Equity Incentive Schemes: Examining the rationale behind shareholder rejection

Two historical examples of organizations that have had their stock option plans rejected by shareholders include Red Lion Hotels and HomeAway. How could they have reduced the likelihood of rejected plans? Read to find out

The approval for equity-based incentive plans, or amendments to current plans, is a critical part of many organizations strategies to acquire and retain premium talent. Opposition or even rejection by shareholders can derail these efforts.

In this article we look at two historical examples of organizations that have had their equity incentive plans rejected and explore the reasons behind and impact of shareholder opposition.

When Red Lion Hotels was punished for lack of clear strategy

In 2019, Red Lion Hotels Corporation’s (NYSE: RLH) shareholders delivered a blow to the company by voting overwhelmingly (70% opposed) against the proposed amendment to the 2015 stock incentive plan.

Shareholders were troubled by, what they perceived, as the board’s continued inability to fulfil its obligations and the absence of a clear strategy (Vindico Capital LLC – letter to the board). Flat performance of the stock over time and significant underperformance against the market and industry peers were particular points of concern for shareholders.

When HomeAway was sent packing

In 2015, HomeAway (NASDAQ: AWAY) had their amended equity incentive plan rejected. Investors felt equity awards continued to be granted despite diminishing returns for investors over time. While the Market Capitalization of HomeAway had remained relatively steady over two years, the rest of the index saw significant gains. Total Shareholder Return was perceived as minimal in this context and the equity awards were seen to be rewarding poor performance. Ultimately HomeAway was acquired shortly afterwards and incorporated into one of the largest travel industry players, Expedia.

Trends in the opposition

When shareholders are considering the impact of diluting their holdings, they require that any potential value lost by the equity incentive plan is offset by the value the business gains by meeting the qualifying KPIs. Whether this is Market Capitalization, Total Shareholder Return, EBITDA or free cashflow, there has to be a compelling strategic rationale for the award of equity. Further, the remuneration committee must ensure that the organization behaves is a prudent manner, even after the plan is agreed to.

Test your equity compensation plans with Glass Lewis’ Equity Compensation Model

Reduce the likelihood of shareholder rejection on your stock option plans and proposals with Glass Lewis’ new  Equity Compensation Model (ECM) application. Now available exclusively via CGLytics. Providing unprecedented transparency to the U.S. market in one powerful online application, both companies and investors can use the same 11 key criteria as the leading proxy advisor to assess equity incentive plans.

Click here to experience Glass Lewis’ new application.

Latest Industry News, Views & Information

The increasing popularity of linking equity compensation to socially responsible practices

Social responsibility is an increasing priority for corporates, reflecting changing pressures from stakeholders and society. In this article CGLytics looks at the trend of linking executive equity compensation to responsible social practices.

The Effect of Executive Departures on Company Performance

The Executive Management Team plays a pivotal role in the performance of a company. The dismissal or exit of one or more executives is often accompanied by a change in strategy. However, this isn’t always perceived as a positive change by investors.

Capri Holdings – A Glass Lewis Use Case into Executive Compensation Benchmarking

In this use case, Glass Lewis examine the “additional considerations” regarding the quantitative examination with respect to Capri Holdings, Inc. (formerly Michael Kors Holdings Ltd.) using CGLytics’ analytical tools.

Latest Industry News, Views & Information

The increasing popularity of linking equity compensation to socially responsible practices

Social responsibility is an increasing priority for corporates, reflecting changing pressures from stakeholders and society. In this article CGLytics looks at the trend of linking executive equity compensation to responsible social practices.

The Effect of Executive Departures on Company Performance

The Executive Management Team plays a pivotal role in the performance of a company. The dismissal or exit of one or more executives is often accompanied by a change in strategy. However, this isn’t always perceived as a positive change by investors.

Capri Holdings – A Glass Lewis Use Case into Executive Compensation Benchmarking

In this use case, Glass Lewis examine the “additional considerations” regarding the quantitative examination with respect to Capri Holdings, Inc. (formerly Michael Kors Holdings Ltd.) using CGLytics’ analytical tools.

The increasing popularity of linking equity compensation to socially responsible practices

Social responsibility is an increasing priority for corporates, reflecting changing pressures from stakeholders and society. In this article CGLytics looks at the trend of linking executive equity compensation to responsible social practices.

Historically, the primary concern of shareholders and company executives has been to deliver returns on investments and ensure that the company meets or exceeds their quarterly earnings expectations. Inevitably this led to a more short-term view with any projects that didn’t contribute to the present quarter / yearly results being at risk of cuts.

However, as some of the leading shareholders continue to embrace their roles in ensuring that companies are held accountable for their impact on both the environment and society, a growing trend has emerged of remuneration committees coming under pressure to link equity and compensation awards to sustainable environmental and socially responsible business practices (E.g. Alphabet 2019 Proxy Statement – Proposal 13).

A number of studies [Project ROI] have been carried out that link social and environmental impact to attracting and retaining customers, increasing revenue and building a vibrant corporate culture, whilst also having significant brand impact in a landscape where simply achieving results may become secondary to the “how” they were achieved.

Linking social impact to executive compensation

One of the most significant hurdles of linking the social impact of a company to the equity based compensation of senior executives and directors has been the attempt to identify  quantifiable measures for what can be a very subjective definition of success.

As the topic has come under more scrutiny there has been a visible appetite for businesses to provide more reporting and demonstrate measures that have been taken to ensure they partake in socially responsible practices. This can include:

  • Auditing suppliers to ensure that they and their subcontractors adhere to the values that they wish to demonstrate,
  • Allocating employee time and resources to positively impact society, or
  • Specific metrics regarding health and safety at work.

An example of this trend is Alcoa. In their 2019 proxy statement Alcoa links 30% of incentive goals to non-financial measures such as safety at work and diversity in the workforce, up from 20% in 2018.

In addition to the individual metrics defined by organizations, there has also been a growing trend of executive compensation being linked to the performance of a company on a corporate responsibility index (e.g. Dow Jones Sustainability Index). By linking elements of incentive multipliers to performance against a wider set of peers and the index, companies are able to not only create quantifiable targets to base awards on but are also focused on ensuring that they take a long term view in order to outperform competitors.

Gathering momentum

By defining these criteria and linking to long term incentives, businesses are more able to demonstrate their roles in a socially responsible business world. The positive financial impact of a socially responsible business is only a relatively recent trend. However, with a growing number of large investors taking an active role in the stewardship and engagement of their assets (Blackrock letter to CEOs), it is a trend that is likely to continue to gain traction.

Conversely, organizations that are perceived to be failing to meet their obligations to society will increasingly impact the brand, reputation, and ultimately the bottom line. Hence companies that traditionally have been focused on their financial results are exploring how they can adapt to the new criteria.

The Glass Lewis Equity Compensation Model

Glass Lewis’ Equity Compensation Model (ECM) is now available exclusively via CGLytics. Providing unprecedented transparency to the U.S. market in one powerful online application, both companies and investors can use the same 11 key criteria as the leading proxy advisor to assess equity incentive plans.

Click here to experience Glass Lewis’ new application.

Latest Industry News, Views & Information

The Effect of Executive Departures on Company Performance

The Executive Management Team plays a pivotal role in the performance of a company. The dismissal or exit of one or more executives is often accompanied by a change in strategy. However, this isn’t always perceived as a positive change by investors.

Capri Holdings – A Glass Lewis Use Case into Executive Compensation Benchmarking

In this use case, Glass Lewis examine the “additional considerations” regarding the quantitative examination with respect to Capri Holdings, Inc. (formerly Michael Kors Holdings Ltd.) using CGLytics’ analytical tools.

Interlocking Directorates: Looking for signs of collusion, conflict of interest and overboarding

Conflicts of interest, collusion and the overboarding of directors have been known to grab the attention of the biggest media outlets. As many companies are unfortunately aware. How can this be avoided right from the start?

The Effect of Executive Departures on Company Performance

The Executive Management Team plays a pivotal role in the performance of a company. The dismissal or exit of one or more executives is often accompanied by a change in strategy. However, this isn’t always perceived as a positive change by investors.

The Executive Management Team plays a pivotal role in the performance of a company. Collectively they make strategic decisions which steer the company in a certain direction. The dismissal or exit of one or more executives is often accompanied by a change in strategy. However, this isn’t always perceived as a positive change by investors.

Executive Turnover and Performance

Using CGLytics data and intelligence it is possible to assess how executive departures may affect the Total Shareholder Return (TSR) of a company. In constructing the graph, the average TSR is taken across all years for each different number of Executive departures. The results below reveal that having more than one executive (CEO, CFO or COO) depart in a year causes a decline in TSR, whereas having just one executive depart may be seen as less of a concern.

However, when three or more executives depart there is a stark contrast, and TSR decreases significantly. Three executive departures in one year may indicate the cause for concern to investors and subsequently diminish investor confidence and with it, shareholder value.

Executive Departures from S&P 500 Companies and Average 1-year TSR (2013-2018)*

*The average 1-year TSR is calculated across six years (2013-2018) and the number of departures is calculated across all S&P500 companies during these six years.

Source: CGLytics Data and Analytics

CGLytics’ data and analytics are trusted and used worldwide by Glass Lewis, the leading independent proxy advisor, as a basis for their research on companies

 

A change in leadership inevitably means that the way a company is managed will be altered. The extent to which this alteration will permeate the company and affect its performance is contingent on the influence of the leadership position.

The most influential managerial position at a company is indisputably that of the CEO, closely followed by other executive positions such as COO or CFO. When there is a change in one of these positions it can be considered routine. Investors may not feel any apprehension over the future of the company as the majority of the executive team remains the same.

However, this is not the case when 3 or more executives depart the company. In such an event, investors may become uncertain over the future of the company. As aforementioned, this uncertainty is derived from investors losing their sense of familiarity with the management team. They may no longer feel they can comfortably predict the strategic decisions which management will undertake. This then casts doubt over the future performance of the company.

To learn how companies can become proactive and support modern governance decision-making, with access to the same insights as activist investors and proxy advisors, click here.

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Capri Holdings – A Glass Lewis Use Case into Executive Compensation Benchmarking

In this use case, Glass Lewis examine the “additional considerations” regarding the quantitative examination with respect to Capri Holdings, Inc. (formerly Michael Kors Holdings Ltd.) using CGLytics’ analytical tools.

Interlocking Directorates: Looking for signs of collusion, conflict of interest and overboarding

Conflicts of interest, collusion and the overboarding of directors have been known to grab the attention of the biggest media outlets. As many companies are unfortunately aware. How can this be avoided right from the start?

The Billionaire Battle Over Oil Part 2: The Oil Giant’s Resolve

In the second part of The Billionaire Battle Over Oil, we look at the outcome of the proposed deal between Occidental Petroleum and Anadarko.

Capri Holdings – A Glass Lewis Use Case into Executive Compensation Benchmarking

In this use case, Glass Lewis examine the “additional considerations” regarding the quantitative examination with respect to Capri Holdings, Inc. (formerly Michael Kors Holdings Ltd.) using CGLytics’ analytical tools.

Glass Lewis’ two-pronged approach to executive compensation analysis in the North American market is delineated between the quantitative analysis and a qualitative assessment. The quantitative portion, while anchored by the pay for performance grade, incorporates additional considerations to supplement the standardized pay for performance analysis.

CGLytics’ suite of tools is fast becoming an integral part of the quantitative analysis for the North American market. In July 2019, the Compensation Analysis section became a part of Glass Lewis’ Proxy Paper for S&P 1500 companies in the U.S. and Canada. The page illustrates total realized compensation of CEOs based on data provided by CGLytics. Covering the past three years, realized CEO pay is presented on both an absolute basis and relative to country and industry peer groups developed by Glass Lewis using CGLytics tools.

In the following discussion, we examine the aforementioned “additional considerations” regarding the quantitative examination with respect to Capri Holdings, Inc. (formerly Michael Kors Holdings Ltd.) using CGLytics’ analytical tools.

Review of Capri Holdings’ Compensation Program

On August 1, shareholders gave their appraisals of executive pay practices at Capri Holdings, casting votes in favor or against the compensation packages of its named executive officers. The company is one of the few in the broader markets where multiple named executive officers receive pay at the CEO level or higher. Michael Kors as chief creative officer (CCO) and honorary chair and John Idol as CEO have received largely equivalent pay packages for most if not all of Capri Holdings’ history as a publicly traded company.

Multiple CEO-level pay recipients at individual companies have drawn the ire of shareholders in the past and no doubt will continue to do so in the future. However, executives from the apparel industry who engaged with Glass Lewis note that the industry is distinct in that the parity between chief executive and chief creative officer pay is not uncommon, but CCO pay is rarely reported on the Summary Compensation Table as these officers are not typically considered executives. In Capri Holdings’ case, however, perhaps because of his additional title of honorary chair, Mr. Kors is thus a named executive officer whose pay is subject to scrutiny at the Company’s annual advisory say on pay vote.

Overview of the Pay For Performance Grade and the Compensation Analysis Page:

Despite its dual CEO pay level executives, Capri Holdings received a “C” grade under Glass Lewis’ pay for performance model in each year from fiscal years 2015 to 2018, indicating adequate alignment. But in fiscal 2019, the company received a “D” grade after a jump in equity compensation to Messrs. Kors and Idol pushed Capri Holdings’ three-year weighted average compensation levels up – a move unsupported by the company’s weighted average performance that dipped in this year’s analysis. The analysis concluded that the company paid moderately more than its peers but performed moderately worse compared to peers.

Unique situations such as Capri Holdings’ case demonstrate the benefits that additional quantitative  analyses have had in Glass Lewis’ approach to executive compensation. One might contend that the pay for performance grade penalized Capri Holdings for common industry pay practices of chief creative officer pay, boosting total named executive officer pay above peers that do not also list their chief creative officer as a top executive.

The CGLytics-powered Compensation Analysis page in Glass Lewis’ research provided additional perspective to help consider Capri Holdings’ executive pay situation. Its focus on CEO pay underscored concerns flagged by the pay for performance analysis. In the same year that the company granted $7.5 million in equity incentives to each of Messrs. Kors and Idol, Mr. Idol’s fiscal 2019 total realized pay increased by 210% from $22.2 million to $68.9 million. At the same time, the Compensation Analysis reported that the median CEO total realized pay among industry peers remained relatively stagnant, highlighting the stark difference in realized pay levels for the CEO position at Capri Holdings compared to peers. While many companies often cite retention concerns due to low realized or realizable pay as reasons for significant increases in equity grants, the analysis using CGLytics indicated this to not be the case, at least for realized pay to the CEO.

Additional Perspectives Through CGLytics:

Beyond the Compensation Analysis page, by focusing on CEO pay using the CGLytics’ broader suite of tools, Glass Lewis found evidence to suggest deeper concerns with pay-setting for the short-term incentive. While the company provided Mr. Idol with no LTIP award in 2018 and only $1 million in 2017, the company’s incentives focused on short-term performance made up for the deficiency. Using CGLytics we can observe the following short-term incentive payout comparison to the industry peer median for most of Capri Holdings’ history as a publicly traded company where 2018 represents the most recently completed fiscal year for the company:

In our view, excessive upside opportunities under a bonus plan may unduly incentivize short-term performance and may undermine a long-term focus on company performance among executives. In fact, Mr. Idol received his maximum payout opportunity under the short-term incentive every year since 2012.

Switching gears in 2019, the Company decided to grant Mr. Idol $7.5 million in long-term incentives. Indeed, the grant resuscitated the level of Mr. Idol’s outstanding compensation following the exercise of a significant number of stock options. Mr. Idol exercised options to acquire 906,076 shares in fiscal 2019 – a value of $58.3 million according to the company’s proxy statement. The following chart shows the change in Mr. Idol’s total outstanding awards with the 2018 data representing the company’s fiscal 2019 and showing the net effect of his exercise of options and increased levels of long-term incentive grants during that year:

The effects of the long-term grant on total CEO pay was quite pronounced as seen in the graph below:

Review of GL recommendation:

In the end, an 89% year-over-year jump in Mr. Idol pay placed it at the 85th percentile of CEO compensation compared to the company’s self-disclosed peer group. The pay decisions for fiscal 2019 degraded the alignment between pay and performance in our analysis. Additional analysis into in the quantum of pay for Mr. Idol through CGLytics compounded our concerns. That Mr. Kors’ pay presented similar issues as Mr. Idol’s was also considered.

A deeper dive beyond our initial pay for performance analysis into the CEO’s total direct compensation uncovered a history of over-focus on short-term performance. Capri Holdings’ short-term incentive payouts rose well above the industry median since 2013. Due to the equity grants made to Mr. Idol during the most recently completed fiscal year, his pay spiked 1.2 times the median industry peer level, according to CGLytics’ multiple of median analysis.

As a result of these concerns, and following a qualitative assessment of the pay program, Glass Lewis recommended against supporting Capri Holdings’ executive compensation proposal for the 2019 annual meeting.

Conclusion:

Overall, the additional quantitative analysis using CGLytics underscored the concerns initially highlighted by Glass Lewis’ pay for performance grade by illustrating issues with pay regardless of the impact of Mr. Kors’ compensation on total NEO pay.

Access Glass Lewis’ Say on Pay analysis – Available through CGLytics

Glass Lewis uses CGLytics as it’s global compensation data provider. For the 2020 proxy season our data will provide the basis of Glass Lewis’ Say on Pay recommendations.

 

Learn More

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Interlocking Directorates: Looking for signs of collusion, conflict of interest and overboarding

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Barrick Gold Corp, Acacia Mining and Turbulence in Tanzania

Barrick Gold Corp, Acacia Mining and Turbulence in Tanzania Issues involving the mining industry and corporate governance practices are nothing new. And Barrick Gold’s recently deal with Acacia Mining is no exception. After multiple negotiations and tradeoffs in the past, Acacia Mining has agreed to Barrick, the majority shareholder, buying out the remaining minority shareholders. … Continue reading "Barrick Gold Corp, Acacia Mining and Turbulence in Tanzania"

Interlocking Directorates: Looking for signs of collusion, conflict of interest and overboarding

Conflicts of interest, collusion and the overboarding of directors have been known to grab the attention of the biggest media outlets. As many companies are unfortunately aware. How can this be avoided right from the start?

Conflicts of interest, collusion and the overboarding of directors on publicly listed companies have been known to grab the attention of the biggest media outlets. As many companies are unfortunately aware, this unwanted attention raises questions, creates risk to a company’s reputation, gains attention from activist investors, and can ultimately affect the value of company shares. However, there is a way that all of this can be avoided right from the start.

Interlocking directorates are nothing new. It occurs when two firms share a common director, and the tie or connections that he/she creates is also referred to as a board interlock.

Although lawful and not illegal, it does raise questions about the independence of decisions made in the boardroom and can be seen by the U.S. Federal Trade Commission (FTC) as an anti-competitive practice prompting an investigation.

As stated by the FTC it is their responsibility to, “take(s) action to stop and prevent unfair business practices that are likely to reduce competition and lead to higher prices, reduced quality or levels of service, or less innovation”.

WHEN INTERLOCKS BECOME A CONCERN

An example of where interlocks became a concern for the FTC was during 2009. During this year Apple’s director Arthur Levinson abruptly resigned his seat on Google board following pressure from regulators. Following the announcement FTC’s chairman praised Google and Levinson “for their willingness to resolve our concerns without the need for litigation”.

That same year also saw Google’s Eric Schmidt resign from Apple’s board, three years after accepting a seat.

Eric Schmidt
Eric Schmidt resigns from Apple’s board in 2009

It’s important to mention that prior to these resignations, the FTC had been looking into whether interlocking directorates between Google and Apple raised competitive issues. These competitive issues may have violated U.S. antitrust laws.

The only safe way for companies to avoid situations of interlocking directorates that prompt investigation is by having oversight of every board members’ seats on other companies. By gaining this oversight companies can instantly see any risks or red flags, which are likely already on the radar of investors with governance issues coming under greater scrutiny of late.

This is also hugely important when a company makes new appointments to their board, or an existing director takes on additional responsibilities. Without oversight, companies might be opening themselves up to governance risk and wider liability.

 

CGLytics online solution provides instant information about a company’s board composition, director skills and expertise, as well as interlocking directorates for corporations, investors and advisors.

 

Interlocking directorates are common. It is not new. Most directors will have other board positions across one or more industry, however with highly confidential information that they are privy to, it is vital to identify potential conflicts of interest.

That being said, interlocking directorates can be indicators of the following:

– Collusion: Two or more members of the board holding appointments on another board and using this connection to influence the decision-making away from the best interests of either company.

– Conflict of interest: Directors with specific industry experience will often sit on boards that could be in competition. This can lead to questions from investors on if these board members are performing their duties in the best interests of the company.

– Overboarding: Directors must have the adequate time to devote to their duties of providing oversight for a company. US Proxy Advisory standards state that a director is considered to be overboarded when he/she is a non-executive director and sits on more than five boards, or he/she is an executive director and sits on more than three boards.

– Chairmen of the board are expected to spend double the amount of time as a NED and are considered overboarded with one chair and three other NED roles.

By identifying whether a board member is also on the board of a potential competitor (sometimes inevitably in niche markets where experience is necessary), or if two or more members of the board sit on the same board of another company, is vital for the nomination and governance committees to be aware and ensure that they have the correct policies and procedures in place, as regulators, investors and activists are constantly monitoring.

THINK LIKE AN ACTIVIST

Activist investor campaigns are continuing to show a year-on-year increase with more focus being placed on the composition of the board and the board members existing commitments. Leading investors are voting against the re-appointment of directors who are perceived to be overboarded. In addition, never before has there been as much scrutiny on the skills that a director brings to the board.

Activist investors are using CGLytics’ data and analytics for assessing the board effectiveness of listed companies worldwide.

 

With deep insights into how boards are composed in the CGLytics platform, and a skills matrix applied consistently across all companies in its universe, activist investors easily benchmark a board and assess if its compliant with regulatory and stewardship codes, hence see if there is any reputational risk.

Companies can access these very same insights in the CGLytics platform.

Corporate issuers, their boards and stakeholders can see exactly how they are perceived by activist investors. CGLytics is helping to promote good governance through transparency to the market. View director interlocks, see how board composition compares to competitors and raise concerns of any red flags. Identify any potential skills gaps and be proactive in succession planning, with access to a database of 125,000+ executive profiles draw from 5,500+ publicly listed companies across 40 indexes and 24 countries.

Curious to see how companies are viewed through the eyes of an activist investors? Click here

 

RESOURCES

https://www.ftc.gov/enforcement/anticompetitive-practices

https://www.reuters.com/article/us-google/arthur-levinson-quits-google-board-appeasing-ftc-idUSTRE59B2R120091012

https://techcrunch.com/2009/08/03/google-ceo-eric-schmidt-resigns-from-apple-board-surprised/

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The Billionaire Battle Over Oil Part 2: The Oil Giant’s Resolve

In the second part of The Billionaire Battle Over Oil, we look at the outcome of the proposed deal between Occidental Petroleum and Anadarko.

After a contentious few weeks between Carl Icahn’s continuing proxy war against the Occidental Petroleum (Oxy)-Anadarko deal and the awaiting of the passing vote from shareholders in order for the acquisition to be completed, news has once again been made. Not surprisingly, the proposal passed with a 99% vote in favour of the deal that gives them $72.34 per share (based on last Wednesday’s price); Oxy and Anadarko secured the largest deal in the oil and gas industry since Royal Dutch Shell and BG Group.

However, with big deals come big costs, and the aforementioned is no exception. It adds over USD 40 billion to Oxy’s capital structure and leaves the company “with less flexibility to confront commodity price volatility” in the future. It is no surprise that Icahn chose to launch a proxy war and call for a replacement of board members in the wake of the deal.

Not to mention, Occidental Petroleum is selling USD 13 billion of debt to finance the acquisition after receiving more than USD 75 billion in orders for the deal at its peak. That’s the biggest demand for a debt sale since Aramco, but how will this play out?

Occidental will carry out the bond sale in 10 parts, the longest portion being a 30-year bond that yields around 2.25%. Further, to aid in the USD 10-15 billion divestment plan, Oxy has decided to sell off Anadarko assets in Africa to Total SA of France. The company is also searching for a buyer to hold majority control in the pipeline operator Western Midstream Partners LP, which Occidental is slated to inherit after the takeover.

The first week of August saw Occidental hedge nearly 40% of its combined oil production into 2020 as well, all in an attempt to reassure shareholders that dividend payouts will be possible while taking on an increased debt load.

While the deal may be a win from the company’s perspective, analysts and the market have voiced otherwise. Company ratings from analysts covering Occidental shifted, with the most telling from Evercore ISI “The company’s ‘Pledge’ for greater capital discipline and enhanced corporate governance proved fleeting with ROCE to decline significantly due to the Anadarko transaction. The commensurate decline in valuation places OXY at a 10-year low in the equity market.” The deal is claimed to be value-destructive, and the market bared its teeth towards Occidental and its antics; Year to date (YTD) shares are down nearly 26%, off more than 41% from the trailing twelve-month period, and down 30% since the acquisition was announced.

Generally, good financial stewardship hedges against overvalued, high-impact dealings. Thus, it begs the question: how could such a complex deal be so vigorously accepted internally, despite market kickback and open disagreement?

Viewing Occidental’s board of directors and their relevant skills and expertise within CGLytics’ platform, it is apparent that financial expertise and oversight is lacking.

Occidental Petroleum Corporation’s Board Expertise

Source: CGLytics Data and Analytics

It is possible that the lack of financial oversight was manifested when Occidental Petroleum decided to move forward with its acquisition and outbid Chevron for Anadarko. Increased financial responsibility may have produced different results, but the oil industry is ridden with mergers, acquisitions, and deals that walk a fine line in terms of good corporate governance practices.

It begs the question if the oil industry is in need of a corporate governance overhaul in the near future, as the story of Oxy-Anadarko is a tell-tale sign that a lack of expertise can lead to a less-than-stellar outcome.

Corporate boards and executive teams increasingly require insights and analytical tools to identify any potential areas of reputational risk. Without this oversight, companies may be targets of activist campaigns and cannot proactively prepare.

To learn more about how CGLytics’ deep, global data set and unparalleled analytical screening tools can potentially help you identify these areas of risk, click here.

Did you miss it? Read the article of The Billionaire Battle over Anadarko (Part 1) here.

About the Author

Rollin Buffington

US Research Analyst

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Barrick Gold Corp, Acacia Mining and Turbulence in Tanzania

Issues involving the mining industry and corporate governance practices are nothing new. And Barrick Gold’s recently deal with Acacia Mining is no exception. After multiple negotiations and tradeoffs in the past, Acacia Mining has agreed to Barrick, the majority shareholder, buying out the remaining minority shareholders.

Barrick Gold Corporation, based in Canada, is one of the largest gold mining companies in the world. It currently holds 262,246,950 shares of Acacia Mining (64% stake in share capital). To gain the remaining 36%, Barrick has proposed a 24.2% premium on the closing price of Acacia shares on July 18. The deal comes in at USD 430 million and will take the company private.

The Acacia CEO, after finally reaching an agreement, stated: “Given all the circumstances, this is possibly the best outcome.”

Perhaps more importantly, is that the deal aims to resolve many of the longstanding public issues between the Tanzanian government and Acacia that have plagued the mining company’s operations.

Two years ago, the Tanzanian government banned the export of mineral concentrates. This movement was due in part because the government believed they had not received a fair share of profits from mining in the country. Two of Acacia’s units came under fire, being handed a USD 190 billion tax bill from the government. This tax bill has since been reduced to USD 300 million.

Additionally, Tanzania recently demanded that Acacia cease use of a waste-storage facility at a core gold mine. These disruptions have crippled operations and caused Acacia’s shares to fall 50% since 2017.

After facing external pressures and at the insistence of minority shareholders, Barrick CEO, Mark Bristow, proposed a higher offer than what was initially proposed to Acacia in May. This was recently accepted.

Shareholder awareness proved a worthy factor here; Acacia shares rallied 20% on the deal and a positive response was received from the Tanzanian government. This is a fine example of shareholders prioritizing the survival of a company.

Delving into Acacia Mining’s board composition, by utilizing CGLytics’ board effectiveness tools in the online platform, provides insights into why the company may not have managed issues as effectively as possible.

Acacia Mining plc’s Board Expertise

Source: CGLytics Data and Analytics

The board expertise and skills matrix from CGLytics show that experience in the area of governance severely lacks, however industry and sector, and financial expertise is heavily present. This may provide an explanation to the problematic relations they experienced with the Tanzanian governance. It generates a question of if more governance experience was present on the board, would the situation have been different? While the survival of the company and acceptance of the “best-we-can-get” deal could be attributed to the strong presence of industry and financial expertise.

The recent movements have rekindled, if only just, a better relationship with the government. Because of Barrick’s increased involvement, the Tanzanian government agreed to receive USD 300 million for the tax debt as a gesture of goodwill. The company was also given the option to pay in installments, with an upfront cost of USD 100 million to be paid out in addition.

Furthermore, Barrick was able to negotiate an agreement in which payment to the Tanzanian government is dependent on the export ban being lifted from Acacia and its subsidiaries in the country. In a “give and take” action, the Tanzanian government also claimed a 16% stake in Acacia in the form of Class B shares.

The complex strategy devised is a clear manifestation of the board leveraging its expertise and abilities to secure a better position. Had there been more Governance oversight, perhaps the company would not have encountered such trifles. The devastating government backlash will certainly continue to have an effect for years to come. Nonetheless the Board can rest easy knowing that it has found the best outcome to a longstanding battle, one that could’ve left Acacia and Barrick incapable of recovering.

CGLytics offers the broadest, up to date global data set and powerful benchmarking tools to conduct comprehensive analysis for executive compensation decisions and risk oversight. CGLytics is Glass Lewis’ source for global compensation data and analytics. These analytics power Glass Lewis’ voting recommendations in both their proxy papers and their custom policy engine service. To find out more click here.

About the Author

Rollin Buffington

US Research Analyst

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Proxy Season Lookback: CGG marks first binding ‘non’ on pay in France – A guest blog by Glass Lewis

The 2019 season marked the second opportunity for French shareholders’ to cast retrospective binding votes on executive compensation. And for the first time, shareholder votes prevented the payment of a bonus award, as well as the implementation of a new pay policy.

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Proxy Season Lookback: CGG marks first binding ‘non’ on pay in France – A guest blog by Glass Lewis

The 2019 season marked the second opportunity for French shareholders’ to cast retrospective binding votes on executive compensation. And for the first time, shareholder votes prevented the payment of a bonus award, as well as the implementation of a new pay policy.

A guest blog by

The 2019 season marked the second opportunity for French shareholders’ to cast retrospective binding votes on executive compensation. And for the first time, shareholder votes prevented the payment of a bonus award, as well as the implementation of a new pay policy.

In many markets a say-on-pay vote is offered, but under Sapin II legislation, which came fully into effect in 2018, French shareholders get several “says” on remuneration arrangements. The variable payments due to each executive are subject to a series of “ex-post” binding votes (one for each executive) and there is an annual “ex-ante” binding vote on the intended remuneration policy for the current year. In addition, shareholders also get forward-looking advisory votes on severance arrangements.

It’s the binding “ex-post” vote that has drawn the most attention — in particular, the potential implications of how a rejection could affect the organisation, with several possible scenarios. How would an executive react to such a public rebuke from shareholders? To losing the bonus they thought they had earned? Would the board take emergency measures and what could these be, or would continued service prove untenable, prompting an immediate resignation? In 2018 there were several backward-looking compensation proposals that came close to providing answers, with Teleperformance, Vinci, Renault, Technicolor and Atos coming close to failing. But it wasn’t until this year’s shareholder meeting of SBF120 listed CGG, specializing in geophysical services, that shareholders got to see the implications of voting down a CEO’s pay. Well, sort-of.

After changing CEO early in the fiscal year, CGG had a number of proposals covering executive pay on the agenda. Shareholders received two binding, backward-looking votes, covering the FY2018 variable remuneration due to both the current and former CEOs, as well as one binding, forward looking vote, covering the proposed FY2019 remuneration policy of the current CEO, and one advisory forward looking vote on post-termination severance arrangements.

Shareholders voiced their dissent across the board. Support for executive pay proposals ranged from a high of just 56.65% to a low of 38.63%, with two voted down. These were the ex-post, binding vote on the remuneration due to the former CEO Jean-Georges Malcor for fiscal year 2018, and the ex-ante, binding vote on the 2019 remuneration policy for the current CEO, Sophie Zurquiyah.

Besides being historic, the ex-post rejection was somewhat surprising. Mr. Malcor’s variable package contained no surprises and only represented a small fraction of his total quantum for the year. Payment of a €75,000 extraordinary award in respect of a successful debt restructuring may have been viewed as somewhat questionable, especially after CGG decided to pursue a new strategy after his departure in order to recover from a record of poor financial performance. However, the payment was relatively modest, particularly in comparison to the total of €1,626,673, that Mr. Malcor received in respect of fixed salary and a non-competition agreement (the ex-post votes under Sapin II do not cover fixed remuneration). Also surprising was that the award was not unexpected, having been clearly disclosed as part of Mr. Malcor’s forward-looking binding remuneration proposal, which received 96.90% support at the 2018 meeting.

With only 53.52% support, the binding proposal covering variable remuneration due to the current CEO, Sophie Zurquiyah, narrowly avoided the same fate. The binding, forward-looking proposal covering the remuneration policy intended to apply for the current fiscal year was not so fortunate, garnering just 44.3% support. The consequences of this vote are more transparent, and nowhere near as potentially far-reaching, as that of the “ex-post” vote. Instead of the policy terms that had been proposed, Ms. Zurquiyah’s remuneration will continue to be determined by the company’s existing policy, previously approved by shareholders at the 2018 AGM. That may ultimately suit shareholders – while the company had not proposed any material changes to the existing policy, specific details of the 2019 iteration were not fully disclosed.

The company has issued a press release acknowledging the vote results and stating that the board “will consider the adjustments to be made to the Chief Executive Officer’s remuneration policy in order to obtain the shareholders’ approval at the next General Meeting.” It’s unclear if that consideration will include an engagement programme to garner feedback from investors – or what will happen if and when French shareholders reject the variable pay due to a current, rather than former, CEO.

This article was originally published on the Glass Lewis website, 23/07/2019. You can read the article here: https://www.glasslewis.com/proxy-season-lookback-cgg-marks-first-binding-non-on-pay-in-france/ 

About the Author

1030648

Iris Bucelli
Senior Research Analyst at Glass Lewis & Co.,

Irene joined Glass Lewis as Corporate Governance Analyst for Continental Europe in 2017. She specialises in executive compensation analysis of French blue-chip and mid-cap companies. After completing a Masters Degree at the University of Bologna, she worked on international projects in Italy, France and Spain, before landing in Ireland.

Access Glass Lewis’ Say on Pay analysis – Available through CGLytics

Glass Lewis uses CGLytics as it’s global compensation data provider. For the 2020 proxy season our data will provide the basis of Glass Lewis’ Say on Pay recommendations.

 

Learn More

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Correcting Founder’s Syndrome: Executive Compensation Practices at Ralph Lauren

Ahead of the Ralph Lauren AGM, CGLytics looks at how CEO pay has changed since the founder’s exit, and how the nominations change the board composition.

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Correcting Founder’s Syndrome: Executive Compensation Practices at Ralph Lauren

Ahead of the Ralph Lauren AGM, CGLytics looks at how CEO pay has changed since the founder’s exit, and how the nominations change the board composition.

Ralph Lauren Corporation, a global leader of premium lifestyle products, is scheduled to hold its 2019 Annual General Meeting of Shareholders (AGM) on August 1, 2019. Shareholders attending the AGM will vote on the following resolutions:

  • The election of 4 directors to serve until the 2020 Annual General Meeting of Shareholders;
  • The ratification of the appointment of Ernst & Young LLP as the Company’s independent registered public accounting firm for the fiscal year ending March 28, 2020;
  • The approval, on an advisory basis, the compensation of the Company’s named executive officers and the Company’s compensation philosophy, policies, and practices;
  • The adoption of the Company’s 2019 Long-Term Stock Incentive Plan.

 

Election of Directors:

Ralph Lauren has two classes of directors, Class A and Class B. At the upcoming AGM, four Class A directors will be proposed for election: Frank A. Bennack, Joel L. Fleishman, Michael A. George, and Hubert Joly. We note that in 2018, Ralph Lauren increased the size of its Board with the appointment of three new directors, namely Michael A. George, Angela Ahrendts, and Linda Findley Kozlowski, ostensibly to expand the Board’s “diversity of skills and experiences”. These three directors bring to the Board Leadership, Executive, and Industry/Sector expertise, with Michael A. George and Linda Findley Kozlowski being active CEOs in two retail companies and Angela Ahrendts being a former executive of Apple, Burberry Group plc and Kate Spade & Company. In terms of skills, the three individuals bring about Marketing, Sales and Operations knowledge. Nevertheless, the Board still appears to lack Technology and Financial expertise.

However, in addition to the diversity of skills that the addition of the new directors has brought to the board, the company also now maintains a gender diversity level of 50%, well above the market standard for the United States.

Source: CGLytics Data and Analytics

Executive Compensation:

The third resolution in the agenda is a shareholders’ advisory vote to approve the Company’s executive compensation.

After the Founder, Ralph Lauren, stepped down from his position as CEO, Ralph Lauren has gone through two CEO changes, with Stefan Larsson serving from November 2015 to May 2017, and Patrice Louvet serving since July 2017. As can be seen from the absolute comparison chart generated by CGLytics’ Pay for Performance module, there appears to be a misalignment between CEO compensation and one-year total shareholder return between 2008 and 2015. However, it appears that this misalignment has reduced since Mr. Lauren left the position of CEO. Furthermore, we also see that the total realized compensation for the CEO thereafter has been reduced significantly.

Source: CGLytics' P4P Modeler

CGLytics’ data and analytics are trusted and used worldwide by Glass Lewis, the leading independent proxy advisor, as a basis for their research on companies

CEO Compensation Package Breakdown

Historically, the CEO’s compensation package has primarily focused on his STI opportunity (between 2009 and 2012). However, since then, the CEOs compensation package breakdown has shifted towards long-terms incentives, which now form a greater component of the CEO’s compensation package.

Additionally, in 2017 the performance measures of LTI grants shifted from 3-year Cumulative Operating Margin and Operating Margin to 3-year Cumulative Return on Invested Capital (ROIC) and 3-year Relative Total Shareholder Return (TSR) in 2018. Ralph Lauren also added Global digital revenue as a new measure for STI grants, a modifying KPI that could result in an “adjustment of bonuses upwards or downwards by 10%.”

Source: CGLytics' P4P Modeler

Relative Positioning

In comparison to Ralph Lauren’s own disclosed peer goup, the Company’s CEO pay appears now to be line with its peers. Additionally, when reviewing the company’s relative positioning among its peers, there also appears to be a pay for performance alignment between Ralph Lauren’s 3-year TSR and compensation paid to its CEO.

RalphLauren4
Source: CGLytics' P4P Modeler

Ralph Lauren also proposes adopting a 2019 Long-Term Stock Incentive Plan, under which the Company awards equity compensation to executive officers, to replace the current Ralph Lauren Corporation 2010 Amended and Restated Long-Term Stock Incentive Plan. Under the new plan, LTI awards will be determined based on 3-year Cumulative Return on Invested Capital (ROIC) and 3-year Relative Total Shareholder Return (TSR).

Overall, we find that although the company has seen shifts in executive leadership over the past few years after Mr. Lauren left the reigns of the company to his successor, we also find that the company’s executive compensation programs have fallen more in line with market norms, correcting a former pay for performance misalignment that extended under Mr. Lauren’s leadership.

To learn how companies can become proactive and support modern governance decision-making, with access to the same insights as activist investors and proxy advisors, click here.

Sources

CGLYTICS DATA AND ANALYTICS   RALPH LAUREN 2019 PROXY STATEMENT

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CEO Pay continued to dominate the AGM season in 2019. As we take a break over the summer, it’s worth reviewing the top 50 highest paid CEOs and seeing how this has changed from 2018.

We also take a look at how the performance of these companies has increased to understand how executives are rewarded for performance.

Key CEO pay take aways from the first half of 2019 :

  • The top 50 total granted compensation has increased by over 300% from 2018 to 2019 ($4.49bn compared to $1.12bn).
  • Although over 50% of the $4.4bn is attributable to one individual’s granted compensation (Elon Musk, Tesla: $2.28bn).
  • Even discounting this outlier, total granted executive compensation increased by 97%.
  • Meanwhile the average growth in market capitalisation was around 3% from 2018.
  • And 1 year Total Shareholder Return (TSR) actually shrank by 1%.

 

Given these significant increases in total granted compensation compared to the value being delivered to shareholders, it’s easy to see why CEO pay and compensation continues to dominate AGM discussions.

Trending Top 50 CEOs

Ranking

CEO

Company

Total Granted
Compensation

Total Realised Pay

TSR in %

TSR 1YR growth in
%point

1

Musk, Elon

Tesla, Inc.

$2,284,044,884
(
54575310%)

$56,380 (513%)

57%

515%

2

Smith, Patrick

Axon Enterprise, Inc.

$246,026,710
(
56433%)

$25,488,720
(
5472%)

565%

592%

3

Zaslav, David

Discovery Communications, Inc.

$129,499,005
(
5207%)

$33,498,259
(
662%)

511%

543%

4

Glancey, Stephen

C&C Group plc

$119,819,023
(
510%)

$1,643,004
(
536%)

50%

62%

5

Hodler, Bernhard

Julius Baer Group Ltd.

$78,813,367
(
54694%)

$2,979,804
(
581%)

640%

639%

6

Levine, Jay

OneMain Holdings, Inc.

$71,532,583
(
516913%)

$71,532,583
(
516913%)

67%

62%

7

Schwarzman, Stephen

The Blackstone Group L.P.

$69,147,028
(
645%)

$69,147,028
(
645%)

50%

51%

8

Legere, John

T-Mobile US, Inc.

$66,538,206
(
5270%)

$42,071,611
(
5243%)

50%

57%

9

Iger, Robert

The Walt Disney Company

$65,645,214
(
581%)

$66,065,073
(
68%)

54%

56%

10

Steele, Gary

Proofpoint, Inc.

$64,730,296
(
5892%)

$54,931,367
(
528%)

66%

510%

11

Charlès, Bernard

Dassault Systèmes SE

$51,098,970
(
577%)

$65,983,199
(
578%)

518%

517%

12

Alber, Laura

Williams-Sonoma, Inc.

$50,758,332
(
5252%)

$28,830,401
(
5224%)

51%

63%

13

Heppelmann, James

PTC Inc.

$49,969,163
(
5403%)

$17,041,464
(
5107%)

536%

546%

14

Freda, Fabrizio

The Estée Lauder Companies Inc.

$48,753,819
(
50%)

$9,387,109
(
683%)

53%

56%

15

Buckley, Henry

Uni-Select Inc.

$47,774,090
(
52687%)

$47,012,426
(
53416%)

630%

634%

16

Handler, Richard

Jefferies Financial Group Inc.

$44,674,213
(
5105%)

$5,951,709
(
5339%)

633%

638%

17

Kilroy, John

Kilroy Realty Corporation

$43,624,774
(
5282%)

$18,204,958
(
622%)

614%

610%

18

Bird, Lewis

At Home Group Inc.

$43,089,790
(
52477%)

$1,614,791
(
63%)

639%

632%

19

Lebda, Douglas

LendingTree, Inc.

$42,318,238
(
629%)

$164,584,011
(
53682%)

636%

628%

20

MacMillan, Stephen

Hologic, Inc.

$42,040,142
(
5275%)

$12,231,622
(
656%)

64%

56%

21

Hogan, Joseph

Align Technology, Inc.

$41,758,338
(
5256%)

$69,763,660
(
5504%)

66%

61%

22

Schulman, Daniel

PayPal Holdings, Inc.

$37,764,588
(
596%)

$41,295,115
(
5328%)

514%

517%

23

Hastings, Reed

Netflix, Inc.

$36,080,417
(
548%)

$4,064,854
(
698%)

539%

547%

24

Roberts, Brian

Comcast Corporation

$35,026,207
(
58%)

$47,400,117
(
640%)

613%

613%

25

Jellison, Brian

Roper Technologies, Inc.

$34,931,318
(
520%)

$142,847,568
(
5103%)

54%

59%

26

Wenig, Devin

eBay Inc.

$34,842,832
(
597%)

$19,946,164
(
566%)

626%

628%

27

Thiry, Kent

DaVita Inc.

$32,017,501
(
5109%)

$13,983,054
(
610%)

629%

632%

28

Kotick, Robert

Activision Blizzard, Inc.

$30,841,004
(
57%)

$4,307,586
(
697%)

626%

622%

29

Wichmann, David

UnitedHealth Group Incorporated

$30,824,112
(
577%)

$22,558,157
(
673%)

515%

518%

30

Dimon, James

JPMorgan Chase & Co.

$30,033,745
(
56%)

$18,136,934
(
687%)

67%

68%

31

Lutnick, Howard

BGC Partners, Inc.

$29,694,152
(
589%)

$17,791,850
(
511%)

643%

659%

32

Stephenson, Randall

AT&T Inc.

$29,118,118
(
51%)

$21,606,548
(
614%)

622%

69%

33

Narayen, Shantanu

Adobe Systems Incorporated

$28,397,528
(
529%)

$67,297,455
(
555%)

529%

534%

 

Benioff, Marc

salesforce.com, inc.

$28,391,846
(
5510%)

$44,183,075
(
662%)

534%

549%

35

Moghadam, Hamid

Prologis, Inc.

$28,201,397
(
546%)

$35,887,540
(
56%)

66%

516%

36

Gorman, James

Morgan Stanley

$28,168,639
(
515%)

$19,299,856
(
652%)

623%

624%

37

Florance, Andrew

CoStar Group, Inc.

$27,555,954
(
5159%)

$18,644,383
(
517%)

514%

520%

38

Greenberg, Robert

Skechers U.S.A., Inc.

$27,361,406
(
5252%)

$11,157,656
(
515%)

640%

637%

39

Umpleby, D.

Caterpillar Inc.

$27,289,513
(
594%)

$14,840,544
(
5171%)

618%

616%

40

Fink, Laurence

BlackRock, Inc.

$26,543,344
(
64%)

$51,471,260
(
561%)

622%

621%

41

Schleifer, Leonard

Regeneron Pharmaceuticals, Inc.

$26,520,555
(
50%)

$117,840,017
(
524%)

61%

56%

42

Chenault, Kenneth

American Express Company

$24,208,661
(
530%)

$54,431,474
(
642%)

63%

61%

43

Holmes, Stephen

Wyndham Worldwide Corporation

$21,479,166
(
542%)

$50,161,004
(
553%)

629%

669%

44

Johnson, R.

HCA Healthcare, Inc.

$21,419,906
(
524%)

$109,050,692
(
51407%)

543%

544%

45

Banga, Ajaypal

MasterCard Incorporated

$20,379,353
(
59%)

$60,704,447
(
5145%)

525%

528%

46

Brown, Gregory

Motorola Solutions, Inc.

$20,348,558
(
533%)

$69,555,180
(
5137%)

530%

535%

47

Minogue, Michael

ABIOMED, Inc.

$19,243,230
(
587%)

$123,043,867
(
5907%)

573%

585%

48

Casper, Marc

Thermo Fisher Scientific Inc.

$18,607,103
(
616%)

$85,476,755
(
5161%)

518%

524%

49

Meyer, James

Sirius XM Holdings Inc.

$17,633,953
(
582%)

$50,452,233
(
5331%)

57%

56%

50

Fairbank, Richard

Capital One Financial Corporation

$17,333,796
(
57%)

$108,527,637
(
557%)

623%

622%

[1] Compensation in USD – exchange rates based on single point of time, end of tax year 2018.

[2] Excludes executives appointed since 2017 season.

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