SRD II and the ramifications for disclosure obligations

With the proxy season fast approaching SRD II is top of mind. Learn about the implications SRD II will have on disclosure of executive pay and corporate goverannce.

With the next proxy season fast approaching the Shareholder Rights Directive (SRD) is top of mind. Extensive disclosure obligations are part of the second iteration and reliable information is key to ensuring requirements are met.

 

This article is part of the featured news report by governance.co.uk on SRD II. Click here to download the full article.

With the EU directive requiring transposition into domestic law in all Member States by September 2020, companies have a limited window to comply with the new requirements and ensure they have aligned their company’s structure in a way that encourages shareholder engagement long term.

The directive’s main aims involve long-term thinking and practices, transparency and increased engagement. However don’t think that this doesn’t also have implications for institutional investors, asset managers and proxy advisors. 

The new regime involves institutional investors and asset managers having to disclose their engagement  policies, and intermediaries to make sure they facilitate the transmition of information to shareholders in a transparent manner. This includes publicly disclosing what they charge for these services.

In short, the SRD II is aimed at reducing short-termism and excessive risk taking by EU companies, plus increasing transparency all-round.

The problem of pay

With executive pay being heavily scrutinized over the past few years, it comes as no surprise that SRD II calls for change to pay disclosures. Creating a better link between pay and performance of company directors, and bringing an end to short-term targets as a measure of success. With this aim brings requirements of providing greater detail and information to support pay policies, including what metrics are being used to measure executive performance. Decisions will have to be rationalized and justified in detail, and without data and facts showing exactly why these decisions were made, companies put themselves at risk of non-compliance.

For companies and investors to meet the requirements of SRD II and as they become effective in the 2020 proxy season (and for intermediaries to be fully compliant) there is no doubt that they need access to accurate and reliable data. CGLytics is already helping many companies, investors and intermediaries get up to speed with meeting obligations, including providing Glass Lewis with data for their Proxy Papers, and you can be fully prepared too.

If you would like to know more about the impact SRD II will have on your company or firm, click here to download the full article

Or reach out to us at CGLytics and receive a free explanation and assessment on how it’s likely to affect you. Click here

Aniel Mahabier SRD II quote

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How Glass Lewis improved their executive compensation analysis and Say on Pay recommendations for European markets

Andrew Gebelin from Glass Lewis talks through how he and his team of analysts have benefited from using the CGLytics data and tools to improve their executive compensation analysis and Say on Pay recommendations for European markets.

Basic Energy Services, Inc. (BAS): Hitting the Brakes on Dilutive Granting Practices

Basic Energy Services, Inc. (BAS): Hitting the Brakes on Dilutive Granting Practices A little foresight can go a long way. Glass Lewis’ new Equity Compensation Model (ECM) tool allows users to predict the likely Glass Lewis voting recommendation for equity plan proposals, allowing companies to modify share requests, avoid potential pitfalls, and reduce the uncertainty … Continue reading "Basic Energy Services, Inc. (BAS): Hitting the Brakes on Dilutive Granting Practices"

GlaxoSmithKline: Hampton’s departure gives a sense of unfinished business

CGLytics’ examines the board expertise and director interlocks of GSK both pre- and post-appointment of Mr. Jonathan Symonds, following Philip Hampton’s resignation as Chairman.

How Glass Lewis improved their executive compensation analysis and Say on Pay recommendations for European markets

Andrew Gebelin from Glass Lewis talks through how he and his team of analysts have benefited from using the CGLytics data and tools to improve their executive compensation analysis and Say on Pay recommendations for European markets.

In the continuously evolving and sometimes volatile economic times, investors have to make tough decisions. To ensure they are making the best possible decisions they require greater insights into activities within portfolios. Whether it’s sustainability practices, gender and cultural diversity, or executive compensation and remuneration, Glass Lewis has experienced, first-hand, the increasing demand for additional information from their investor clients.

Voicing their expectations of more detailed executive compensation analysis and consistency across borders when assessing pay practices, Glass Lewis Europe listened closely to their investor clients and in the 2018 proxy season turned to CGLytics to help define a new peer group methodology.

Two distinct comparator peer groups were defined: cross-border industry groups and in-country groups based on company size. This peer group refinement provided a standardized approach to pay analytics using common points of comparison for companies in the European market.

However, not all companies are alike. Where unique circumstances in pay plans required bespoke pay analysis using different indicators or uniquely designed peer groups, Glass Lewis could use CGLytics SaaS platform to drill-down and perform a multitude of quantitative comparisons and tests.

 

Implementing a standardized display that allows every company to be compared on a like-for-like basis, while retaining the flexibility to utilize an array of customized key performance metrics, Glass Lewis yielded overwhelmingly positive feedback from investor clients and from companies.

Glass Lewis now produce quantative pay analysis and peer comparisons that are second-to-none and offer access to their quantitative executive remuneration analysis and peer group modeling tools directly to their investor clients and corporate issuers via CGLytics.

Click here to download the full story.

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GlaxoSmithKline: Hampton’s departure gives a sense of unfinished business

CGLytics’ examines the board expertise and director interlocks of GSK both pre- and post-appointment of Mr. Jonathan Symonds, following Philip Hampton’s resignation as Chairman.

The increasing trend of shareholder opposition to executive pay

Votes against executive remuneration are growing. In this article we look at this change in the European indices and the S&P500.

Deutsche Bank: How CGLytics Tools Inform Glass Lewis’ Pay and Governance Analysis

Glass Lewis’ assessment of executive remuneration reflects a balance of quantitative and qualitative considerations, with CGLytics’ suite of tools underpinning the quantitative component. In the following discussion, we review the quantitative assessment with respect to Deutsche Bank, using CGLytics’ analytical tools.

Basic Energy Services, Inc. (BAS): Hitting the Brakes on Dilutive Granting Practices

A little foresight can go a long way. Glass Lewis’ new Equity Compensation Model (ECM) tool allows users to predict the likely Glass Lewis voting recommendation for equity plan proposals, allowing companies to modify share requests, avoid potential pitfalls, and reduce the uncertainty that surrounds securing shareholder approval.

Simulating the eleven tests used in Glass Lewis’ equity plan analysis framework, the ECM tool predicts the proxy advisor’s recommendation for an equity plan proposal based on the size of the share request, the company’s granting history, plan terms and features, and other user-inputted datapoints. In addition, the ECM tool generates specific datapoints from the tests exactly as they would appear in Glass Lewis’ proxy paper. This data includes information that is closely monitored by the proxy advisor’s institutional clients, informing their ultimate voting decisions for both equity plan proposals and Say on Pays.

Basic Energy Services, Inc. could well have benefited from some foresight when plotting out the award schedule under its new 2019 Long-Term Incentive Plan (2019 LTIP). Announcing its 2019 annual shareholder meeting, the company sought approval of the 2019 LTIP, which would have authorized 1.8 million new shares for future issuance. However by the time the meeting took place, investor opposition had forced last-minute amendments to the agenda, including a cancellation of the share request.

In its analysis of the equity plan and the broader advisory vote on executive compensation, Glass Lewis raised concerns regarding massive grants made to executives after the 2018 fiscal year. In fact, much of the additional 1.8 million share request that would be voted upon at the May 2019 annual meeting was already ear-marked for April 2019 incentive awards to named executive officers, pending shareholder approval. After the plan failed a number of Glass Lewis’ tests, including measures of the company’s historic pace of grants and cost of the share request, the proxy advisor recommended that shareholders vote AGAINST the proposal.

An AGAINST recommendation for an equity plan proposal from Glass Lewis is infrequent and typically driven by particularly egregious granting practices and/or highly shareholder-unfriendly provisions. Cost concerns drove 21.97% of the advisor’s AGAINST recommendations during the 2019 proxy season; dilution issues accounted for 13.64%; and evergreen and repricing/buyout provisions together spurred 62.12% of the negative recommendations.

Glass Lewis’ voting recommendation contributed to growing investor momentum against the proposal. However, it appears that Basic Energy Services’ board and management had not anticipated the scope of opposition. As a result, the company, which had climbed out of Chapter 11 bankruptcy in 2016, found itself in what appeared to be another scramble — this time to revise its equity plan proposal with only eight days to go before the annual meeting.

On May 6th, with some investors having already cast their votes, the company filed an amendment to its 2019 proxy statement announcing that it was no longer seeking an additional share request. Instead, shareholders would vote on whether to move currently available shares from prior plans into the 2019 LTIP for future issuance.

Meanwhile, to compensate for the elimination of the 1.8 million share request, the large April 2019 grants that the company made to its named executive officers were revised to rely less on equity-settled payouts and more heavily on cash. Subsequent to the amended proposal, and in the absence of either a share request or associated problematic features (such as repricing provisions or evergreen replenishment authority), Glass Lewis revised its voting recommendation to FOR.

Basic Energy Services’ revision of its equity plan proposal and NEO grants represented more than just a minor hiccup in front of a public audience of voting shareholders. While the equity plan was ultimately approved, it received just 75% support, relatively low for this type of proposal. Obtaining that approval required a costly last-minute engagement campaign, a series of supplementary fillings, and an outsized outlay to fund the switch of executives’ 2019 awards from equity to cash—all with the company’s shareholder meeting looming.

Well before filing its proxy statement, the company could have understood that the rate of granting over the last three fiscal years would be an important concern—and one that would be exacerbated by the additional awards granted in April. Using the intelligence provided by CGLytics’ ECM tool, the company could have foreseen concerns regarding plan costs and granting pace under the equity analysis plan framework, designed a proposal that was more widely acceptable to investors, and avoided the costs and uncertainty associated with renegotiating proposals and compensation policies in the days before a shareholder meeting.

Set the Agenda

The benefits of the ECM go well beyond its predictive proposal recommendation abilities. The tool is an integral part of the executive pay decision-making process and longer-term compensation program planning with real-time calculations of cost, burn rate and overhang information.

Well before equity awards are granted, the ECM can identify policies and practices that draw shareholders ire. For Basic Energy Services, which failed Glass Lewis’ tests on its historical pace of grants, the ECM tool could be used to evaluate the impact of potential grants, and help the company manage its available share pool to avoid excessive dilution.

More than just an internal planning tool, the ECM provides important intel to prep directors and executives during shareholder engagement efforts. The analyses generated on the platform provide comparisons to industry benchmarks relating to cost, overhang, burn-rate and grants to named executive officers, which can help a company control and inform its messaging during its annual outreach to shareholders.

Armed with such information, a company could not only avoid missteps such as the one experienced by Basic Energy Services. It could also use the data to more effectively formulate its message to its shareholders on matters related its executive compensation program for its annual say on pay vote.

Another interesting insight is that Hampton is not currently sitting on any other company’s board, unlike Symonds who is currently sitting on four different boards (including HSBC Holdings plc). One could easily argue about the effectiveness of that choice when it comes to availability and focus/time dedication for the heavy incoming agenda.

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

GlaxoSmithKline: Hampton’s departure gives a sense of unfinished business

CGLytics’ examines the board expertise and director interlocks of GSK both pre- and post-appointment of Mr. Jonathan Symonds, following Philip Hampton’s resignation as Chairman.

The increasing trend of shareholder opposition to executive pay

Votes against executive remuneration are growing. In this article we look at this change in the European indices and the S&P500.

Deutsche Bank: How CGLytics Tools Inform Glass Lewis’ Pay and Governance Analysis

Glass Lewis’ assessment of executive remuneration reflects a balance of quantitative and qualitative considerations, with CGLytics’ suite of tools underpinning the quantitative component. In the following discussion, we review the quantitative assessment with respect to Deutsche Bank, using CGLytics’ analytical tools.

GlaxoSmithKline: Hampton’s departure gives a sense of unfinished business

CGLytics’ examines the board expertise and director interlocks of GSK both pre- and post-appointment of Mr. Jonathan Symonds, following Philip Hampton’s resignation as Chairman.

This article examines GlaxoSmithKline’s board expertise and director interlocks both prior and post the appointment of Mr. Jonathan Symonds; replacing Chairman Philip Hampton.

GlaxoSmithKline plc (GSK) announced in December 2018 the merger of its non-prescription drug and parapharmacy activities with those of the American giant Pfizer. The two labs are creating a GBP 10 billion joint venture, which will become the industry leader with GSK holding a majority of the shares – 68% and Pfizer a 32% holding. Within three years however, GSK plans to separate from this new entity and introduce it on the London Stock Exchange, placing Emma Walmsley as the CEO. There will therefore be a demerger project for GSK, aiming at separating their consumer health division (merged with Pfizer’s business) from their pharmaceutical and vaccines one. A lot of investors have been asking for this demerger over the past few years, however GSK is still in the middle of a transformation that is not quite complete.

The company intended, since 2015, to recover its Free Cash Flow (FCF) after the expenses arising from the costs of restructuration and integration of the Novartis deal. The company’s FCF is recovering quite well, with a GBP 5.7 billion in 2018 (+63% compared to 2017).

In January of this year, the Chairman of GSK, Philip Hampton, announced his decision to step down from his position after three and a half years and declared:

“Following the announcement of our deal with Pfizer and the intended separation of the new consumer business, I believe this is the right moment to step down and allow a new Chair to oversee this process through to its conclusion over the next few years.”

 

GSK announced their decision for a successor of Mr. Hampton, and it appears that Mr. Jonathan Symonds will be taking that role. Both individuals have different backgrounds and expertise. Mr. Symonds brings with him a strong pharmaceutical background together with corporate governance and corporate development experience. He was CFO of Novartis AG from 2009 to 2013 and prior to that CFO of AstraZeneca plc. He has been Deputy Group Chairman at HSBC Holdings plc since August 2018 and its Independent Non-Executive Director since April 2014. During his past experience, he has proven to be an expert of corporate changes. The most important transactions of Novartis (acquisition of Alcon) and AstraZeneca (acquisition of MedImmune) took place under his tenure. The experience Mr. Symonds brings with him added to his international finance knowledge make him a great fit for the upcoming challenges GSK will face.

The board expertise diagrams, produced directly from data and analytics in CGLytics’ platform, show GlaxoSmithKline’s board expertise matrix before and after Symonds’ appointment. The information used for producing CGLytics’ expertise and skills matrices in the SaaS offering is standardized and applied consistency to more than 5,500 companies globally for easy comparison, analysis and benchmarking of boards composition.

GSK board expertise prior to Symonds 4

Looking at the current board composition of GlaxoSmithKline, the Board’s strongest expertise are International, Governance, Leadership and Executive. The Board however currently has no director with Technology expertise. Five directors, including Sir Philip Hampton, have Financial expertise, having served as Finance Director of BG Group Limited. The Chairman nonetheless lacks Industry expertise which is in line with what market watchers have said.

The chart below displays the company’s expertise with the coming of the new Chairman Mr. Symonds. Jonathan also brings with him Non-Executive, Financial, Executive, Governance expertise among others. However, he also brings with him Industry expertise having served as CFO of Novartis AG. With his addition, the board will still lack in the area of Technology expertise.

GSK board expertise with Symonds 4

Another interesting insight is that Hampton is not currently sitting on any other company’s board, unlike Symonds who is currently sitting on four different boards (including HSBC Holdings plc). One could easily argue about the effectiveness of that choice when it comes to availability and focus/time dedication for the heavy incoming agenda.

The UK Corporate Governance Code advises:

“Additional external appointments should not be undertaken without prior approval of the board, with the reasons for permitting significant appointments explained in the annual report. Full-time executive directors should not take on more than one non-executive directorship in a FTSE 100 company or other significant appointment.”

Glass Lewis, in their UK 2019 Proxy Paper Guidelines, recommends:

“Voting against a director who serves as an executive officer of any public company while serving on a total of more than two public company boards, and any other director who serves on a total of more than five public company boards.”

On the other hand, investment management company BlackRock Inc., top shareholder of GSK’s capital, shares in their 2019 Proxy Voting Policy document that they would:

“Expect companies to provide a clear explanation in situations where a board candidate is a director serving on more than three other public company boards; or a Chairman serving on more than two other public company boards (or only one if this is an additional chairmanship).”

Finally, the recommendations of GSK’s second largest shareholder – asset management group Vanguard – state that:

“A fund will vote against any director who is a Named Executive Officer (NEO) and sits on more than one outside public board.”

Additionally,

“A fund will also vote against any director who serves on five or more public company boards.”

Mr. Symonds is sitting on one other public company’s board (from which he will be stepping down from at the beginning of 2020) and does not hold any executive position, which means that he satisfies the previous recommendations. But at the same time, Symonds remains on the board of three private companies: Proteus Digital Health Inc. (Chairman), Genomics England Limited (Chairman) and Rubius Therapeutics Inc. (Non-Executive Director). Despite the fact that he’s satisfying all guidelines, we can question if his agenda will allow him to dedicate the optimal amount of time for all the changes GSK is about to face.

As a conclusion, we can obviously always find a rational explanation to Hampton’s resignation and highlight the benefits of Symonds’ arrival. But at the end of the day, we must remember everything Hampton has done since joining the company: he has replaced the CEO, has reorganized the Board of Directors and led one of the biggest corporate restructuring projects seen these past years.

What makes this resignation a big event, is that GSK is currently in a timeframe where it needs as much stability as possible on a management level. The massive projects that are being led rely on the company to be extra cautious with its many moving parts. Considering the time needed for the restructuring and demerger to be concluded, we can think Hampton should have ideally stayed until the very end and then recruited a board for each entity.

All the reasons lead to thinking of the possibility of activities being overshadowed to keep investors from worrying. However, GSK has been clear about the fact that Hampton decided to leave once the Pfizer deal was announced. There may never be light over the other possible reasons that pushed Hampton to resign.

For more information regarding how CGLytics’ deep, global data set and unparalleled analytical screening tools can potentially help you make better decisions, click here.

About the Author

Amine Chehab: European Research Analyst

Amine completed his Master’s degree in International Financial Analysis at INSEEC Bordeaux, France. As part of his studies, he also attended the University of California, Riverside as an exchange student. Previously, he gained experience in the field of finance as a Finance Business Analyst and Financial consultant. Most recently he worked as a Credit Manager Assistant.

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Deutsche Bank: How CGLytics Tools Inform Glass Lewis’ Pay and Governance Analysis

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During 2019 we saw an increase in the volume of shareholders making their feelings known about what they perceived as misaligned executive pay policies. This was brought on by lacklustre performance by their portfolios.

With a string of high-profile stories, executive compensation was rarely out of the news, and an increasing number of organisations became the focus of media outcry, damaging brands and forcing companies onto the defensive.

As the press and investor relations teams scrambled to justify the remuneration of their CEOs and other executives, CGLytics has taken a look into its historical data set to see whether this is part of an increasing trend of shareholder activism.

From the CGLytics coverage, which includes more than 5,500 companies across the globe, we have analysed the proxy votes submitted so far in 2019. During this time more than 3 trillion votes were cast against remuneration policies submitted. We have compared this number to the three years prior.

An accelerating trend

Looking back, we can see that shareholder opposition to director remuneration policies across Europe has increased. And increased significantly.

From 2016 to 2017 there was only a proportional 9% increase from 2.1% to 2.3% opposition, however in 2018 we see an indication that shareholders were getting frustrated.

Percent of votes against remuneration policies - Europe

From 2017 to 2018 there was a 40% increase in opposition to remuneration policies. While this is still a relatively overall small percentage of 3.2% opposition of the total votes, for some issuers this was a red flag and ensured that they proactively engaged with their shareholders to ensure clarity on awards and demonstrate that they were taking shareholder views into account.

However, many organisations failed to heed the warnings and 2019 saw the proportion of votes against director remuneration policies increase by 90%, up to 6.1% of total votes cast.

Meanwhile in the S&P500

Many US based companies have been under pressure from shareholders to curb perceived excessive pay, and this can be seen by the annual comparison below where in 2019, shareholders cast 16.3% of their votes against the recommended remuneration policies.

Percent of shareholder votes against remuneration policies - SP500

This consistently high level of shareholder opposition to executive remuneration reflects the idea that executives are receiving outweighted rewards compared to the overall growth and performance metrics that they are delivering.

What does 2020 have in store?

As you may have seen in our “Top 50 Highest Paid CEOs” article earlier in the summer, executive pay has the potential to increase significantly compared to relatively flat performance indicators (such as TSR), so it’s not unexpected that the shareholder opposition will continue to accelerate into the 2020 proxy season.

Proactive engagement is the key

CGLytics is the global compensation partner for Glass Lewis, the leading independent proxy advisor, who work with over 1,300 institutional investors around the globe. In our recent “behind the scenes with Glass Lewis” webinar, Andrew Gebelin, VP of Research, Engagement and Stewardship highlighted the benefits of organisations proactively engaging with both proxy advisors and investors to reduce the risk of mis-interpretation of remuneration policy elements and maximise the information available prior to AGM votes.

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.

 

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Deutsche Bank: How CGLytics Tools Inform Glass Lewis’ Pay and Governance Analysis

Glass Lewis’ assessment of executive remuneration reflects a balance of quantitative and qualitative considerations, with CGLytics’ suite of tools underpinning the quantitative component. In the following discussion, we review the quantitative assessment with respect to Deutsche Bank, using CGLytics’ analytical tools.

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Deutsche Bank: How CGLytics Tools Inform Glass Lewis’ Pay and Governance Analysis

Glass Lewis’ assessment of executive remuneration reflects a balance of quantitative and qualitative considerations, with CGLytics’ suite of tools underpinning the quantitative component. In the following discussion, we review the quantitative assessment with respect to Deutsche Bank, using CGLytics’ analytical tools.

For public companies based in Germany, Glass Lewis’ assessment of a company’s remuneration practices balances quantitative data with a variety of qualitative considerations. Since its introduction in 2018, CGLytics’ data analysis has helped us understand the pay structure and identify both quantum-related and broader governance issues.

CGLytics’ analysis of main profitability indicators illustrate the link between pay and performance. The tools are particularly useful when assessing a company’s remuneration in relation to local and European peers. That’s all the more important in Germany, where large companies usually include a significant number of US companies in their benchmarks, leading to a potentially skewed context for remuneration decisions and ultimate payouts.

In the following discussion, we describe how CGLytics’ analytical tools informed Glass Lewis’ review of Deutsche Bank ahead of the 2019 AGM.

Overview of DBK

Annual Say-on-Pay won’t be mandatory in Germany until SRD II is implemented, allowing Deutsche Bank to omit any remuneration-related votes from its 2019 AGM agenda; the multinational last sought shareholder approval of its remuneration policy in 2017. Nonetheless, for large cap companies Glass Lewis provides a remuneration analysis comprising CGLytics graphs and tables and a write-up to summarise any material issues. Even when there is no proposal focused solely on remuneration, this analysis informs our assessment of overall governance practices and the performance of the board, its committees and directors. Beyond the Proxy Paper report and voting recommendations, the analysis helps us to shape our engagement agenda and identify areas for further research.

Deutsche Bank’s KPIs have been consistently negative in the past years due to a number of legal disputes and organisational issues. In 2017, the Bank posted its third consecutive loss. Awards for those three years would have partially vested, mostly due to the achievement of the CET1 capital ratio and relative TSR targets. However, the management board decided to waive all variable remuneration payments and grants for fiscal years 2015 to 2017, in order to demonstrate that shareholders’ experience was reflected in the pay of top executives.

In 2018, the Bank reported its first consolidated net profit since 2014 and resumed the payment and grant of short- and long-term awards to management board members.

Overview of CGLytics Remuneration Analysis

CGLytics’ relative indicators confirmed that the company’s performance was below peers, while payouts were above. Moreover, the  analysis raised concerns about an excessive use of upward discretion and costs related to executive turnover.

Using CGLytics’ data, our analysis showed a poor alignment between pay and performance during an ongoing period of subpar results. In recent years, the management board’s waiver of variable remuneration had demonstrated a good appreciation of shareholders’ concerns – but a return to profitability in 2018 prompted an immediate return to the payment of incentives which appeared excessive and premature. While we acknowledged an improvement in performance, CGLytics showed that Deutsche’s EPS, ROA and ROE were still negative and below peers. Similarly, CGLytics’ analysis of relative TSR and realised pay showed a disconnect between above-median CEO costs and shareholder returns that remained significantly below peers.

The awards granted last year aren’t reflected in the charts below due to their deferral structure – nonetheless, CEO remuneration was still higher than that of German and European peers, highlighting quantum concerns and a wider issue of executive succession planning and turnover costs. Last year, departed Deutsche executives, many of whom presided over a period of underperformance, received over €7 million in immediate non-compete payments, with additional severance payments totalling millions to be paid in tranches over the next few years.

Source: CGLytics Compensation Data and Models

Glass Lewis Perspective

The context for this quantitative analysis centred on Deutsche’s role as a multinational bank. In the case of large  financial institutions , we recognise that the use of US and international peers is – to a certain extent – reasonable. In addition, we recognise that banks subject to CRD IV must cap variable pay at 200% of fixed, which tends to inflate fixed pay levels. We also noted that 2018 awards were subject to extensive deferral requirements.

On balance, while cognisant of the competitive marketplace, we remained concerned by salary levels – and moreover by the high cost of severance, with some payments set to continue for years to come, along with the level of  variable pay awarded given shareholder returns.

Conclusion

Deutsche didn’t have any remuneration-specific proposals on its AGM agenda in 2019. Nonetheless, the executive pay, succession planning and broader governance issues raised by CGLytics’ analysis contributed to our overall assessment of the company’s governance, and our recommendation that shareholders vote against the ratification of supervisory board acts.

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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Shutterfly: A Glass Lewis Use Case

Glass Lewis takes a look at the recent proposed amendment to the Shutterfly equity compensation program and the response from shareholders.

What exactly is a tech company? Shutterfly asked a similar question in proposing an amendment to their equity compensation program at the 2019 annual shareholder meeting. The plan included a number of best practice features and avoided many of the design pitfalls that often provoke shareholder ire, but the S&P 1000 firm still had quite a fight on their hands in securing shareholder support.

The main contentions related not to the terms of the plan, but rather to Shutterfly’s recent granting practices – and the appropriate context for analyzing them. The firm’s equity plan disclosure included relatively candid discussion of the impact of executive transitions, recent acquisitions and repurchase activity, as well as the general difficulty of existing in Silicon Valley. Indeed, that location is central to the company’s point; the disclosure takes specific umbrage with the firm’s inclusion in the retail sector for equity plan assessments. While the company acknowledges that the comparison also includes a narrower internet-specific sub-category, it argues that retailers generally “tend to place more emphasis on cash compensation and grant to a smaller portion of their employees than technology companies like Shutterfly[.]”

The equity compensation model that Glass Lewis uses to develop analysis and voting recommendations looks at multiple factors around cost and dilution, and many of Shutterfly’s concerns were accounted for. Changes in employee ranks and share counts are formally incorporated into the model, which assesses company practices based on a mixture of broad and specific GICS-derived groupings. Using a combination of CGLytics data and the ECM’s back-end information, we reviewed the model result in the context of some of the other claims.

First, we looked at some of the characteristics of the internet retail industry group to  identify how closely the more narrow group within the retail sector compared with Shutterfly. We began by comparing R&D/technology expenditures relative to revenue, which one might expect to be higher for ‘cutting edge’ firms. Shutterfly’s last fiscal year R&D spend was comparable the ECM industry group midpoints, each in the high single-digit percentages. However, to the company’s credit, spend was over 14% of revenue on a trailing basis and for the most recent fiscal year if the revenue from newly-acquired Lifetouch is excluded. Shutterfly also had only slightly lower operating margin than the group median and average, suggesting some comparability. We also found that, like Shutterfly, almost 40% of the industry group was headquartered in areas with a high cost of living. Still, the mix of tangible and intangible products sold by the group complicates this comparison. Ultimately, the industry used by the Glass Lewis ECM appeared to be a fair, if not perfect, peer group for comparing equity usage.

Of course, no peer group is truly perfect. Instead, they serve as a starting point for deeper investigation. In this case, based on the concerns raised above we took a closer look at a group of software & services companies within a range of Shutterfly’s revenue and market capitalization. Most of those firms did not provide the same level of R&D disclosure as Shutterfly, but had a higher average operating margin than the reluctant retailer. Shutterfly’s equity burn rate exceeded both the software & services group and the retail sector, even prior to the significant Lifetouch acquisition, and a close look at the company’s cost and dilution figures showed recent cost proportions well above the average for that sector.

Ultimately, just enough shareholders were convinced of the adequacy of the plan. The final vote tally showed roughly 56% support, a close margin for a type of proposal that usually receives near 90% approval. Any argument citing the poor fit of an established comparator group invites close review and a look at the comparison that ostensibly don’t work. Those reviews require good data – and the right tools.

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.

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Latest Industry News, Views & Information

Tailoring Executive Remuneration Analysis Using CGLytics: Persimmon plc

Glass Lewis’ assessment of executive remuneration reflects a balance of quantitative and qualitative considerations, with CGLytics’ suite of tools underpinning the quantitative component. In the following discussion, we review the quantitative assessment with respect to Persimmon plc, using CGLytics’ analytical tools.

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Tailoring Executive Remuneration Analysis Using CGLytics: Persimmon plc

Glass Lewis’ assessment of executive remuneration reflects a balance of quantitative and qualitative considerations, with CGLytics’ suite of tools underpinning the quantitative component. In the following discussion, we review the quantitative assessment with respect to Persimmon plc, using CGLytics’ analytical tools.

Glass Lewis’ assessment of executive remuneration reflects a balance of quantitative and qualitative considerations, with CGLytics’ suite of tools underpinning the quantitative component.

The Remuneration Analysis section, included in Proxy Papers for the UK and over a dozen markets, helps to identify whether CEO pay practices are aligned with company performance. The section covers the prior three years and can be adjusted to show realised, realisable or granted pay, both on an absolute basis and relative to country and industry peer groups developed by Glass Lewis in collaboration with CGLytics.

In the following discussion, we review the quantitative assessment with respect to Persimmon plc, using CGLytics’ analytical tools.

Persimmon

Background:

Back in 2012, Persimmon plc made a commitment to its shareholders: over the next decade, the UK homebuilder would return £1.9bn (£6.20 per share) of surplus capital through a series of dividends and share issuances. In order to encourage management to deliver on this commitment, the board proposed a new long-term incentive, the Capital Return Plan, which was intended “to provide a closer link between reward to executive directors and senior management for the successful implementation of our strategy.”

The plan gave roughly 140 senior employees, including executive directors, the rights to 10% of the company’s share capital so long as cumulative dividend targets were met at five measurement dates over a ten-year period. Shareholder returns didn’t just determine how much of the award vested, but also the value delivered to executives: while the awards were granted as share options with an exercise price of £6.20 (the per share return target), this exercise price was reduced by any shareholder distributions. Return the full amount to shareholders through dividends and issuances, and the awards would be free to exercise.

Between the Capital Return Plan’s size and structure, and in particular the duplicative reliance on a single measure of performance that could be manipulated by the award recipients, Glass Lewis was sufficiently concerned to recommend voting against adoption at an October 2012 general meeting. However, the decision to align payouts directly with shareholder returns over what appeared to be an extended ten-year period convinced nearly 85% of voting shareholders to support the plan.

The incentive was highly effective at aligning executive interests with shareholder returns – so much so that the ten-year period was quickly irrelevant, with distributions exceeding the 2019 target by the end of 2015. It’s unclear whether the accelerated returns reflected strong performance, insufficiently ambitious targets, or the unexpected tailwinds of the government’s Help to Buy scheme (or all three); regardless, the result was a total pot of approximately £99 million due to be awarded to the three participating executives in FY2017 (subject to a holding period), including approximately £45 million due to chief executive Jeff Fairburn – representing only the first of two tranches, and making Mr. Fairburn one the UK’s most highly paid executives.

CGLytics overview and analysis

Most UK plc’s follow a common template for executive remuneration: salary, cash in lieu of pension, cash and deferred share bonus, and a long-term award of performance-based shares. Accordingly, for most UK companies Glass Lewis’ Remuneration Analysis focuses on realised pay in order to capture the value of long-term performance-share awards.

However, the CGLytics pay-for-performance tool allows users to customize their analysis to show remuneration on a realised, or realisable, or granted basis. In the case of Persimmon, Glass Lewis’ Remuneration Analysis focuses on realisable pay to appropriately capture the Capital Return Plan’s use of share options, reflecting the UK “Single Total Figure of Remuneration” table.

Looking at realisable pay, CGLytics’ analysis illustrates the impact of the Capital Return Plan. Average pay within the industry and across the market remained largely static from 2016 to 2017—but due to the vesting of options at Persimmon, Mr. Fairburn’s pay spiked for both 2017 and 2018, significantly above the level received by either peer group.  A breakdown of absolute pay shows that the disparity stems exclusively from the long-term incentive component of remuneration.

REALISABLE PAY

ABSOLUTE PAY

ABSOLUTE PAY

The sooner- and larger-than-expected vesting in 2017 prompted significant public outcry and investor backlash, with far reaching consequences. Recognising that the Capital Return Plan could have included a more meaningful limit on the size of individual awards, both the board chair and senior independent director (who had chaired the remuneration committee) resigned from the board.  Under new leadership in advance of Persimmon’s 2018 AGM, the remuneration committee carried out extensive engagement with shareholders and reduced awards due to vest in the second tranche by 50%, applying a maximum entitlement of £29 per share.

These reductions were not enough to limit the fallout. In late 2018, Persimmon announced that Mr. Fairburn would leave by mutual agreement, explaining that although he was a “successful leader … the distraction around his remuneration … continues to have a negative impact on the reputation of the business and consequently on Jeff’s ability to continue in his role.”

Ultimately, Glass Lewis recommended that shareholders support the advisory remuneration report at Persimmon’s 2019 AGM. Whereas the remuneration disparity illustrated by CGLytics data had driven Glass Lewis to recommend voting against the initial plan and subsequent remuneration reports, our support in 2019 reflected a variety of factors, including the positive steps taken by the board and committee, such as personnel refreshment and reductions to the second tranche of awards; and an acknowledgement that (a) this is the last year that awards will vest under this plan, and (b) excluding FY2017 & FY2018 remuneration, Persimmon’s historical remuneration outcomes dating back to FY2014 have been aligned with peers and performance, as determined using CGLytics’ P4P tool.

Conclusion

By providing a variable, customized analysis in one centralised platform, CGLytics tools enable Glass Lewis to deliver a more nuanced assessment of executive remuneration in our Proxy Papers, supporting and enhancing our voting recommendations.

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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WeWork’s initial public offering

WeWork has had a tumultuous build-up to their IPO. Many investors were hesitant to back the company as their corporate governance policies did not meet their standards. CGLytics looks at some of the key factors that created controversy.

Preparing for an initial public offering (IPO) is often a strenuous undertaking. Companies strive to ensure that all their affairs are in order before they submit their S-1 filing to the SEC. This is done primarily to make sure that the initial public offering IPO is well received by investors.

WeWork

WeWork first filed its prospectus on August 14th 2019. Two main components of the filing prompted investor backlash. First and foremost, investors were alarmed at WeWork’s consecutive and increasing financial losses over the past three years. Secondly, investors took note of the company’s unusual governance practices. Although a justification could be provided for the financial losses, namely that they were essential to their growth strategy, no justification could be provided for the latter. With lazy governance practices increasingly linked to poor company performance, WeWork responded by making sweeping changes to assuage concerns.

Women on Boards

Gender diversity on boards has become a prominent issue in recent years. Some major investors, such as Blackrock, have even updated their voting guidelines to try and work towards a more equal representation. In light of this, investors were surprised and disappointed when WeWork’s initial filing included seven board members, all of which were male. In response, WeWork quickly recruited renowned culture coach Frances Frei to their board.

Frei earned her reputation when she was hired by Uber to help fix their “Bro Culture”. Although this a step in the right direction, WeWork might benefit from adding more women to their portfolio of directors. Using CGLytics data and intelligence a trendline can be made, in the S&P 500 real estate industry, between the percentage of women on boards and a company’s Average 1-year Total Shareholder Return (TSR).

Women on boards versus average TSR

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

 

Voting Rights

Also included in WeWorks initial filing were plans to award the company’s founders and early investors 20 votes for each share of Class Stock. This would grant unchecked power to the CEO. Moreover, in the event that the Chief Executive Officer, Adam Neumann, would become incapacitated, then his wife, Rebekah Neumann, and two directors would decide who the successor would be.

This plan has subsequently been scrapped and been replaced by a more contemporary policy where the Board of Directors holds the power to pick a successor. In regard to the voting rights, the number of votes for each share of Class A stock will now only account for 10 votes each.

WeWork has had a tumultuous build-up to their IPO. Many investors were hesitant to back the company as their corporate governance policies did not meet their standards. WeWork is just one example of many where Corporate Governance plays an integral role in the health and viability of a company, especially when third parties are involved.

For more information regarding how CGLytics’ deep, global data set and unparalleled analytical screening tools can potentially help you make better decisions, click here.

About the Author

Jaco Fourie: U.S. Research Analyst

Jaco holds a Bachelor of Science degree in Accounting and Finance from the University of Reading. He has gained experience as a research analyst from his enrollment at the Henley Business School and the International Capital Market Association Centre.

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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.

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