AGMs: Tactics for a Plague Year

In a time of crisis and confusion, shareholders are more eager than ever to get answers from their boards and management. Yet holding traditional AGMs is nearly impossible. What are the best options for running AGMs during a plague year?

In a time of crisis and confusion, shareholders are more eager than ever to get answers from their boards and management. Yet holding traditional AGMs is nearly impossible.

Postponing them may also not be a good option. Advisors, analysts, shareholders, investors, employees and all other stakeholders are all eager to understand their companies’ way forward in such troubled times, and the AGM offers the best way to address this. Postponing the AGM, even for good reasons, sends a bad signal to the markets at the very time when addressing investor and broader social concerns is critical.

For example, many companies are considering reducing dividends due to the challenging economic conditions, yet CEO pay reductions are not on the AGM agendas. CEO pay continues to rise, regardless of performance. The top 35 highest-paid CEOs on the S&P 500 received a combined Total Realized Compensation (TRC) of almost $3 billion in 2019, yet pay-for-performance alignment is badly skewed at nearly half of the companies on the index as our statistics show.

If postponing is not an option, companies do have two other options at their disposal: Running a ‘hybrid’ AGM, which would combine physical presence with virtual communications, or making the entire AGM virtual. Most companies don’t have such options included in their Articles of Association, but the first step at the hybrid or virtual AGM would mean voting on such changes. The London Stock Exchange is currently pushing for emergency legislation to change the companies act to allow all companies to stage virtual shareholder meetings. 

The hybrid option means that either board members are physically present at the AGM, while shareholders communicate with them via virtual links, or that shareholders send representatives to physically attend the meeting while board members communicate via video or audio communications. Voting ahead of meetings is also an option, working with proxy advisors.

Swedish telecoms and networking firm L.M. Ericsson has chosen the former hybrid option for its 2020 AGM on 31 March. The President and CEO Börje Ekholm will not attend in person, but will participate via links (it is not clear whether other board members will attend in person). A live webcast of the meeting will be available to shareholders.

To keep the numbers of attendees down, Euroclear Sweden will offer shareholders who are individuals the option to vote via proxy, and other opportunities to work with proxies are made available to shareholders. “No food or refreshments will be served,” the official invitation warns.

Ericsson’s official invitation offers links to Nomination Committee proposals as well as to some shareholder motions.

But, in this hybrid approach to the AGM, is it clear that board members will be able to fulfil their fiduciary responsibilities in communicating with shareholders? Will it be possible to hold a dynamic discussion of the company’s affairs? Will shareholders be able to work with proxy advisors on such short notice – how will policies be communicated? Will a shareholder wishing to pose a complex question to the CEO get sufficient airtime?

The alternative hybrid approach to running AGMs would mean that board members are physically present, while shareholders communicate with them entirely via audio, video and messaging. And there is the further alternative, in which all communication takes place virtually.

Each of these alternatives poses many of the same questions that we’ve raised above. One of the virtues of the physically-attended AGM is that a shareholder can follow up on questions, or insist on attention to specific subjects. Can shareholders be sure this will happen online?

The even larger question being asked at some companies will be whether all shareholders have had access to sufficient information to vote before the AGM. For example, under current conditions, it may not be possible for the audit of financial statements to be concluded. Some companies are opting to work with financial reporting that is incompletely audited. This poses a serious corporate governance challenge that the board would have to address at the AGM.

The diffusion of extensive financial and non-financial information to shareholders and their representatives ahead of the meeting is also critical for these virtual or semi-virtual AGMs to succeed. Given that shareholders must accept somewhat limited access to the board, they must be certain that all of the information relevant to decision-making on matters such as executive compensation, director election, Stock Purchase Plan has been provided in advance.

Boards that take all the necessary steps to ensure that shareholders have the information they need ahead of the AGMs will be fulfilling their fiduciary responsibilities to shareholders. At the same time, Shareholders will need to step up and leverage technology and information to support their engagement. The AGM will provide the basis for the company to move forward even in a Plague Year.

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Harvey Norman AGM; Strike 2 in the making?

Harvey Norman’s Annual General Meeting is to be held this Wednesday November 27, 2019. With leading independent proxy advisor CGI Glass Lewis advising to vote against the reappointment of the company’s chief executive, Katie Page, and the remuneration report, the gloves are off.

Shareholders have braced themselves for the upcoming Harvey Norman Annual General Meeting (AGM) to be held on November 27, 2019. The meeting will not be taken lightly following the shocking results of the 2018 AGM. Here we take a look at the controversial corporate governance practices that has investors and proxy advisors concerned.

Votes against remuneration report in 2018

What happened in 2018? Majority of the shareholders voted against the adoption of the remuneration report, resulting in 50.63 per cent of shareholders disapproving the resolution earning the company a first strike. Not only did a large percentage of shareholders vote against the remuneration report, but an average of 27.76 per cent opposed the re-election of the following directors: Non-Executive Director Mr. Michael John Harvey, Non-Executive Director Mr. Christopher Herbert Brown, and Executive Director and Chief Operating Officer (COO) Mr. John Slack-Smith. An average of 17.5 per cent of shareholders also voted against the grant of performance rights under the Harvey Norman 2016 Long-term Incentive Plan to the following Executive Directors: Executive Chairman Mr. Gerald Harvey, Chief Executive Officer Ms. Kay Lesley Page, Executive Director and COO Mr. John Slack-Smith, Executive Director David Ackery, and Executive Director and Chief Financial Officer and Company Secretary Chris Mentis.

Questions over what will happen at 2019’s AGM

Harvey Norman is now in hot waters, especially if majority of the shareholders continue to vote against the adoption of the remuneration report in the 2019 AGM, leading to a spill resolution. The Corporations Act 2001 has been amended to include a “two-strike” rule [1]. A company will be given a first strike if 25 per cent or more vote against the remuneration report. Until the next AGM, the company is required to review and respond to the shareholders’ growing concerns regarding executive pay. The next AGM will determine whether a company gets a second strike [2]. This occurs when 25 per cent or more shareholders still vote against it. During the same AGM, shareholders will establish whether directors need to stand for re-election. If 50 per cent or more shareholders vote for to pass a “spill” resolution, a “spill” meeting will be held within 90 days. Proxy advisors Ownership Matters and CGI Glass Lewis have advised investors to vote against the remuneration report and face a spill resolution to effectively improve its corporate governance [3].

ASX’s Corporate Governance Principles comes into question

Minority shareholders are dissatisfied with the number of independent directors present in the board. The board is currently composed of: Executive Chairman Gerald Harvey, Chief Executive Officer Katie Page, Executive Director and Chief Financial Officer/ Company Secretary Chris Mentis, Executive Director and Chief Operating Officer John Slack-Smith, Executive Director David Ackery, Non-Executive Director Christopher Brown, Non-Executive Director Michael Harvey, Independent Non-Executive Director Maurice Craven, Independent Non-Executive Director Kenneth Gunderson-Briggs and Senior Independent Non-Executive Director Graham Paton.

There are 10 board members and only three of which are independent. The company disregards the 4th edition of ASX’s Corporate Governance Principles and Recommendation that states majority of board members must be independent [5].

Data from CGLytics suggests that only 30% of the Harvey Norman board members are independent. Independent directors are vital members of the board because they provide more transparency to shareholders and fill the gap of skills required by the company [6]. The lack of independent directors poses a huge problem for minority shareholders especially when the board of directors have a total of 56.9 per cent stake in the company, making them the majority shareholders. This gives a disadvantage to minority shareholders that want to voice concerns regarding re-election of directors and the adoption of the remuneration report.

HN Board

Proxy advisory firm Ownership Matters even goes so far to propose the voting against the re-election of non-Independent Directors to force the company to make board changes [7]. In the Harvey Norman 2019 Annual Report, the company responded to the reason behind appointing fewer independent directors, stating that each executive director (including non-executive directors that are not independent) still provide quality independent judgment to the issues that arise.

Tenure reveals a stale board

The board also appears to be stale. The average tenure of the board directors is 20 years. For some time now, corporate governance stakeholders; governance experts and shareholders alike have paid substantial attention to the issue of board refreshment or entrenched boards. Usually, when a board is stale, there is the concern that they may lack new perspectives, become complacent which may affect the long-term performance of the company as well as provision of effective oversight and management.

One more independent director added to the board

In March 2019, the company added John Craven who was an independent director to the board. This was the first time in 14 years that the board had appointed an independent director to its fold since Graham Paton joined the board in 2005.

Data from CGlytics shows that although there are 10 board members, most of their skills are concentrated on three areas: finance, advisory and technology. This shows that the composition of the skills matrix is not balanced between the members and is not aligned with the skills that the company requires. Having a skill such as risk is a vital key competency a board needs, especially in turbulent times that may make or break the company.

Harvey Norman's board expertise

What are the proxy advisors’ view?

Because of the criticism and frustration of stakeholders, proxy advisors such as ISS Governance and Ownership Matters  encourage investors to vote for the appointment of self-elected Mr. Stephen Mayne as a director. Mr. Stephen Mayne is a journalist and a shareholder activist that constantly offers himself up for election on boards. Executive Chairman Gerald Harvey has urged Australian regulators to question the credibility of the proxy advisors that advise shareholders to appoint someone who has no experience in the retail industry [8].

Different proxy advisory firms Ownership Matters and CGI Glass Lewis are also recommending against the re-election of Chief Executive Officer Katie Page [9].  The company is being questioned by the Australian Securities and Investment Commission regarding the high increase in pay for Ms. Page despite the decrease in the Total Shareholder Return (TSR) of the company [10].

Where does Harvey Norman’s CEO Pay for Performance rank?

The CGLytics Relative Positioning Pay for Performance tool compares Harvey Norman’s CEO pay with that of the industry peer group’s three year TSR. The performance evaluation shows that it is misaligned. The company’s total realized pay is in the 45th percentile while the three-year TSR ranks in the 15th percentile and shows that the CEO is compensated more than the increase in TSR.

HN P4P analysis

Changes in remuneration was included in its 2019 Annual Report, changing the short-term incentive financial metric from return on net assets to earnings per share adjusted for the after tax effect of property increments decrements. The short-term incentives will be measured 50 per cent on earnings per share adjusted for the after tax effect of property and 50 per cent as non-financial conditions. Short-term incentives will still be given in cash except when the executive directors have shares lower than the benchmark level. The STI pool will also be increased to the maximum level at 120%.

As to whether, these changes have the potential to avert a potential revolt at the upcoming AGM, it remains to be seen.

Would you like to gain instant insights into more than 5,500 globally listed companies’ board composition, diversity, expertise and skills? Or access the same CEO pay for performance insights used by Glass Lewis in their proxy papers?

Click here to learn more about CGLytics’ boardroom intelligence capabilities and executive remuneration analytics, used by institutional investors, activist investors and advisors.

About the Author

Alex Co: APAC Research Analyst

Alex graduated from the S P Jain School of Global Management in Sydney with a degree in finance and entrepreneurship. She previously worked in the compliance division at a large financial institution and gained her experience as a research analyst.

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

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. Glass Lewis use their equity compensation model to examine the shareholder opposition and how it could have been potentially avoided.

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.

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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.

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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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.

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What’s your flavor? Companies get a taste of CEO pay for the proxy season

This article, originally published in Dutch in Mgmt. Scope, CGLytics examines CEO compensation issues going into the 2020 proxy season

CEO Pay Continues to Increase, but Performance Often Lags

Shareholders, including large institutional investors, are continuing the growing momentum to link executive pay to company performance.

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.

 

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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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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.

 

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The Billionaire Battle over Anadarko

Much noise has been made around the USD 38 billion hard-fought acquisition of Anadarko Petroleum by Occidental Petroleum and the hotbed of disagreement. An analysis of Occidental’s board, using CGLytics board insight tool, yields telling results.

Much noise has been made around the USD 38 billion hard-fought acquisition of Anadarko Petroleum by Occidental Petroleum (Oxy). Occidental’s CEO Vicki Hollub, in her race to beat Chevron for the acquisition, secured funding from Warren Buffett—USD 10 billion to be exact at 78% cash and 22% stock. This then allows Buffett to acquire 100,000 shares of cumulative perpetual preferred stock and an 8% dividend payout annually.

The deal was born out of Occidental’s board preferring to bypass an extraordinary shareholder meeting, wherein which the initial deal would have required a change of the Company Charter and a slim chance at a passing vote. Enter the second billionaire to the mix: Carl Icahn.

After getting wind of the deal, Icahn launched a lawsuit against Oxy on the grounds that the proposed acquisition was “fundamentally misguided and hugely overpriced.” There may be some truth to his assertion, with Oxy opening nearly 6% lower after the acquisition announcement.

Icahn accused Buffett of exploiting Oxy’s need for cash. Buffett is set to receive an 8% yield, far above Oxy’s pre-bidding 4.7%. This equates to a pre-tax cost of debt of around 10%, which is three times Oxy’s bond yield, and would put the company debt up to USD 40 billion.

In addition, Chevron decided against a counteroffer for Anandarko; thus, the company must now pay USD 1 billion in breakup fees to Chevron. It is also critical to note that this comes at a time when shareholders are calling for spending cuts and improved dividends.

As such, and perhaps the most glaring issue in the governance field, is the clear bypassing of shareholders’ voice by attempting to avoid an Extraordinary General Meeting of Shareholders (EGM).

Because of Buffett’s funding, Hollub and Oxy were able to exclude shareholder votes (as aforementioned). According to Icahn, this move was “disturbing” and “usurped the fundamental and critical role of the stockholders.”

Icahn, acting as the poster child for agitated shareholders, is calling for a restructuring of the board with seats of his own in order to ensure that Oxy acts in the best interest of shareholders. It seems apparent that the market and shareholders alike strongly disagree.

In current market conditions, Icahn has stated that the deal is a bet on the price of oil. Should oil prices fall below USD 45 per barrel, Occidental could be forced to cut dividends and once again defy shareholders. In turn, both Icahn and T. Rowe Price have agreed that the potential to put stockholder dividends at risk should first be cleared with the stockholders themselves.

An analysis of Occidental’s board, using CGLytics’ board effective and insights tool, yields telling results.

Occidental Petroleum Corporation’s Board Expertise

Source: CGLytics’ Board Effectiveness and Insights

Occidental’s board lacks significant expertise in two key areas extremely relevant to the recent deal; Financial and Industry/Sector. While there are a few financial experts, Audit and Capital Management skills particularly stand out as lacking in board discussions. Further, the lack of Financial expertise may certainly have ineffectively prepared the board to examine management’s agenda as well as properly evaluating the financial implications that come with the deal. Additionally, the Industry and Sector expertise appears inadequate; especially when considering the size of this acquisition.

The hotbed of disagreement over the deal is sure to play out in the coming weeks. It is possible that Hollub and Oxy avoided shareholder approval of such an acquisition of this scale because of the risk of disapproval at an EGM. Notwithstanding, Oxy resolved this issue by consulting Buffett.

Buffett saw opportunity arise out of the Company’s dilemma and divvied out premium funding. Now, Icahn demands a justification and correction of this supposed breach in shareholder rights. Following Icahn’s demand, Oxy will be holding a shareholder meeting on August 8th to determine the sentiment on this year’s biggest oil and gas deal. It is improbable that Icahn will win out on a lawsuit of this magnitude, especially when asking to gain seats on the board to prevent such deals in the future; but then again, it was equally unexpected that Occidental would attempt a merger with Anadarko.

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.

SOURCES

THE MARKET REALIST
YAHOO FINANCE
CNBC

Latest Industry News, Views & Information

A diverse supervisory board: This is how to unlock a wealth of talent

Aniel Mahabier, CEO of governance data specialist CGLytics, welcomes the fact that selection committees are using corporate governance analytics to assess the diversity of their own supervisory board. Technology is bridging the gap between the available talent and the knowledge and experience that committees already have in-house.

What’s your flavor? Companies get a taste of CEO pay for the proxy season

This article, originally published in Dutch in Mgmt. Scope, CGLytics examines CEO compensation issues going into the 2020 proxy season

CEO Pay Continues to Increase, but Performance Often Lags

Shareholders, including large institutional investors, are continuing the growing momentum to link executive pay to company performance.