Federal Securities Lawyer & Attorney : Porter Wright Law Firm : Securities Exchange Law : Serving Ohio, Washington DC, Florida

Earlier this week Aflac became the first large US company to offer shareholders the opportunity to approve compensation for top executives. Faced with an up or down vote, the shareholders resoundingly approved the $12 million pay package by a vote of 93 percent.

Institutional investors and shareholder services have pushed proposals to give shareholders the opportunity to approve pay packages for the past three years. Some companies have asked shareholders to reject such measures. Last year, 43 percent of proposals received shareholder support. This year, the approval rate is at about 42% according to Risk Metrics.

A shareholder vote against a specific compensation package is troublesome because there is no way to know what it means. Different shareholders vote no and yes for different reasons so it is difficult to know which aspect of the compensation is being rejected, or more importantly, what type of compensation package a majority of shareholders would support.  

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As the Green Movement continues, more institutional investors are becoming concerned with the potential costs and risks of investing in projects that produce high amounts of carbon. This was the topic of a recent meeting of investors in New York organized by the United Nations Foundation and Ceres, a coalition of investors and environmental groups.

Investors have asked the SEC in the past to require carbon footprint disclosures, but the SEC has declined, and many companies are against such disclosures. The investors are not being altruistic; they are reacting to potential costs that could affect their investments, including 12 bills currently in Congress that would raise costs for companies that emit too much carbon. Investors what to know what is a company’s “climate risk,” which includes risks associated with the costs of carbon production, diminished reputation for not being green, and costs associated with environmental forces such as hurricanes that tend to disrupt energy-based investments.

The investors, including investment banks and pension and retirement funds, have a lot of power if they can agree on strategies for obtaining carbon footprint disclosures. The organizers of the meeting claimed those that attended collectively control trillions of dollars in capital.

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Earlier this week the U.S. Supreme Court ruled in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc. that stockholders cannot sue third parties that participate in a securities fraud scheme because the stockholders have not directly relied on the advice of the third parties. Such third parties potentially include banks, accountants, and law firms. The law that allows stockholders to sue for fraud requires that they actually rely on the misinformation they receive. The Court determined that even if a third party such as an investment bank contributes to fraudulent activity in connection with the sale of securities, the third party does not directly communicate misinformation to stockholders, and therefore the stockholders have no fraud claim against the third party.

The case will have direct implications for Enron stockholders who have been waiting for the Stoneridge decision to determine whether they can sue Enron’s former bankers. Unless Congress creates a private right of action against third parties, the Supreme Court has determined that stockholders only have claims against the fraudulent issuer.

Not surprisingly, investor-advocate groups have criticized the decision as anti-investor. The ruling eliminates one theory of third party liability; however, the SEC continues to have authority to pursue claims against any party that participates in securities fraud.

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RiskMetrics Group, an international company that advises institutional investors on the corporate governance policies of publicly traded companies, has announced its 2008 proxy voting policies updates. The updates will apply to all companies with shareholder meeting dates after February 1, 2008. The updates explain how RiskMetrics Group’s ISS Governance Services unit determines whether to support various shareholder and management proposals.

As more U.S. companies move toward having shareholders approve an annual advisory vote on executive compensation (Say-On-Pay), ISS offers more information on how it will evaluate compensation programs. Currently, ISS evaluates executive compensation programs on a case-by-case basis but offers “five global principles” for appropriate compensation. High on the list is no “pay for failure,” meaning no excessive severance packages.

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According to Institutional Shareholder Services, Valero Energy has become the fifth company this year to have investors support an annual advisory vote on executive compensation. Investors at Ingersoll-Rand, Motorola, Blockbuster, and Verizon Communications have also approved, by a majority or more, so-called “say on pay” advisory votes.

ISS reports that in 2006, seven similar resolutions went to a vote and averaged 40% support. Two bills are currently in Congress (one in the Senate and one in the House) that would require every publicly traded company to allow for an annual advisory vote on executive compensation. The House Bill passed in April. See previous posts about Say on Pay issues here, here, and here.

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Ohio Governor Ted Strickland signed a bill into law yesterday that allows Ohio corporations to permit directors to be elected by means other than a plurality of votes. Previously, Ohio law stated that director candidates who receive the greatest number of votes are elected. The law has been amended to allow shareholders to provide for different methods of election in the articles of incorporation, such as election by a majority vote.

The Ohio State Bar Association supported the amendment because some Ohio corporations have received shareholder proposals to reincorporate in states where a majority voting provision could be adopted, namely Delaware. The OSBA expects the new law to keep businesses in Ohio. 

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Lauren Cohen of Yale University, Andrea Frazzini of the University of Chicago, and Christopher Malloy of the London Business School have made available a study indicating a correlation between mutual fund returns and the relationship between the fund manager and the executives of the companies in which the fund managers invest. The study indicates that funds do better when fund managers invest in companies operated by old college and graduate school classmates.

Professor Dale Oesterle of Ohio State University’s Moritz College of Law blogs here that this study could indicate these mutual fund results are due to insider trading. Another explanation is that fund managers simply have better information regarding whether old acquaintances know how to run a business. If insider trading is the reason, this study could lead to scandal just as similar studies regarding correlations in stock trading led to the option backdating scandal.       

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Staying in line with Aflac CEO Dan Amos’ belief that executives should be respected and not feared by a company’s shareholders and employees, Aflac is the first U.S. company to permit shareholders to have a say on pay. Thus, beginning in 2009, Aflac shareholders will have an advisory vote on executives’ compensation. ABC News Nightline ran a brief story about Aflac on Monday.

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The same day the House of Representatives approved the Shareholder Vote on Executive Compensation Act, a similar bill was introduced by Senator Barack Obama in the U.S. Senate. The bill has been referred to the Committee on Banking, Housing, and Urban Affairs. We will continue to update you on any developments.

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On April 20, members of the U.S. House of Representatives approved a bill that would provide shareholders of public companies with an advisory vote on executive compensation. H.R. 1257, the “Shareholder Vote on Executive Compensation Act,” was passed by a vote of 269-134.

H.R. 1257 would also provide shareholders with a separate advisory vote on golden parachute compensation. Thus, for example, shareholders would have an advisory vote on the offering of a severance package to a principal executive officer of a company in connection with the sale of the company’s assets.

The Administration opposes the bill, noting in a statement that it “does not believe that Congress should mandate the process by which executive compensation is approved.” The Administration further noted that recent improvements in corporate governance and executive compensation rules need “time to take effect” before additional governance rules are mandated.

Shareholders have an existing mechanism through shareholder proposals to offer advice to its board of directors. The Washington Post recently reported that shareholder proposals relating to compensation include proposals urging directors to strengthen links between pay and performance, proposals urging votes against directors who are on compensation committees, and proposals urging directors to develop compensation practices similar to those of comparable companies.

So far, however, shareholders who have supported say on pay proposals have fallen short of success. Last year was the first year that such a proposal appeared on shareholder ballots. The seven say on pay proposals earned an average of 40% of shareholder votes.

Thus far this proxy season, say on pay proposals have averaged about 41% support at seven meetings, indicating that such proposals have gained little momentum over the last year.

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