Constellation Energy Group is the latest S&P 500 firm to have its pay practices rejected by investors, according to news reports.
At Constellation’s annual meeting today, the utility company failed to obtain majority support during its advisory vote on executive compensation, according to the Baltimore Sun. Detailed voting results were not immediately available. One of the company’s largest investors, French utility firm EDF, which has a 7.3 percent stake, said publicly that it would vote against Constellation’s pay practices.
It appears that many investors had pay-for-performance concerns. Constellation CEO Mayo Shattuck received almost $16 million in total compensation in 2010, up 137 percent from his $6.7 million pay package in 2009. At the same time, the company posted a negative 10.3 percent share return over the past year, and a minus 30.6 percent return over three years.
The CEO received a significant increase in his deferred compensation and pension value ($4.9 million in 2010 compared with zero in 2009). As disclosed in the company’s proxy statement, Shattuck’s 2010 pension value increased primarily due to a decrease in the discount rate assumption, which is used to compute the present value of his supplemental plan benefits. The increase was also affected by an increase in Shattuck’s age and a small increase in the average base salary used in the calculation. Excluding this component, the CEO’s pay increased by 64.9 percent from $6.7 million in 2009 to $11.1 million in 2010.
In addition to Constellation, five other S&P 500 firms and 20 Russell 3000 companies have failed to win investor approval for their pay practices this year, according to ISS data. However, this group is still less than 2 percent of the firms that have held advisory votes this year.
May 2011 Archives
Constellation Energy Group is the latest S&P 500 firm to have its pay practices rejected by investors, according to news reports.
The United Brotherhood of Carpenters, a long-time advocate of majority voting bylaws, has asked the U.S. Securities and Exchange Commission to abolish “withhold” votes in board elections.
“The ‘withhold authority’ vote," or so-called ‘withhold’ vote, established decades ago to ‘provide greater opportunities for shareholders to exercise their right of suffrage' . . . has outlived its intended purpose. The widespread adoption of a majority vote standard in director elections provides shareholders a valid opposition vote (‘against’) that has a ‘legal effect’ in determining whether a nominee is elected. The symbolic ‘withhold’ vote, a vestige of a plurality vote standard era, is not a valid vote option under any vote standard and its continued use contributes to confusing and misleading proxy communications that threaten the integrity of director elections,” the union pension fund wrote in a May 20 rulemaking petition.
Because of the activism of the Carpenters and other investors, majority voting provisions now are widespread among large-cap companies. According to the Carpenters, 820 issuers have adopted a majority vote standard for uncontested board elections, including 397 companies in the S&P 500 index.
If withhold votes are eliminated, investors at companies without a majority voting standard would be left with two ballot options: “for” or “abstain.”
During a panel discussion at the Council of Institutional Investors’ (CII) spring meeting in April, Ed Durkin, director of corporate governance for the Carpenters, said the union pension fund hopes that the elimination of withhold votes would prod companies to adopt majority voting provisions.
Without withhold votes, "companies will have to explain why they are not allowing any opposition vote," he said. "This will help us finish the job of private ordering. If you don't have majority voting, you will stick out like a sore thumb."
Durkin said this approach would be better than filing shareholder proposals at the thousands of mid- and small-cap companies that still have plurality voting. "No one has the stomach to file 5,000 more proposals," he said during the CII panel.
It remains to be seen whether the SEC will address this issue soon. The commission still has a significant workload of Dodd-Frank-mandated rulemaking to address, including rules on the disclosure of pay-related proxy votes, compensation committees and consultants, pay disparity ratios and clawback policies, and disclosure of conflict minerals. Earlier this week, the SEC voted 3-2 to approve final rules to implement a whistleblower bounty program.
The number of failed U.S. pay votes at Russell 3000 companies has reached 25 after Talbots and Weatherford International Ltd. reported the results of their shareholder meetings.
At the May 19 meeting of Talbots, management’s “say on pay” proposal received 47.4 percent support amid pay-for-performance concerns. The CEO’s total compensation increased by 104.3 percent year-over-year, despite the fact that the one- and three-year share returns for the Massachusetts-based clothing retailer were below the median of its industry peers. The key drivers behind the increase in CEO pay were: a non-equity incentive award of $1.4 million that was comprised of a $936,000 annual incentive award and a special $500,000 one-time retention award resulting from the closing of a 2010 merger transaction; and a restricted stock award of $3.6 million.
At Weatherford, an oil services company that is listed on the New York Stock Exchange but incorporated in Switzerland, the firm’s compensation practices received 43.9 percent support on May 25. It appears that investors were concerned about discretionary cash bonuses that were received by named executive officers. The awards ranged from $300,000 to $1.3 million for the CEO. The company said the bonuses were granted for retention purposes, and noted that four executives departed the firm in 2010. Weatherford also made substantial expatriate tax equalization payments on behalf of some executives, including $613,021 for the chief financial officer.
Overall, these 25 failed advisory votes account for less than 2 percent of the 1,249 U.S. companies that have held advisory votes this year, according to ISS data.
Also this week, a second U.K. company failed to win majority support for its remuneration report this year. At Robert Walters Plc, an employment services company, the remuneration committee used its discretion to award discretionary bonuses of 120 percent of salary to executive directors, which exceeded the 100 percent maximum that had been set. The company noted that it had a very successful performance during the past year and that no bonuses were paid in 2009. The executives also received 5 percent basic salary increases for both 2010 and 2011.
The board at HSN has refused to accept the resignation of a director who received less than majority support from investors.
At the company’s May 17 annual meeting, director Gregory R. Blatt received more “withhold” votes than “for” votes. The company has a plurality vote standard with a director resignation policy, and thus he offered to resign. The vote against Blatt presumably reflected investor concern that he is “overboarded;” Blatt serves as the CEO of IAC/InterActive (which was HSN’s former parent until a 2008 spinoff), and also is on the boards at Interval Leisure Group and Meetic SA.
In a May 20 regulatory filing, the Florida-based multi-channel retailer said: “In determining whether to accept Mr. Blatt’s resignation, the Board of Directors considered a number of factors relative to what was in the best interest of the Company and its shareholders. Among other things, the Board considered Mr. Blatt’s unique qualifications, his past and expected future contributions, his participation at Board meetings, his commitment to the success of the Company, the overall composition of the Board and the reasons why Mr. Blatt received more ‘withheld’ votes than 'for' votes. Ultimately, after consideration of all of these factors, the independent members of the Board of Directors determined unanimously that it would not be in the best interests of the Company and its shareholders to accept Mr. Blatt’s resignation.”
According to ISS data, 12 directors at U.S. companies have failed to receive majority support this year, primarily because the Dodd-Frank Act’s “say on pay” mandate is leading to fewer “withhold” votes against compensation committee members. With the spring proxy season to starting to wind down, it appears unlikely that the number of majority-opposed directors will come close to the 107 board members who faced that dissent in 2010.
HSN and these other firms likely will hear from investor advocates. The Council of Institutional Investors has been urging companies with majority-opposed directors to refrain from reappointing them.
Over the past few years, most of the companies with majority-opposed directors have been small or medium-cap firms that typically don’t have majority voting bylaws or resignation policies. There have been just a handful of cases where resignation policies have been triggered and boards have refused to accept the resignations of directors who failed to win majority approval. Examples include:
- Gen-Probe: One director received majority opposition in 2007 after the company reported that she attended less than 75 percent of board meetings.
- Axcelis Technologies: Three directors received majority opposition in 2008 after the board rejected a takeover bid. Investors later went to court to demand more information on the board’s decision to seat those directors, but the Delaware Supreme Court ultimately rejected their lawsuit.
- Pulte Homes: Three directors had majority opposition in 2009 over the company’s classified board and poison pill.
- Vital Images: One director had majority opposition in 2010 after the company conducted a stock-option repricing without obtaining shareholder approval.
Masco and Nutrisystem have joined the growing list of U.S. companies where investors have said “no” on pay. Masco, a building products firm in the S&P 500 index, received just 44.7 percent support during its “say on pay” advisory vote, while Nutrisystem, which sells diet programs and products, earned 41.5 percent approval.
Overall, five S&P 500 firms and 17 Russell 3000 companies have reported failed pay votes this year. While that number may appear large, it amounts to just 2 percent of the 1,069 U.S. issuers that have held advisory votes this year and where ISS has collected vote results. Notwithstanding these votes, most companies are receiving overwhelming support for their pay practices. So far, companies are averaging 91 percent support (based on votes “for” and “against”), up from 89 percent last year. The median support level is 96 percent this year, according to ISS data.
Thanks in part to "say on pay," U.S. directors are receiving less opposition from investors this season. As of May 12, the average "withhold" vote was 4.7 percent, as compared with 5.5 percent last year. At S&P 500 companies, the average opposition rate has fallen from 4.1 percent in 2010 to 3.9 percent this year, according to ISS data.
Five more U.S. companies have reported that they failed to receive majority support during their advisory votes on executive compensation. The firms include Cincinnati Bell, Hercules Offshore, Curtiss-Wright, Intersil, and Helix Energy Solutions.
At all five issuers, the shareholder opposition appeared to stem from a perceived disconnect between the CEO's total pay and the company’s stock performance.
In a notable response to the vote, Helix Energy's compensation committee outlined several specific actions it would take: “(i) implement defined performance metrics for the 2011 Cash Bonus Program for executive officers with the Committee, however, retaining overall discretion with respect to the grant of individual awards made under the program; and (ii) modify the long-term incentive compensation awarded to executive officers to include additional pay for performance elements in future grants.”
Cincinnati Bell received just 29.8 percent support for its pay practices, the lowest vote seen so far this season, according to ISS data. (This percentage is based on votes present, which included an 11.7 percent abstention vote.)
Overall, 20 Russell 3000 companies have reported that they failed to earn majority approval for their pay practices this year. At the same time, most firms are receiving broad support from their investors on executive pay this year. As of May 16, companies were averaging 89.3 percent support for their pay practices, with 8.9 percent opposition and 1.7 percent abstentions, according to ISS data. This average is based on vote results from 794 Russell 3000 companies.
At Bank of America’s annual meeting on Wednesday, investors gave 35.5 percent support (based on votes “for” and “against”) to a new shareholder proposal that seeks to ban reimbursement benefits for relocating executives who lose money on the sale of their homes, according to a company filing.
The vote is a solid showing for a first-time proposal. For most new shareholder resolutions, it can take several years until they attract broad support from institutional investors. This result follows significant shareholder support for investor proposals that have sought to eliminate “golden coffin” benefits or tax gross-up payments at other companies in recent years.
The home loss perk proposal was filed by the CtW Investment Group, the investment arm of the Change to Win labor federation. The labor group submitted the proposal in response to a $553,500 home loss subsidy paid to the president of the Bank of America’s Countrywide home mortgage division. BofA tried to get permission from the Securities and Exchange Commission to exclude this resolution on "ordinary business" grounds, but the commission staff did not agree.
“Shareholders have showed a strong level of support for this proposal to end home loss reimbursement for executives,” said Bill Patterson, director of CtW Investment Group. “Given its role as a mortgage lender, the bank’s board should act quickly to eliminate this perquisite and restore credibility.”
Also at Bank of America, investors gave 39.5 percent support (based on votes cast “for” and “against”) to another first-year proposal that seeks an independent audit committee report on the bank’s mortgage and foreclosure practices. This result is the best showing so far for this resolution, which was filed by New York City’s pension funds. Similar proposals won 29.3 percent support at Citigroup and 22.8 percent approval at Wells Fargo.
“We are pleased with the strong support Bank of America shareholders showed for the NYC Pension Funds call that the bank's board clean house,” NYC Comptroller John Liu said in a press release today. “Bank of America’s board cannot ignore the substantial block of shareholders who want an independent audit of the bank's mortgage and foreclosure practices.”
The American Federation of State, County, and Municipal Employees and RAM Trust are urging investors to vote against the pay practices of ExxonMobil at the oil giant’s May 25 meeting.
"Is there any limit to what the executives of publicly traded companies can pay themselves? Exxon's 'just trust us' approach to executive compensation should not be rubber stamped by institutional investors," AFSCME President Gerald W. McEntee said in a press release on Monday. "Exxon's compensation committee needs to explain how these lavish amounts are tied to performance.”
The activist investors argue that the compensation for Chairman and CEO Rex Tillerson is out of line with the company’s share performance. According to ISS data, the chief executive received a 6.6 percent increase in total pay in 2010, while the company posted a negative 5.8 percent share return over the past three years and a 10.1 percent share return in the past year, which both trail industry peers.
The investors further contend that the annual bonuses for Exxon executives are not based on the achievement of pre-established performance metrics, but rather are awarded on a discretionary basis after the compensation committee sets an annual bonus pool. In 2010, Tillerson received a $3.36 million bonus, 40 percent more than in 2009.
The investors also complain that the company’s restricted stock awards, which make up 50 to 70 percent of senior executive compensation, vest over time, “which rewards executives for the passage of time, rather than the achievement of performance goals.”
AFSCME and RAM also assert that Exxon does not conduct a meaningful benchmarking of pay. When benchmarking pay to peers, the compensation committee does not target any specific percentile, but rather uses its “well-informed judgment,” according to the union. “Shareholders have no way to determine whether pay is benchmarked below, at, or above the peer median,” the investors said.
In a May 6 filing, ExxonMobil defended its pay practices and said CEO pay has been aligned with shareholder returns during three out of the past four fiscal years; the exception was 2008, when “the Compensation Committee was taking steps to improve alignment of CEO pay with market peers.” The company argued that its executive pay should not be judged solely against short-term share returns. “ExxonMobil’s business depends on investment lead times ranging from a minimum of five to 10 years, to decades. Our compensation program is tied to the long-term nature of our business, as it should be,” the company said.
AFSCME and RAM Trust also are urging investors to support an annual advisory vote on compensation at ExxonMobil. Management has endorsed a triennial vote.
So far this year, AFSCME has waged “vote no” campaigns against the pay practices at Pfizer, Johnson & Johnson, and Alcoa, and is urging a vote against management at ConocoPhillips on Wednesday. While AFSCME, as an indexed investor, does not own a large stake in any given company, the union’s pay campaigns have attracted significant support. Pfizer and J&J both received more than 39 percent dissent, nearly four times the average opposition rate this year.
RAM Trust, which has been active at ExxonMobil in the past, is led by shareholder activist Robert Monks, who was a founder of ISS.
The investors also are urging support for a trio of shareholder proposals. The resolutions seek an independent board chair, a report on company expenditures to influence public policy and legislation, and the adoption of a policy prohibiting harassment and discrimination based on sexual orientation and gender identity.
However, ExxonMobil’s strong first-quarter results may prompt some undecided investors to vote with management. On April 28, the company announced that its quarterly net income increased 69 percent to $10.7 billion, the firm’s largest profit in almost three years, according to Bloomberg News. The company recently announced that it would increase its quarterly dividend by 7 percent to 47 cents per share.
Stewart Information Services has become the 13th U.S. company to fail to win majority support during a "say on pay" vote this year.
At the Houston-based company's April 29 annual meeting, there was 47.8 percent support for the firm's pay practices. In a notable protest, investors also withheld majority approval from a compensation committee member, W. Arthur Porter, and withheld more than 44 percent support from four other directors. In 2010, Porter and two other pay panel members received majority opposition, but all three were renominated. This year's votes against the Stewart board members are especially noteworthy because few compensation committee members have faced significant opposition this year, because most investors have chosen to use "say on pay" votes to express their concerns rather than withholding support from directors.
The continuing dissent at Stewart appears to reflect investor concern over pay for performance. While the small-cap company has lagged its industry peers over the past one- and three-year periods, the total pay for both CEOs increased approximately by 30 percent year-over-year, predominantly due to increases in base salary, time-based restricted stock grants, and a $319,000 non-equity grant when no such grant was awarded in 2009. Each executive also received a $100,000 discretionary bonus in fiscal 2010.
Overall, four S&P 500 issuers, eight Russell 3000 companies, and one micro-cap firm have failed to earn a majority of votes present (including abstentions) for their pay practices this year. Australia still holds the yearly record for failed advisory votes at large-cap firms. In 2010, nine S&P/ASX 300 companies did not earn majority support for their remuneration reports, according to ISS data.
The number of failed U.S. advisory votes this year has reached a dozen after two Denver-based firms, Janus Capital Group and M.D.C. Holdings, reported that they did not receive majority support for their executive compensation practices at their shareholder meetings last week.
At Janus Capital, an asset management firm in the S&P 500 index, the pay practices earned 40.1 percent support (based on “for” and “against” votes and abstentions) on April 28. At Janus, it appears that the investor dissent stemmed from the generous sign-on package received by new CEO Richard M. Weil, who joined the company on Feb. 1, 2010. To induce Weil to take the job, Janus gave him a $10 million in restricted stock as well as a $306,287 relocation package, which included an $114,670 tax "gross-up.” Weil’s total 2010 compensation package was valued at $21.3 million.
At its April 27 meeting, M.D.C. Holdings received just 33.4 percent approval during its advisory vote on compensation. At the mid-cap homebuilder, it appears that shareholders had concerns over pay for performance. The total compensation for M.D.C.’s long-serving CEO, Larry Mizel, increased by 2 percent in the past year, while the company’s one and three-year shareholder returns were below the median for its GICS peer group. Mizel did not receive an increase in salary or bonus; the majority of his pay increase stemmed from growth in his pension value, the value of restricted shares, and an increase in all other compensation, which consisted primarily of dividends on restricted shares and reimbursement for travel for his service on non-profit organizations. His $9.6 million total compensation also exceeded than the $2.4 million median for the company’s industry peers.
Overall, four S&P 500 issuers, seven Russell 3000 companies, and one micro-cap firm have failed to receive a majority of votes present (including abstentions) for their pay practices this year. Australia still holds the yearly record for failed advisory votes at large-cap firms. In 2010, nine S&P/ASX 300 companies did not earn majority support for their remuneration reports, according to ISS data.