3000 companies, approximately 1,000 companies per year put their equity plans up for shareholder votes, and they pass in overwhelming numbers, notwithstanding ISS’s high negative recommendation rates. In 2014 for example, there were 953 plan votes and there were only four failures. In understanding what hoops to jump through in this area and how to govern your business practices and your plan design, it is important to understand that over time very, very few plan proposals fail, and ISS has been singularly unpersuasive in getting its clients to vote against equity plans. I think companies should stick to their policies, should focus on what the shareholders care about, and should have good shareholder outreach explaining why they need their equity plans and why it is better to pay in equity for alignment purposes and for cash maintenance purposes. While it is important to be mindful of proxy advisor policies, I wouldn't tie myself up in knots trying to score a few points on their tests.
What are the latest development on exclusive forum bylaws?
Stokdyk: There has actually been a fair amount of traction on exclusive forum bylaws. Recently, there was a California case that recognized the validity of an exclusive Delaware forum selection bylaw that was enacted at the same time the merger agreement was signed. Historically, there was a little bit of a concern that you should really enact these bylaws when things are quiet, but we have seen that there has been even more recognition from courts that there is a valid purpose for enacting these bylaws, even in the middle of a significant event. The current trend is that a lot of state courts are continuing to approve these forum selection bylaws. Similarly, what we are seeing from the ISS Survey of Institutional Investors is that ISS is not viewing exclusive forum bylaws as as much of a significant of an issue as, for example, fee shifting bylaws. I think as a result of all these factors, many more companies are considering adopting exclusive forum bylaws, and I think this is a significant trend that we will continue to see throughout the year.
In light of the increased focus on cybersecurity generally, is there anything companies and boards should be mindful of when preparing for proxy season?
Stokdyk: Cybersecurity is all over the news today with all the recent hacks – it is a very high profile situation. Even President Obama has suggested that there be new laws in this area protecting individuals and companies with respect to cybersecurity. The SEC has not taken any formal action here, apart from just emphasizing to boards and companies that they must consider their cybersecurity disclosure and issues. So, one thing that we are carefully focusing on with companies in both their 10-K forms and their proxy statements is adding additional thought with respect to what the companies are going to say about their cybersecurity and how they are managing those risks.