Four additional firms--Mylan, Tower Group, Sterling Bancorp., and Manitowoc Co.--reported that they failed to win majority support for their executive compensation practices. Overall, 12 U.S.-listed companies have not obtained majority approval from their investors during say-on-pay votes this year, according to ISS data.

Mylan, a pharmaceutical firm in the S&P 500 index, earned about 48 percent support on pay during its May 4 annual meeting. It appears that investors had concerns over pay-for-performance alignment. The Pennsylvania-based company also extended executive employment agreements that include excise tax gross-up provisions, and provided limited disclosure about its engagement with shareholders after Mylan received less than 64 percent support on pay in 2011.

On May 3, the Tower Group, an insurance firm in the S&P 600 small-cap index, received 29.6 percent support, which is the second-lowest vote seen this year during an advisory vote on pay. The New York-based firm has posted low three-year returns relative to its peers, “compounded by substantial non-performance based pay elements and poor long-term incentive design,” according to the ISS report on the company. In its post-meeting 8-K filing, Tower defended its pay policies but said it “will fully consider the concerns expressed by its stockholders and the Compensation Committee will review the structure of the Company’s executive compensation programs.”

At Sterling, a regional banking firm in the S&P 600, pay-for-performance concerns also contributed to investor dissent at the May 3 shareholder meeting. As the ISS report noted: “CEO pay is significantly higher than peers (excluding the change in pension value) and the company's one- and three-year [total share returns] have not kept pace. Further, the multiple fallback structure of the annual incentive plan is incongruous with the purpose of performance-based incentive programs, offering alternative target measures when the original target is not met.” 

Pay-for-performance concerns apparently were a factor at Manitowoc, a Wisconsin-based company that makes cranes and food-service equipment. The Russell 3000 firm received about 48 percent approval on compensation at its May 1 meeting. The ISS report on Manitowoc concluded that there “was misalignment between CEO pay and TSR [total shareholder return] performance relative to peers over the 1- and 3-year term and on an absolute basis over the five-year term,” and that the chief executive’s 2011 pay package was not sufficiently performance-based.

Both Sterling and Tower received more than 90 percent support on pay in 2011, according to ISS data. At Manitowoc, there was 75 percent approval last year.
 

Three more U.S.-listed companies--Cooper Industries, NRG Energy, and Ryland Homes--have reported that they failed to receive majority support for their executive compensation practices. At all three firms, it appears that investors had pay-for-performance concerns.

Cooper Industries earned just 29.4 percent approval at its April 23 annual meeting; this vote is the lowest support level during a say-on-pay vote this year, according to ISS data. The company’s investors have expressed concern over pay in the past. Cooper, an Ireland-incorporated firm that is listed on the New York Stock Exchange and is part of the S&P 500, received just 50.4 percent support during its 2011 advisory vote.  

NRG, a power generation firm in the S&P 500 index, received 45 percent approval during its April 25 advisory vote, one year after earning 59 percent support on compensation. 

Ryland Group, a homebuilder in the S&P 600 small-cap index, had 41 percent support for its compensation policies at its April 25 meeting. Ryland also received significant opposition in 2011, earning just 62 percent approval.  

These three votes suggest that some investors are taking a harder line this year at companies that had less than 70 percent support in 2011 but have not fully addressed shareholder concerns. At the same time, there are other firms that are receiving much greater support after suffering failed votes in 2011. One example is Stanley Black and Decker, which received more than 93 percent support this year after improving its pay practices. In addition, Umpqua Holdings earned 98 percent approval this year after getting just 36 percent support in 2011. 

Overall, eight companies have reported failed votes this proxy season, according to ISS data. The other firms include Citigroup, International Game Technology, KB Home, FirstMerit Group, and Actuant Corp. 

Notwithstanding these votes, investors have overwhelmingly endorsed the pay practices of most U.S. companies. As of May 1, the average support level was 90.6 percent, according to ISS data, which includes vote results from 345 issuers.

Governance Exchange members can obtain more data on say-on-pay results by clicking here.

A fifth U.S. company, FirstMerit Corp., has failed to win majority approval from shareholders for its executive pay practices this year. In a regulatory filing, the Ohio-based financial firm reported that it received 46.6 percent support (based on votes cast "for" and "against") during the say-on-pay advisory vote at its April 18 annual meeting. 

It appears that investors had concerns over a pay-for-performance disconnect. While the company's one-, three-, and five-year share returns were negative, the CEO’s total 2011 compensation of $6.4 million was 2.3 times higher than the median of ISS' peer group, according to the ISS report on the company. In addition, FirstMerit lacks a predominantly performance-based pay structure and robust disclosure that details the rationale for the maximum bonus payout for the CEO, the ISS report said. 

So far this year, four other U.S. companies (Citigroup, KB Home, International Game Technology, and Actuant Corp.) have failed to receive majority investor support on their compensation practices, according to ISS data. During this same period in 2011, four companies reported failed say-on-pay votes. 

Notwithstanding these votes, most U.S. companies continue to win broad investor approval on compensation. During the early 2012 proxy season, the average shareholder support during say-on-pay votes was 90.3 percent at Russell 3000 firms, which is close to the 92 percent average in 2011, according to ISS data. 

During all of 2011, 41 Russell 3000 companies reported that they failed to win majority support on compensation. That total still is less than 2 percent of the firms that held advisory votes on pay that year, according to ISS data.

The early vote results this year also suggest that many investors are responding to engagement and pay practice changes that companies are making in response to low votes in 2011. For instance, the four U.S. companies with failed pay votes during the early 2011 proxy season all made changes to their compensation policies and earned significantly more shareholder support this year. At Hewlett-Packard, say-on-pay approval jumped from 48.7 to 78.8 percent. At ShuffleMaster, the company received 86.4 percent support this year, up from 44.5 percent in 2011. Beazer Homes USA and Jacobs Engineering Group both won more than 96 percent approval this year after failed votes in 2011. 
 
For an analysis of the factors that contributed to shareholder opposition during 2011 pay votes, please see a recent ISS white paper, "Parsing The Vote: CEO Pay Characteristics Relative to Shareholder Dissent."

At its annual meeting on Tuesday, Citigroup reported that it failed to win majority approval from investors for its executive compensation practices. According to news reports, Citi received 45 percent support during its non-binding say-on-pay vote. 

It appears that investors may have had concerns over the amount of discretion for the compensation committee under the incentive compensation and retention programs for CEO Vikram Pandit. Citigroup also has posted negative shareholder returns over the past one, three, and five fiscal years. 

After the vote, Citigroup Chairman Richard Parsons said the vote was "a serious matter" and that directors would meet with shareholders to hear their concerns, according to the Reuters news service.  

In addition to Citigroup, three other U.S. companies--KB Home, International Game Technology, and Actuant Corp.--have reported failed say-on-pay votes this year.

In 2011, the first year of mandatory pay votes for most U.S. companies, 41 firms in the Russell 3000 (or less than 2 percent of the total index) reported that they failed to win majority approval from investors on pay.

So far this year, the average investor support level during say-on-pay votes has been 90.4 percent, according to ISS data, which includes vote results from 175 companies. That percentage is almost identical to the average support during all of 2011.

Most companies with failed votes (or close votes) last year have fared better this proxy voting season due to engagement efforts with investors and, in some cases, positive changes to their pay programs. For instance, Jacobs Engineering Group and Beazer Homes USA, which both suffered failed 2011 votes, received more than 95 percent support this year after making improvements to their pay practices.
 

Earlier today, President Obama signed into law the "Jump-start Our Business Startups (JOBS) Act," which will exempt newly public companies from say-on-pay votes and other governance and accounting rules.

The JOBS Act, which passed with bipartisan support in both chambers of Congress, creates a new category of "emerging growth companies," which will be exempt from votes on executive compensation; golden parachute votes; and various audit, disclosure, and initial offering requirements for five years after their IPO or until they reach $1 billion in annual revenues or $750 million in market capitalization. It is estimated that more than 90 percent of new companies will qualify for these exemptions. 

In addition, the new law exempts these firms from the auditor attestation requirements of the Sarbanes-Oxley Act. The legislation also increases the threshold for companies to register with the SEC to 2,000 investors (or 500 persons who are not "accredited" investors.)

Investor advocates, audit experts, and regulators have criticized the law for weakening critical protections for shareholders. Institutional investors backed a Senate amendment that would have lowered the law’s threshold to $350 million in annual revenues, but Senate Republicans opposed that measure and it failed to gain the necessary 60 votes needed for passage.

During remarks today while signing the bill, Obama sought to address concerns that the law may increase the likelihood of securities fraud and said that the U.S. Securities and Exchange Commission would play “an important role in implementing this bill.” 

“It also means that, to all the members of Congress who are here today, I want to say publicly before I sign this bill, it's going to be important that we continue to make sure that the SEC is properly funded, just like all our other regulatory agencies, so that they can do the job and make sure that our investors get adequate protections,” the president said. 

Since the Republicans won control of the U.S. House after the 2010 elections, the SEC has not received the funding that it anticipated it would need to implement the many provisions of the Dodd-Frank Act.
 
 

 On Tuesday, the U.S. House of Representatives voted 380-41 to approve final legislation that would exempt newly public companies from say-on-pay votes and various accounting and disclosure rules. Investor advocates and regulators have criticized the bill for weakening essential shareholder protections.

The Senate approved the bill, known as the “Jump-start Our Business Startups (JOBS) Act,” late last week by a 73-26 margin. The legislation now awaits the signature of President Obama, who has expressed support for the bill. The JOBS Act would create a new category of newly public issuers, “emerging growth companies,” that would be exempt from say-on-pay votes; golden parachute votes; and various audit, disclosure, and initial offering requirements for five years or until they reach $1 billion in annual revenues or $750 million in market capitalization. It is estimated that more than 90 percent of new companies would qualify for these exemptions. 

Last week, Senators Jack Reed, Mary Landrieu, and Carl Levin offered an amendment that would have lowered the threshold for these “emerging” companies to $350 million in annual revenues, and made other revisions to the bill. The Council of Institutional Investors, labor funds, and other activist investors urged the Senate to support this amendment. However, Senate Republicans opposed this amendment, and it failed to win the 60 votes necessary for passage under Senate rules. Earlier, the House voted mostly along party lines against a Democratic-backed amendment that would have removed the say-on-pay exemption.  

The final bill does include a Senate amendment that calls for additional requirements on companies that seek to raise funds from investors through "crowd funding" over the Internet.  

Amy Borrus, deputy director of the Council of Institutional Investors, pointed out that smaller companies are more prone to fraud and accounting scandals. “We may rue the day this bill passed,” Borrus told the New York Times. 

A second U.S. issuer, International Game Technology, has reported a failed say-on-pay vote for 2012. The Las Vegas-based casino game company received 44.4 percent support for its compensation practices at its March 5 annual meeting.  

It appears that the investor dissent arose from pay-for-performance concerns, which also contributed to most of the failed advisory votes in 2011. According to the ISS report on International Game Technology, the total compensation for CEO Patti Hart was nearly two times the ISS peer group median and was comprised predominantly of non-performance-based elements. In fiscal 2011, the CEO received a nearly across-the-board increase in pay, including a restricted stock award that more than doubled. The increased value of the CEO's equity awards for fiscal 2011 included an Oct. 4, 2010, special retention grant of 353,000 stock options and 363,000 restricted stock units with an aggregate value of $2,686,000 (based on ISS' full term Black-Scholes assumptions) and $4,827,900 respectively, according to the ISS report.  

In January, Actuant Corp. received 46.7 percent for its compensation practices. As in 2011, most other U.S. companies have earned broad support during say-on-pay votes at early 2012 shareholder meetings. As of March 21, the average support level was 90.9 percent support, according to ISS Voting Analytics data, which included vote results from 138 companies in the Russell 3000 index.

Governance Exchange members can see more ISS data on say-on-pay votes by clicking here
 

Earlier today, the U.S. Senate voted 73-26 to approve legislation that would exempt newly public companies from say-on-pay votes and various accounting and disclosure rules. Investor advocates and regulators have criticized the bill for weakening essential shareholder protections.

Twenty-five Democrats and one independent voted against the bill, which was dubbed the “Jump-start Our Business Startups (JOBS) Act.” Twenty-six Democrats joined Senate Republicans in supporting the legislation, according to news reports. A similar bill already has passed the House of Representatives, and President Obama likely will sign the final legislation. 

Senator Richard Durbin, the second-ranking Democrat in the Senate, was one of the lawmakers who spoke against the bill. He argued that it would reverse many of the reforms that were adopted following the 2008 global financial crisis. 

“The bill’s supporters have characterized it as a jobs bill, but this bill is really designed to change disclosure, accounting and auditing standards and to exempt many firms and corporations from the Securities and Exchange Commission oversight,” Durbin said, according to TheHill.com.

The JOBS Act would create a new category of newly public issuers, “emerging growth companies,” that would be exempt from say-on-pay votes; golden parachute votes; and various audit, disclosure, and initial offering requirements for five years or until they reach $1 billion in annual revenues or $750 million in market capitalization. It is estimated that more than 90 percent of new issuers would qualify as "emerging" companies. The bill also would excuse these firms from Section 953(b) of the Dodd-Frank Act, which would require disclosure of the ratio between a CEO's total compensation and that of the firm's median employee. These companies also would be spared from the Sarbanes-Oxley Act's requirement to hire an outside auditor to attest to the sufficiency of their internal financial controls.

Earlier this week, Democratic Senators Jack Reed, Mary Landrieu, and Carl Levin offered an amendment that would have lowered the threshold for these “emerging” companies to $350 million in annual revenues, and made other revisions to the bill. The Council of Institutional Investors, labor funds, and other activist investors urged the Senate to support this amendment. However, Senate Republicans opposed this measure, and it failed to win the 60 votes necessary for passage under Senate rules. 

The Senate did approve an amendment that would impose stricter reporting requirements on companies that seek to raise funds from investors through "crowd funding" over the Internet.
 

Earlier today, the U.S. Senate failed to pass an amendment backed by institutional investors and regulators that would limit the broad corporate governance, accounting, and disclosure exemptions for new companies that are proposed in legislation passed by the House of Representatives. 

The amendment, which was sponsored by Senators Jack Reed, Mary Landrieu, and Carl Levin, received 55 votes, five votes short of the 60 needed for consideration, according to news reports. The three Democratic senators offered the amendment, known as the “INVEST in America Act,” as an alternative to the “Jumpstart Our Business Startups (JOBS) Act," which was passed by the House of Representatives by a 390-23 vote earlier this month.

The Senate, which has fast-tracked consideration of the bill during this election year, likely will vote on the House legislation on Wednesday. The Obama administration has welcomed the House bill, but also was supportive of Senate Democrats’ efforts to add investor protections to the bill. 

The JOBS Act would create a new category of newly public issuers, “emerging growth companies,” that would be exempt from say-on-pay votes; golden parachute votes; and various accounting, disclosure, and initial offering requirements for five years or until they reach $1 billion in annual revenues or $750 million in market capitalization. 

The Reed-Landrieu-Levin amendment called for lowering the threshold for these “emerging” companies to $350 million in annual revenues. “The House bill would allow very large companies, with up to $1 billion in revenues per year, to offer stock to the public and yet avoid financial transparency and auditing requirements designed to ensure they’re not cooking the books,” Levin said in a statement.

The Council of Institutional Investors, which represents public, labor, and corporate pension funds, urged senators to support the Senate alternative. SEC Chairman Mary Schapiro, Commissioner Luis Aguilar, former SEC chairman Arthur Levitt, the CFA Institute, the Consumer Federation of America, and the AFL-CIO are among those who have raised concerns about the broad reach of the House legislation.  

In an editorial, Bloomberg News warned that the House bill would “gut many of the investor protections established just a decade ago in the 2002 Sarbanes Oxley law." 

“A wave of accounting scandals--think Enron and WorldCom--had destroyed the nest eggs of millions of Americans and upended investor confidence in Wall Street. The relief would extend beyond small businesses and apply to more than 90 percent of companies that go public,” the editorial noted. 

During the second year of say-on-pay votes, institutional investors and their proxy advisers are prompting more companies to improve their CEO pay practices, according to a new report by the Conference Board, the NASDAQ OMX Group, and Stanford University's Rock Center for Corporate Governance. 

A majority of companies surveyed said they are likely to change their compensation practices to win support from institutional investors and proxy advisory firms during say-on-pay votes, according to the report, which was based on a recent survey of 110 large and mid-cap public companies. Of the surveyed companies, 72 percent said they review the voting policies of proxy advisory firms or engage with an advisory firm to get feedback on their compensation practices. 

Companies that received low support during their say-on-pay votes in 2011 said they are more likely to make changes to their compensation programs this year by enhancing disclosure, introducing performance-based equity awards, reducing potential severance payments, changing their pay targets, or by reducing compensation levels, according to the report. 

ISS updates its voting policies on executive pay and other proxy voting matters each year after receiving broad input from institutional investors, corporate issuers, and other market participants. During ISS’ 2011-12 policy survey, more than 300 respondents weighed in on issues that included compensation, board independence, engagement triggers, and social and environmental issues.